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.
Building a Better Index With Strategic Beta
Written by: Yazann Romahi, Chief Investment Officer of Quantitative Beta Strategies and Lead Portfolio Manager of JPMorgan Diversified Return International Equity ETF at J.P. Morgan Asset Management
With the global economy warming up, but political uncertainty remaining a constant, it’s more important than ever for investors to position their global portfolios to navigate long-term market volatility. That’s where the power of diversification comes in, says Yazann Romahi, Chief Investment Officer of Quantitative Beta Strategies at J.P. Morgan Asset Management and Lead Portfolio Manager of JPMorgan Diversified Return International Equity ETF (JPIN).
Not all diversified portfolios are alike
In their search for diversification, many investors turn to passive index ETFs, which track a market cap-weighted index. But these funds aren’t always the most effective way to steer a steady course through volatile markets—and there are two key reasons why.
First, traditional market cap-weighted indices are actually less diversified than investors may think. For example, in the S&P 500, the top 10% of stocks account for half the volatility of the index. Within sectors, while you might assume that sector risk is distributed across the ten major sectors fairly evenly, it is a surprise to many that at any point in time, one sector can be as high as 50% of the risk.
Second, cap-weighted indices come with some inherent weaknesses, including exposure to unrewarded risk concentrations and overvalued securities. So, while these indices provide investors with exposure to the equity risk premium and long-term capital growth, as is the case with any other investment, investors can also experience painful downturns, which increase volatility and reduce long-term performance. For investors seeking equity exposure with broader diversification—and potentially lower volatility—strategic beta indices may be better positioned to deliver the goods.
How do we define strategic beta?
Strategic beta refers to a growing group of indices and the investment products that track them. Most of these indices ultimately aim to enhance returns or reduce risk relative to a traditional market cap-weighted benchmark.
Building on decades of proven research and insights, J.P. Morgan’s strategic beta ETFs track diversified factor indices designed to capture most of the market upside, while providing less volatility in down markets compared to a market cap-weighted index. Rather than constructing an index based on market capitalization—with the largest regions, sectors and companies representing the largest portion of the index—our strategic beta indices aim to allocate based on maximizing diversification along every dimension—sectors, regions and factors. The index therefore seeks to improve risk-adjusted returns by tackling the overexposure to risk concentrations and overvalued securities that come as part of the package with traditional passive index investing.
So, how do you build a better index?
As one of just a few ETF providers that combine alternatively-weighted and factor-oriented indices, our disciplined index methodology is designed to target better risk-adjusted returns through a two-step process.
First, we seek to maximize diversification across the risk dimension. This essentially means that we look to ensure risk is more evenly spread across regions and sectors, which balances the index’s inherent concentrations. As uncontrolled risk concentrations are unlikely to be rewarded over the longer term, we believe investors should strive for maximum diversification when constructing a core equity exposure.
Second, we seek to maximize diversification across the return dimension. Research shows that there are a number of sources of equity returns beyond growth itself. These include risk exposures such as value, size, momentum and quality (or low volatility). When creating a diversified factor index in partnership with FTSE Russell, we seek to build up the constituents with exposure to these factors. We therefore select securities through a bottom-up stock filter, scoring each company based on a combination of these return factors to determine whether it is included in the index. These factors provide access to a broader, more diversifying source of equity returns as they inherently deliver low correlation to one another, providing diversification in the return dimension.
So, whereas traditional passive indices allow market cap to dictate allocations, the diversified factor index seeks to ensure that we minimize concentration to any source of risk—whether it be region, sector or source of return.
How are you currently weighted versus the market cap-weighted index, and how have your under- and over-weights enhanced risk-return profiles?
Crucially, our weightings don’t reflect specific views on sectors or regions and are instead, by design, the point of maximal diversification. It is important to remember that market cap-weighted indices typically carry a lot of concentration risk—for example, at various points in time, a single sector can explain half the risk of the index when left unmanaged. At the moment, three sectors explain two-thirds of the risk of the FTSE Developed ex-NA Index—these being financials, consumer goods and industrials. In contrast, the FTSE Developed ex-NA Diversified Factor Index—or strategic beta index, which JPMorgan Diversified Return International Equity ETF (JPIN) tracks—is explicitly designed to maintain balance and therefore these sector allocations range from 8% to 12%. In the short term, any concentrated portfolio can of course outperform a more diversified one, if the concentrated bet paid off.
Investing wholly in a single stock may outperform over short-term periods. At other times, it may significantly underperform an index. However, it is well understood that an investor is better off diversifying across lots of stocks for better risk-adjusted long-term gains. The same applies here. From a pure return perspective, if financials, for example, account for half of a cap-weighted index in terms of market cap and have a strong run over the short term, of course, this index would outperform over this period. Over the long run, however, it is fairly uncontroversial to suggest that the more broadly diversified index could achieve better risk-adjusted returns.
Seeking a smoother ride in international equity markets?
For investors targeting enhanced diversification through a core international equity portfolio, JPMorgan Diversified Return International Equity ETF (JPIN) targets lower volatility by tracking an index that more evenly distributes risk, enabling them to get invested—and stay invested.
Learn more about JPIN and J.P. Morgan’s suite of strategic beta ETFs here.
Call 1-844-4JPM-ETF or visit www.jpmorganetfs.com to obtain a prospectus. Carefully consider the investment objectives and risks as well as charges and expenses of the ETF before investing. The summary and full prospectuses contain this and other information about the ETF. Read them carefully before investing.
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