In 1970, I met with Dr. Dan for the purpose of estate and business planning. He was 40 years old and had an optometry office. We agreed that he needed $300,000 of protection. I suggested whole life. He explained that he had a profit-sharing plan and expected fully to fund that; he intended to retire at age 65 with the practice worth about $1 million. He said he would not need cash values in the future because of his business assets and the retirement plan. He insisted that he only wanted term insurance, which he intended to terminate at age 65.
I explained the attributes and shortcomings of relying on term for permanent planning, but he was adamant. Through the years, we had many meetings to review his program and circumstances. His position on term did not change. We added more term and replaced some with newer policies in the years of the term wars. I did get him to an attorney, and he did wills and trusts, but there was no movement on the term insurance position.
He retired around age 68, about five years ago. It was at a time when the profit-sharing fund was not where he anticipated it would be, and the practice did not sell for as high as he thought it would. A few months after that, he telephoned me to say he had gotten his term premium notice, and it seemed like it had gone up quite a bit. I told him it had and that had been the pattern for the past three decades. He did not realize it because he always gave the notices to a secretary to pay. He asked what could be done, and I invited him into the office.
We met, and I explained that an option was to lapse the policies. He said he could not do that because he wanted the coverage and now had some high blood pressure and a bit of sugar diabetes. I further offered the options of paying the premium or conversion of all or part of the face amount. He opted to pay the premium.
The following year, he called me with the same observation of a rise in the premiums. I asked, “When can you come in?” I offered him the same three options. He paid the premium. The year after, the conversation was the same, with the added sharp comment, “I can’t hold on, and I can’t let go.” The next year, Dan called and spoke to my secretary, Lori. She said I was in and asked if he wanted to speak to me. He said, “No, Burt only wants to sell me whole life.”
The next year, his wife called for him and spoke to my secretary. She ended the conversation by sarcastically asking, “Why didn’t Burt sell us whole life?” I called her back, and she blamed their plight of high premiums on me. I asked her please to come to the office and I would lay all of Dan’s files on our conference table so she could examine 30-some years of records, including all the studies I had made for conversions through those years. I told her my notes of meetings also would be included, with comments made to me by Dan, some of them not so kind. She declined. The policies still are in force and still are accelerating in cost. Something has to happen sometime. What? I can’t anticipate.
When universal life (UL) first hit the market in the early ’80s, I made a note in my flashcards that said, “UL is a product that will require some tending.” Enter variable life (VL) and a couple dozen other interest-sensitive products, and we have found a new meaning for the words “service” and “total immersion.” I have a couple of rate books going back over 100 years. One is from 1886, and one is from 1905. Anyone in the business less than 10 years would know nothing about these. He or she would know rate bytes better than rate books.
Going back to those years, only three plans were available to producers: whole life, limited pay, and endowment. They didn’t have super-select life, non-driver, left-handed life, non-cholesterol life, the challenger, the maximizer, the pinto, the jaguar, T-2000, three-step life, econolife, modular hopeful life, or a host of other plans whose names do not describe what is inside the contracts and make one wonder how they got through state insurance commissions. And they still made a living.
Today, anyone can sit down at a computer and run an illustration that is thicker than the entire rate book was a few years ago. We have more stuff stuffed inside there than 200 years of actuarial science. Some of us are so adept with our machines that we reinvent the deal each time we sit down to run an illustration. Sometimes, when I ask for various proposals to start putting a case together, I get scared when I look at the volume of paper that comes in to glare at me. Think about how happy the office supply stores are when we start a file for four shareholders for two face amounts each and a couple of variations of term, variable, or whole life.
Sometimes the producer might look at a client file and see two illusions — oops, illustrations — for the same prospect and find differences that confused him or her, even though it was he who ran them. Then he starts searching for what the differences are. Was a certain rider checked or not checked? Male or female? Smoker or not? Dividend variations? Various interest assumptions? And a lot of other detective-type steps until he gets himself on track.
In the late 1960s, I was the chairman of an Agents and Managers advisory committee for a certain company. We were having a meeting at the home office. About seven agents and 10 department heads and officers were in attendance. The company had a massive conference table that accommodated all of us. I was sitting at the table’s head next to the president of the company. We were following an agenda, but there was a lot of time for tableside caucuses and side discussions. At one point, the volume of conversation had risen while these discussions took place. There was a sudden break in the discussion where only one voice was heard. An assistant actuary was sitting next to the actuarial vice president when he thought he was whispering, but because of the abrupt lowering of volume, his voice was heard all around the table asking, “Do the agents have rate books?”
