April 19, 2018 INN Exclusives

Commentary: Have We Created A National Shadow Retirement System?

InsuranceNewsNet

By Ron Sussman

As financial services professionals, retirement planning is one of the most important opportunities we have to assist our clients in a lasting and meaningful way.

Retirement anxiety is among the most commonly reported concerns of working people of all ages, and for good reason. The vast majority of people saving for retirement have no idea how much money they will need, and vastly underestimate the length of time they will need it. In addition, a large percentage of Americans either delay saving or save entirely too little to meet their actual needs.

The U.S. retirement system consists of numerous tax-favored opportunities to save, such as 401(k), IRA, Roth, defined benefit plans, etc. But all come with restrictions that effectively limit the amount of the contribution or payout. In addition, the government sets legal guardrails for these plans that ensure the participant’s money is safeguarded. For instance: In a defined benefit plan, the contributions are recalculated every year based on the achieved returns to calibrate the balance required to provide the defined benefit at anticipated retirement. I use this example because funding a life insurance policy to provide an income at a future specified date is most analogous to a DB plan.

Higher income earners will need substantially more to meet their desired retirement needs than a 401(k) or DB plan can provide and must use after-tax dollars to make up the difference. So, it’s perfectly understandable and appropriate that the life insurance industry provides a tax-deferred vehicle for this purpose. Not only can life insurance provide a conservative accumulation of cash, but the mortality component can guarantee the plan’s success if the insured dies prior to receiving what should be tax-free cash payments.

Unlike government-mandated plans, a retirement plan funded by a life insurance policy has no regulatory guardrails to which the owner of the policy must adhere. There is no reporting requirement, no annual “true up” to recalibrate based on actual returns, no rules about suitability and no third-party administrator to keep track. And while the lack of oversight is undoubtedly a selling point, it is also the Achilles heel of this method of saving.

For the life insurance industry as a whole, 2017 premiums for “cash accumulation” products were approximately three to four times the premiums for death benefit products. In terms of premium collected, cash accumulation via life insurance is by far the largest contributor to industry sales of indexed universal life and whole life. This is a trend that has been accelerating over time and will likely continue to outpace all other premiums for all permanent products.

This Trend Should Be Alarming

We have, in effect, created a national shadow retirement system. From the industry’s perspective, this is a welcome trend. But from a client perspective, this trend should be quite alarming.

Here’s why.

Most agents sell insurance products, not long-term administration. This means most clients must take control of the process and be capable of managing all of the intricate details of the products they purchase.

Carriers pay front-loaded commissions that de-incentivize agents to continue to monitor and manage the products they sell. Agent disengagement is endemic and carriers are ill prepared to pick up the slack.

Illustrations cause purchasers to rely on projections that are wrong as soon as they are printed. Buyers will always point to the income projection on the as-sold proposal as proof that that is what was “promised.”

There is currently no carrier with a system that would allow policy owners to review, evaluate, monitor and make changes to either IUL or WL products. It is truly shameful that our industry is so technologically stunted.

Products are becoming entirely too complicated. Most buyers can’t understand simple current assumption universal life let alone the uber-complicated IULs being marketed as cash accumulation vehicles. And whole life is no better! Dividends have always been a “black box” promise and now with indexed dividends we have compounded the confusion. And the fact that premiums are not flexible just adds to the management problem.

Most sales of accumulation products are destined to disappoint. This might not be a problem if those sales represented a sleepy corner of the insurance world. But that’s not the case. In fact, the opposite is true. This is the fastest growing segment of the life insurance business.

Technological Solution Needed

You would think that a technological solution would be forthcoming, but our industry stubbornly resists modernization. We are at least 10 to 15 years behind every other industry in providing web-based solutions to what seem to me to be mission critical problems. And it’s not as if the carriers are completely unaware of this problem.

We have had discussions about digital platforms for policy management with all of the carriers we represent and none seem to have that on their list of things to do in the near term.

In fact, we engaged in a substantive discussion about IUL and its projections and management with a well-known carrier who appeared to have an interest in solving this for their clients. We were ultimately disappointed to find that the whole project was really about gaining a competitive sales advantage and not at all about making the products easy for clients to manage to a successful conclusion.

Ironically, what scuttled the original idea was the realization that IUL products are so complicated that there is legitimately no way to standardize the data so that anyone without an actuarial degree and an options license could understand it.

