Companion Advisor: Insurance
Separate Insurance and Savings Products Premium
No chance the returns match those of other investments
No matter how appealing
the presentation, no matter how gripping the accompanying illustration,
if a life insurance agent or broker approaches you with the recommendation
that in order to effectively fund your retirement you should acquire a
life insurance policy and then pump into it as much premium as you can
What this risk-laden
strategy invariably conceals is more critical than what it reveals and
for success depends primarily upon the performance of an unguaranteed
product, namely, the Universal Life insurance policy.
Yet today promotion
of this product for just such a retirement strategy is commonplace and
being conducted with increasing creativity and intensity. In the process,
many otherwise astute business people and professionals, evidently blinded
by the promise of `tax sheltered investment,' are being attracted to these
strategies before investigating whether there are more productive and
secure alternatives. There are.
Bearing in mind the
old adage 'if it sounds too good to be true it usually is,' let us consider
the product and determine whether `full disclosure' is being provided
in the sale of this retirement investment strategy, and whether it merits
the hype it now receives.
A universal life policy
is an extremely complex product that is poorly understood by most insurance
practitioners and policy owners alike, let alone lawyers and accountants.
At a recent brokers' educational seminar an insurance carrier in its promotional
summary described universal life as an 'enigma', but also a 'powerful
and capital-efficient financial tool which, in the hands of an amateur
is subject to disastrous results.' Recently an insurance company executive
told me he figured that 98% of agents and brokers did not understand this
This type of product
is an adjustable whole life policy in which life insurance companies reserve
the right to unilaterally make adjustments should their various actuarial
calculations fail to live up to expectations. Among these, but not limited
to them, are: policy lapse assumptions, interest rates, premium taxes,
etc. Further under certain conditions insurers reserve the right to change
the amount of life insurance coverage, premiums being paid, even to lapse
the policy. Consumers should not be misled by insistence that because
one or a few components are guaranteed this makes it a guaranteed policy.
It is not.
If you doubt these
revelations, simply read a policy very, very carefully. This exercise
alone should tell consumers who ultimately control the policy.
Add to this the fact
that an ever-increasing number of insurers insist that before taking possession
of their universal life policy, the owner must sign a disclaimer acknowledging
their awareness that their policy might not work out quite the way it
Among other troubling
things, one company's disclaimer lists 12 points that could negatively
affect a policy and then concludes with, "Finally, even if all the
above conditions are respected, (we) cannot guarantee that the policy
will not lapse if future government taxes are implemented and adversely
affect the values of the above policy".
Well isn't that terrific!
If we ever needed evidence that insurers are still haunted by the vanishing
premiums' class action lawsuits that discredited whole life policies containing
fewer variables than a universal life, this is it! That aside, in all
candour why would consumers knowingly sign a document that denies them
their rights and relieves a product supplier of accountability?
In its simplest form
a universal life policy consists of life insurance and investments, but
while the illusion given is that these exist independent of each other,
the catchword being "unbounded", should a policy owner try to
cancel one while retaining the other will quickly discover how interdependent
they truly are.
As an investment vehicle,
a universal life policy is a poor one. Certainly it provides more investment
options than did the original whole life policy and these grow tax sheltered
(as did the cash value in the old policy), but should the cash accumulation
fund be withdrawn before the insured's death the entire proceeds are subject
to a policy gains tax, which is applied at an individual's maximum marginal
Further, there is
no chance that the returns in its investments component will match those
of independent investments. In the first place, these policies are loaded
with exorbitant charges and fees, many cunningly devised to relieve a
policy owner of a portion of each premium paid. And should these deductions
increase, the investment performance will be further adversely affected.
While policy illustrations
frequently show 6%, 8%, 10% or even 12% net investment returns, (add 3%
to 4% to such figures to arrive at the real required gross return) most
companies don't guarantee more than 3% on guaranteed accounts. But then,
little faith should be placed in those wondrous projections. I've yet
to see one that reflected reality.
Also less than thrilling
is the discovery that dividends from a universal life policy's so-called
linked or mirrored investments are not always returned to the account
for reinvestment Often they become the insurer's property.
And should a policy
owner endeavour to withdraw cash value or cancel the policy within the
first 10 years, they could find themselves seriously discouraged by a
surrender charge in many cases as high as 100%. Although it differs from
policy to policy, surrender charges often continue for as long as 15 years.
Policy owners could also find that in the first few years little to nothing
is available to them should they wish to make a withdrawal.
IF YOU HAVE A GOOD
POLICY, WHY ACQUIRE ANOTHER?
The much-vaunted strategy
of using the cash value to acquire a loan for tax-free retirement income,
preferably after the policy's 15th year (a concept misleadingly called
an insured retirement plan), initially appears enormously attractive. This
becomes less so when it is revealed that in order to secure a loan financial
institutions demand significant personal security, that this will be reviewed
annually, qualification requirements may change, and should the borrower's
loan security not meet review requirements the financial institution can
call the loan and thus collapse this retirement strategy. The policy owner
is left to find money to repay the loan and could very well discover that
after tax their policy's cash surrender value does not meet this unanticipated
Consumers need to
ask themselves this question: Why would an individual who already owns
a good life insurance policy wish to acquire another (at an older age
and thus higher rates) in which they must pay for more (possibly unnecessary)
life insurance, in order to acquire a mediocre to poor tax-sheltered investment
for collateral to acquire a loan for tax-free retirement income?
It's less than helpful
to criticize or condemn a product or strategy without recommending alternatives.
So, simply put, keep your insurance and investments in separate vehicles
to maximize the effectiveness of both.
For those bent on
the leverage route, acquire a fully guaranteed quick-pay permanent policy
and then through a change to the beneficiary arrange a viatical settlement
which uses the death benefit, rather than the cash value, for security
in much the same way as a reverse mortgage.
This method is completely
guaranteed and achieves greater return for premiums invested. Corporate
shareholders are eligible to further benefits from such an arrangement
by avoiding any out-of-pocket cost with the necessary documentation.
Finally, when confronted
with the universal life hype simply remember that such plans are created
and promoted by actuaries but never purchased by them. Why?
Crusader Insurance & Financial
3134 Plum Tree Crescent
Mississauga L5N 4X1
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