His question more than three decades ago was prophetic for what was to come. Well, we don’t have them anymore, and the rates are a moving target. Even now, some of our computers are being changed by wireless, e-mail-style technology.
Going back to those old days when I got my first rate book, the only plans were whole life and endowment. The term insurance section was a few loose sheets as an insert at the back of the book. We hardly ever used it. It was a different day for insurance. Compared to today, we weren’t even selling “life” insurance. We were selling “death” insurance: itty-bitty policies of $2,000 and $3,000 for burial and final-expense purposes. Obviously, these sales were whole life. For those who had savings or education in mind, endowment fit the recipe. Having some insurance for 20 years and then getting the face amount and dividends in a participating policy was palatable to those who wanted to fulfill a financial goal, such as college funding. It was a secure way to save money. We were not so sophisticated in those days.
To my unscientific observations, it was during the 1960s and early 1970s that we realized life insurance was only money and could do anything and everything that money could do. Many of the illustrious departed members of the MDRT and some of today’s senior, veteran producers brought us out of a bygone era of life insurance and put the world into the enlightened age. But like the evolution of the Bronze Age, the Iron Age, the Stone Age, and the current Hair Spray Age, we will go on to new uses and applications of our current insurance age. The younger gals and guys will take us forward, and I thank them in advance.
I am 72 years old and have been in this profession for 48 years. I’ve been fortunate enough to see this evolution. Going along with that, there are separate, distinct, and purposeful uses and goals for all the kinds of insurance we have and the variations that will come forward. There are definite and precise needs for whole life, term, interest-sensitive products, and annuities. Each has its separate yet inter-connected purpose. Every policy, no matter what kind, is a combination of endowment and term. It is like a teeter-totter: a combination of protection and cash value. As one goes up, the other comes down. By a combination of premium and timing, life insurance basically is nothing more than a merger of time and money.
I sell about 60% permanent insurance, 25% term, and 15% UL or VL. Every producer has different numbers. Each has a use and need, and it is the producer’s job through proper fact-finding to suit the prospect’s wants and needs. I remember the watchword when UL first evolved around 1980. The stock market was becoming better known, and the goal was to merge the disciplines of protection and investment in one vehicle. UL’s developers proclaimed that the clients could determine their own desires, and if they chose, they could take the risk and a little gambling spirit themselves and not rely on the insurance company to prescribe what the guaranteed cash values would be some time in the future. This tied into the mixing and matching and flexibility of premium, cash value, protection, and period of the policy. The late John Savage, one of the innovators and icons whom I mentioned, had a saying: “If you are going to die right away, I will sell you term insurance. If you are going to live a long, long time, I will sell you endowment insurance. If you don’t know, let’s go straight up the middle with whole life insurance.”
We all have had the unpleasant experience of meeting with clients or their advisers to re-explain and resell the idea of UL or VL when the interest earnings did not meet projections. They forget the idea of projections versus guarantees and may interpret one as the other. Maybe it is a matter of selective memory or fixing blame. Minds are expansive and enthusiastic, and memories are short. They forget the caveats, which are put on the printouts. Paper doesn’t care what is written on it, and the printer only spits out what instructions have been inputted. We are aware of the lawsuits that have been leveled against certain companies, and we have compliance departments to guide and monitor agents’ actions.
The word “traditional” has a ring of guarantee to it. An interest-sensitive product that fully is funded and understood can be exactly the tool a particular client wants. A little slip in calculations or circumstances, however, requires some reacting or re-balancing. How many clients are ready for the effort, upset, and disorder in their lives?
The public reacts precipitously to certain market conditions. In the bad times, we hear them talk about putting all their money in “cash.” Why? Because they want guarantees. “New and improved” may be only the fashion of the day and not designed to be enduring. If the client is absolutely sure the need is for only a specific and exact time and there are no contingencies for insurance beyond the target date, term insurance is the perfect recipe. That is traditional and exact.
Is life insurance bought or sold? The answer is sold, but only after the client fully explains the desires and the producer does a proper job of matching the product to the stated specifications. It is our job to be the architect of the clients’ futures rather than the repairman of erroneous assumptions.
I contend if the producer were the most computer-literate person in the world, wanted to develop the perfect policy for all circumstances, and sat down for as much time as it took and used all the factors of goals, time, premium-paying capacity, potential pitfalls, longevity, and inflation, at the end of the session, no matter how long it took, he or she would have reinvented whole life. Nothing is simpler on the face of financial expositions. In fact, going back to when I first started using the rate books, we even didn’t have calculators. We did it by hand and by brain. Usually we had a one-page sheet that we filled with these guarantees and dividends, and we worked off these. I have many policies still in force where the numbers have held up right on point. There were no caveats about the cash values and the paid-up values. A guarantee was a guarantee. There were explanations about the dividends. But for all of these, the dividends have outpaced the projections through the years.