So, we have a huge shadow retirement system based entirely on false projections and assumptions with no client-based software for managing the outcome, sold by carriers who have no desire to disclose the methods they devised to back up their illustrations and no system for allowing a policy owner to monitor the results and make changes.

In a functional governmental environment, this might be an opportunity for a little oversight to protect policy owners from being bamboozled. But oversight in our industry is a fractured mess of state rules and favoritism. The Harkin Amendment is among the most egregious examples. How convenient is it that a senator from Iowa, a state that actively courts insurance carriers, superseded the SEC’s power to regulate indexed insurance products?

But we are not witnessing functional government in any way shape or form. The dismantling of the Consumer Protection Agency by the current administration is a perfect example of the level of contempt that our government has for consumers of any type of product, let alone life insurance. The term “Buyer Beware” has never been so vitally important and yet so egregiously debased.

Agents Can Solve The Issue

I call your attention to this issue because I believe that agents created this problem and only agents can solve it. We must stop allowing insurance companies to attract us to products like flies attracted to cow patties. Last year alone, one carrier soaked up approximately 42 percent of the industry’s IUL premiums with a product that no one, including the carrier, can adequately explain. And this is a product with three times the loads of any other comparable product.

What this says about agent behavior is not complimentary. What it says about our industry is even less flattering. Are you in this business as a side hustle or are you in it for real? If you believe that life insurance is your career and are committed to the well-being of your clients, regardless your carrier bias and or affiliation, you need to change your behavior.

If, on the other hand, you want to see the industry become completely irrelevant to the next generation of buyers, you can just wait for the giant wave of lawsuits that will surely materialize as the owners of over-funded IUL and WL find out that the income they were “promised” is significantly lower than anticipated. Then you can add another generation of disaffected policy owners to the pile already created by carriers who decided that cost of insurance increases are more important to them than future customers.

I know that this may sound hyperbolic. The industry has plodded along forever with flat sales and increasing levels of customer disengagement. The statistics are so ugly that only the life insurance industry could remain unchanged in the face of what looks like certain extinction.

At the risk of sounding a bit irrational, it feels like the industry and the C-suite people who run it are just fine with the idea that permanent life insurance in its current form may disappear like the dodo bird. It’s not as if there aren’t many examples of corporations running away from the life insurance business, such as Voya and the company formerly known as MetLife.

We actually had a meeting with the chief operations officer of one of the largest domestic insurance groups who told us he has no idea why the parent company did not run away screaming from the life insurance side of the business. From his perspective, life insurance is an antiquated product with little upside for the carriers, and capital would best be allocated to other, more profitable product lines. This little nugget of insight into the C-suite was a definite wake-up call. I, for one, do not want to be the last man playing violin on the bow of the Titanic. And yet, the tip of the iceberg seems perilously close.

Stop The Illustration Games

Can we save the industry from itself? Funny enough, yes, I think we can. How? By taking control away from the carriers and stopping the illustration games. You know those grids all carriers provide to show that their product is less expensive or accumulates more cash than all others? Throw them in the trash.

The illustrations that show 17 different steps to obtain the highest cash accumulation need to go too. No client will be able to decipher these or have any shot at getting a carrier rep to explain them when the time comes to request that elusive retirement income.

Any product that requires 28 pages to explain and disclaim should be discarded. Unless and until the carriers provide clients the digital access to manage these products for life, we should refuse to sell them. The only thing this industry responds to is a loss of sales. We may have to drill a few holes in the boat in order to save it.

Or the industry could save itself by making at least an attempt at creating products that do not foist all of the investment and mortality risk on the purchaser, and by being as transparent as possible about the construction and inner workings of the products they sell. Clients deserve better than the “black box” products currently being marketed.

Whole life needs a make-over so that clients can plan around the real limitations of the product and the real expectations for dividends. The rigid premium payment structure of whole life is antithetical to the idea that you could plan for retirement using the policy as your vehicle. If you can’t change the input, you can’t have a positive effect on the output.

This is my call to arms. Contact the carriers you favor and tell them they must invest in better products and technology that consumers can reasonably rely on or else risk irrelevance.

Ron Sussman is founder and chief executive officer of PolicyAudits.com and CPI Companies. He counsels high-net-worth individuals through risk management analysis and life insurance planning strategies. Ron may be contacted at [email protected].