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The Companion Advisor: Insurance
Separate Insurance and Savings Products Premium Erosion
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 afford, beware.

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 product

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 was explained.

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 tax rate.

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 debt burden.

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?

R.J. (Bob) Porter
Crusader Insurance & Financial
3134 Plum Tree Crescent
Mississauga L5N 4X1

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