Ripped From the Headlines: Life Insurance Rate Hikes Send Seniors (and Advisors) to the Life Insurance Secondary Market
This isn’t some new Law and Order series, unfortunately. This is real life.
Over the past year, at least seven big life insurance companies have raised premiums on a range of Universal Life Insurance policies, many of them targeting increases on seniors. From this, the headlines have ensued:
Retirees Stung by Universal Life Costs – The Wall Street Journal (August 10, 2015)
Surprise: Your Life-Insurance Rates are Going Up – The Wall Street Journal (December 4, 2015)
Life Insurers Pass Pain of Low Rates on to Consumers – The Wall Street Journal (March 20, 2016)
Rising Premiums for Universal Life Insurance Draw Scrutiny – The New York Times (May 20, 2016)
Why Some Life Insurance Premiums are Skyrocketing – The New York Times (August 13, 2016)
The news stories provide some compelling – heartbreaking, even – “ripped from the headlines” stories:
- A retired social worker had been paying $700 a year for his Universal Life policy ever since the 1980s. Last year, he received notice that his premium had risen to $6,000 a year. Unable to pay the new rate, he canceled the policy and took a job to supplement his income—at 71 years old.
- When a retired couple’s life insurance bill nearly doubled, they were forced to drop their policy, simply walking away from a policy on which they’d paid $55,000 in premiums over the past 25 years. The return on their investment: the $4,100 in cash that remained in the account.
- A couple, ages 62 and 57, who are both still working, just saw a 40 percent rise in their premiums. They are now cutting back on spending and expecting to work longer to achieve their retirement goals. “You think you’re doing the right thing, and it goes up in smoke,” they said.
“It does not take much imagination to imagine that millions of UL policyholders will be adversely affected if insurers are free to raise rates,” according to James H. Hunt of the Consumer Federation of America, which has called on state regulators to investigate these questionable rate increases. One policyholder decried that insurers should “bite the bullet” because they have historically profited with other people’s money, arguing that carriers should “tighten their belt” rather than seek more revenue and returns from existing policyowners.
Can you, as an advisor, relate these stories to your client’s own experience? Are your clients faced with the lapse or surrender of their policies? And, more importantly, if it was any other asset and your client was considering terminating it, what would you do?
Seniors – and their Advisors – Have Better Options
A better option to being forced out a life insurance policy is to sell the policy. In all instances – as a matter of law – buyers have to pay more than the cash surrender value. But, in fact, seniors selling their policies generally receive 4 to 10 times more than the policy’s cash surrender value.
By selling the policy, the policyholder can receive the full and fair market value of the policy—often as much as $100,000 or more on a $500,000 policy—and use the return to help manage increasing expenses or reinvest it to generate future income. Even if some level of coverage is still desired, the policyholder can opt for a Retained Benefit Settlement that allows a portion of the benefits to be retained—without having to pay additional premiums. (For more on Retained Benefit Settlements, see Here comes the sun: When Retained Benefit Settlements save the day.)
Sound too good to be true? Any client facing a multi-thousand dollar insurance rate hike may think so. But life settlements are very real, very valuable, and very safe.
Further, as I’ve discussed previously, life settlements are one of the most highly regulated financial services transactions in the US today. And, for the past four years, the only consumer complaints stemming from these transactions have been filed against insurance carriers who have attempted to stop the settlements from taking place. (For more on what makes Life Settlements one of the most secure senior financial services available today, see Myth Busters: Top 3 Reasons to Recommend Life Settlements.)
The secondary life insurance market can help you generate good news.
Imagine these headlines: “My financial advisor helped me achieve my retirement dreams.” Or, “Advisor saves a client’s policy from the insurance company’s trash pile: Delivers triple digit returns on the sale of a life policy.” Equally as powerful, you may receive a heartfelt “thank you” from your client.
Sizing up Strategic Beta
Interest in strategic beta ETFs is rising. A few simple guidelines can help investors pick from among the often-bewildering number of options.
The number of strategic beta ETFs has grown at 20% a year, consistently in good markets and bad, since the year 2000. With good reason: Strategic beta ETFs offer a more thoughtful passive option than cap-weighted indexes—and they can do so with a more transparent process and lower fees than actively managed funds.
Bright future, dim past
All well and good, but how should investors assess any particular strategic beta ETF? Close to 40% of these funds have been in operation for less than three years. This lack of an established track record can make it hard to validate their claims. ETF sponsors may try to make up for that shortcoming with back testing, running simulations of holdings they might have had against actual past market performance, but that has its limitations:
Back testing doesn’t always account for fees, liquidity or transaction costs.
Back tests are “selection biased”—that is, back testers have a tendency (conscious or not) to engineer positive outcomes. Live outcomes are therefore likely to be inferior.
Too great a focus on recent history can lead to “driving in the rearview mirror.” While an index or ETF may solve the problems of yesterday well, an investor’s focus should instead be on solving the potential problems of tomorrow.
Three steps to an informed judgment
Because the indexes tracked by strategic beta ETFs are by design somewhat exotic, effective assessment of them calls for some digging:
- Investors first have to understand who the index designer and asset manager are (they may not be the same people). They should have a clearly expressed investment philosophy and the expertise to enact it in practice.
- The properties of the portfolio should reflect the investment philosophy. Not only does the transparency of ETFs allows examination of the holdings to ensure that this is the case, it also measures such as active share relative to a cap-weighted benchmark or turnover can indicate whether an ETF is performing as designed.
- Performance can also be used to confirm that an index is doing its job. While short-term results shouldn’t be given too much sway, the index designer should be able to explain when and why an index will perform and when it might not.
One key aspect of performance shared with traditional passive management is tracking error. Like earlier cap-weighted index tracking funds, strategic beta ETFs should have minimal tracking error to their own indexes. Beware, though, the tracking error to the benchmark can be large and dynamic, it is by this differentiation that strategic beta adds value.
Made to measure
Strategic beta does not defy analysis, despite its novelty. Indeed, it has a lasting advantage over standard active manager due diligence. Strategic beta, after all, is rules-based. What an investor sees in straightforward, well thought-out index composition rules is what the investor will get. In that sense, strategic beta is relatively immune to the personnel changes, style drift and index hugging that can challenge actively managed mutual funds.
Learn more about ETF due diligence here.
This document is a general communication being provided for informational purposes only. It is educational in nature and not designed to be a recommendation for any specific investment product, strategy, plan feature or other purpose. Any examples used are generic, hypothetical and for illustration purposes only. Prior to making any investment or financial decisions, an investor should seek individualized advice from a personal financial, legal, tax and other professional advisors that take into account all of the particular facts and circumstances of an investor’s own situation.
Opinions and statements of market trends that are based on current market conditions constitute our judgment and are subject to change without notice. These views described may not be suitable for all investors. References to specific securities, asset classes and financial markets are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations. Past performance is no guarantee of future results. Investment returns and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. ETF shares are bought and sold throughout the day on an exchange at market price (not NAV) through a brokerage account, and are not individually redeemed from the fund. Shares may only be redeemed directly from a fund by Authorized Participants, in very large creation/redemption units. For all products, brokerage commissions will reduce returns.
J.P. Morgan Asset Management is the marketing name for the asset management business of JPMorgan Chase & Co. and its affiliates worldwide. J.P. Morgan Exchange-Traded Funds are distributed by SEI Investments Distribution Co, One Freedom Valley Dr., Oaks, PA 19456, which is not affiliated with JPMorgan Chase & Co. or any of its affiliates.
For additional disclosure
For a longer discussion, please see our recent publication Strategic Beta’s due diligence dilemma (J.P. Morgan, April 2017).
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