Whole life is a sleep-well product. I never have had to say, “I’m sorry” to anyone for having sold whole life. This is opposite to the painful meetings we have had explaining why the perceived values are not the real values and why the policy will require more years’ premiums than the non-guaranteed projections. I love when clients come into the office and we review their summary sheets and the options are all in their corner rather than restrictive and disappointing news regarding contracts in jeopardy.
Think about the phrases we use to explain our most traditional product: whole life, straight life, or permanent. Nothing is straighter than those expressions to describe a product in one or two words.
Permanent: What more can one say about a product? So I won’t.
Straight life: Again, it is hard to improve upon the simplicity of this word. I wish I knew the origin of it because it sure tells the story without glamour, glitter, or glitz. It is from the rate book straight to the result, which is anticipated without curves and detours. It does what it is supposed to do when it is supposed to do it.
Whole life: This is the basis of it all, and the name again is completely descriptive of what it does. It is in force for the whole of life. After the policy is placed in force, it is there forever. All the policy owner has to do is pay the premium in a timely fashion. After the payment of the first premium, all the policy rights reside with the owner forever. The insurance company only has one right, and that is to accept the timely payment of premiums. The policy owner may make changes and exercise such rights as loans, surrenders, assignments, beneficiaries, and frequency. The insurer only has the right to accept premiums that are paid on time.
The deal is permanent, straight, and for the whole of life.
The traditional products we have are term and whole life. These are the straightforward, uncomplicated products we sell. The textbook definition of term is “protection in force for a stated period.” If it is airline insurance, it is in force for the flight. This is the shortest term there is. Get off the plane, and the term is finished.
Then there are choices of how long one chooses to have the coverage, from one year to life. The variable is the premium. As all of us tend to do, we talk about our business all the time. Many years ago when my daughters were small, I was doing a post-mortem on a case at dinner. One of the children asked, “What is term insurance?” Dori, who was probably 8 at the time, said, “It terminates.” It can’t be said better than that.
Term insurance is like renting an apartment. The rent continually rises, and the tenant owns nothing. The landlord dictates the conditions.
Permanent insurance is like owning a home. The payments remain level or complete themselves, and the owner creates equity.
An interest-sensitive product can be like an adjustable-rate mortgage. It can rise, explode, or develop a balloon payment. The owners take their chances. Assume someone is going to a sporting event at the largest stadium in the area. He or she arrives early and has a choice of where to park.
This lot at the top is for 50 cents a day. The one at the bottom charges a dollar a day. They are both lit and both guarded. There is no apparent difference. Where would he park? Right. The 50-cent lot, as most people would. But a big wind comes along and blows this tree out of the way.
Here is what the sign says: “A dollar a day, but you get your money back.” Now where would he park? Ladies and gentlemen, without adornment, internal rates of return, precise, exacting calculations, and other technical details, this is the basic difference between term and permanent.
This brings us to the philosophy of “invest the difference.” Every so often, we get the objection from someone such as the accountant asking, “What is your rate of return?” An answer is: “When the client dies, the claim is usually paid within 10 days to two weeks. Is that a quick enough rate of return?” A second answer is to say: “That is a good question. Why don’t you figure it out for our client?” Most times, the accountant will not know how to do it. But even if he does, the client thinks about how long it will take him to do it and what the hourly fee will be. The accountant may say: “Why don’t you calculate it? You have the computers for these plans.” I tell him I can do it, but it is the insurance company’s software, and he may believe it is skewed toward the insurance company.
Just as Dr. Dan’s wife wanted to blame me because they were in the position of ever-escalating premiums, I have had many more situations of extreme elation with whole life programs. Being in the business for almost five decades, I have many clients whose programs resemble gold mines. I had an annual review with one recently who said this about his straight life program: “There is only one thing wrong with these policies. They are too small. I wish I had bought more, years ago.” I can’t think of an investment that can be better than a whole life policy with a lot of tenure on it. On those meetings, I get praised for excellent product and advice through the years.
As opposed to relating tough news to insureds regarding declining values or increasing premiums, there is ultimate satisfaction in doing exactly the opposite. They are in a position of having many options, all of them exceedingly to their advantage. They are in a position of choosing to terminate payment by using dividends to pay future premiums. Even in that situation, the cash value continues to grow.
