Falling Intrest Rates and Growing Needs: How to Avoid the Perils of "Orphanage"

Among the many consequences of the dramatic drop in interest rates seen over the past couple of years, perhaps the most often overlooked is the impact on consumers’ life insurance plans. Financial journalists have had many more dramatic tales to tell lately, so they haven’t been chasing this story about boring old life insurance. If there is a problem with your plan, you may not hear about it from your agent, either. The reason for that is that your agent is probably gone; more than 80 percent of life insurance agents drop out of the business within a few years of entering the field. Don’t you remember getting an envelope from your insurance carrier with a picture of a famous guy and the message, “You may already be an orphan?”

Management for Life

Despite the sense of relief you may have felt once your policy was issued, life insurance is not a “buy it and forget it” financial product. It is important to revisit your life plan regularly, to be sure it still meets your changing needs and is performing well under current economic conditions.

Consider the question of how much coverage you should have. What a life insurance policy does is replace the income of a wage earner in the event of a premature death. The lump sum needed to replace your income will vary depending on what sort of returns you can expect on safe money. A few years ago, it might have seemed reasonable to assume that the returns on safe money would continue to be fairly high, say 7-12 percent. Things look different today. What if we are entering an extended period of low interest rates or maybe even a deflationary environment? You may be underinsured, my little orphan. The old rule of thumb was that parents of dependent children should insure their lives for 4 to 8 times their annual income. In a low-interest world, you must have your thumbs recalibrated.

If you own a cash value policy, your situation is certainly more complex, and may be grave. Most cash value policies sold in the past 20 years were universal life, a type of contract with an adjustable interest rate and “flexible” payments. Since rates have fallen, it is often necessary to “flex” those payments up in order to keep the policy in force. It doesn’t matter what the illustration said at the time of the sale. Policy illustrations were and are virtually worthless documents.

Life insurance contracts are complex instruments and there are a number of other problems that can arise after a policy                has been purchased. The most professional

insurance agents review and monitor the status of the policies they’ve sold. If you have such an agent, you are very fortunate. If you don’t have a good agent, or if you want to get the reassurance of having a second opinion on your plan, what should you do?

It’s easy to get advice about life insurance, but virtually impossible to get objective advice. There are two types of insurance agents. The first is appointed by insurance companies to represent them and sell their products to the public. The second type can be hired by consumers to help them evaluate their needs and the products available in the marketplace. According to Texas Department of Insurance statistics, there are 112,274 agents with the first type of license and 124 with the second type. In other words, there are 905 seller’s agents for every buyer’s agent. I guess that’s why they say, “Life insurance isn’t bought, it’s sold.”

You might think that financial planners, as a group, would be a better source of objective help with insurance. However, over 70 percent of the people calling themselves financial planners operate on the “fee-based” model, meaning that they charge fees for planning and take commissions for selling insurance and investment products. In practice, the lion’s share of their income is derived from commissions, which could have a tendency to influence their recommendations. A recent article in Investment News documented a shift among planners from pushing equity investments to selling more annuities and other insurance products. Do you think that’s a result of a change in the clients’ needs or a decline in the planners’ asset-based income?

For the clearest advice about your life insurance plan, hire one of the 124 holders of the Life and Health Insurance Counselor license. They are the only people who legally can charge a fee for evaluating life and health insurance. A second choice would be a fee-only planner who can help you find trustworthy insurance providers for whatever products you need. Only such fee-only professionals are likely to make you aware of all your options, including …

The Big Secret

There are very attractive no-load and low-load life insurance policies available for those who are tired of being sold.

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