I also can point out to them the advantage of continuing premiums, even though it is not necessary. They marvel at the fact they can pay the usual premium and have the cash value increase by two or three times what they deposit. John Todd spoke of the “inevitable gain” in a permanent policy. With a policy that is 20 or more years in force, every cent put into it adds value all over the place. Cash and face value increase on a tax-deferred or even tax-free basis, considering the death proceeds. Incidentally, and as an aside, I never use the phrase “death benefit.” I know that it is exactly that, but I find it hard to use both of those words together. I say “proceeds.” When doing planning with senior citizens and showing mutual funds or annuities, it is hard to avoid the profit of continuing paying premiums on a seasoned policy. I explain that all the options are in their corner. Sometimes, they ask what they should do, and I advise them to continue to pay the premium annually as long as budgetary tolerance and health allow.
I am sure it is no surprise to mention that none of my long-time policy owners ever are upset with their contracts. The next premium is the one that does the most good. Just like the last pushup is the most valuable in exercise. But one has to do all the previous ones to get to this position of profit.
Also consider the fact that some of these long-time mutual companies have gone public. Some of the stock or cash the policy owners received is greater than the face amount of the original policy. Some were suspicious and fearful about signing the forms for choices, fearing they were losing something. They could not believe all this money was coming from the initial public offering and they were sacrificing nothing. So many of them would ask what to do with this money, which was pure bonus; the result was a lot of annuity or mutual fund sales.
I am sensing a current wave of sentiment toward more whole life sales. With the wild, downward ride of the stock market at the start of the 21st century and the accompanying difficulties in interest-sensitive policies, I find a comfort level among many prospects with straight life. I repeat, I have no problem with universal and variable policies, and I sell them. But they do require tending, and clients want to think of their insurance policies as solid and enduring and not questionable and tentative.
When these policies first came out, the interest rates were high, and when it came to running illustrations showing various premium options for the desired coverage, too many clients chose skinny funding. Too may of us allowed this to occur without some sage counseling and tougher selling. The low premiums had the same effect of other programs we had in the past, such as retired lives reserve or deposit term. Given these choices, too many clients chose under-funding with great hopes for the future.
Some people like to say that life insurance is a lousy investment. I always agree, saying: “That’s true, but most investments are lousy life insurance. They are designed to do two different things.” I think this is an apt statement. The two products specifically are designed to do two different things. Granted, the cash values of life insurance are exactly that, cash, and that is what investments are designed to create. No doubt many people look upon the two disciplines to do some of the same things, and they invest or save their money with the goal of a total program of mix and match. For some, sad to say, the cash value of life insurance represents the major portion or the total portion of savings equity they own.
I was going to make a speech in Ottawa, Canada. I got a telephone call from the president of the local association telling me there had been a guest on an afternoon talk show who was completely anti-life insurance. He was a respected professor from Toronto and felt, first off, that no one needed much life insurance and, second, that it should only be term insurance. He further suggested that it could be sold by banks by simply checking a box against checking or savings accounts or even a box on income tax papers. After all, those two entities had those huge mainframes.
The association president told me that the professor had caused a lot of damage because the show was a popular one with a large audience. He asked if I would be willing to come to town a day early and go on the show. I said I would. I asked if the professor had a book and was told he had two. I asked if they could get me copies to read — without buying them. I did not want to lend more credence to a bad philosophy. The books came, and I read them although I didn’t have to do so. We all know what they said about buying term and investing the difference. And here, a quote I have saved for years in my flashcards:
Invest the Difference
Eat ham without eggs and invest the difference
Have your children quit school at 16 and invest the difference
Get rid of your kids, take in boarders, and invest the difference
Don’t dress for success, buy cheap clothes, and invest the difference
Sell your car, buy a moped, and invest the difference
Sell your home, move to the slums, and invest the difference
Stop taking showers, walk in the rain, and invest the difference
Stop reading, ask your friends what’s going on, and invest the difference
Don’t buy a radio, hum, and invest the difference
Cease planning, ad lib, and invest the difference
Don’t vacation, join the Army Reserve, and invest the difference
Give lip service, not real service, and invest the difference
Don’t pay taxes, go to jail, and invest the difference
Cancel your permanent insurance and invest the difference…
It makes as much sense
I arrived at the radio station about half an hour before show time. It was a popular show, but I only got to meet the host about two minutes before airtime. He was a nice, pleasant guy off the air, but he changed when the microphones came live. He set up the show by saying: “Burt Meisel is from the U.S. He is an expert. We had Professor Brown on the show a few weeks ago, and he talked about the value of term insurance over permanent, and I changed all of my whole life policies to term.”
To this I said, “And you will change it back one day at a great cost.” These were the first words out of my mouth, and he realized he did not have a pussycat here. I had on a big, bulbous earphone and microphone set, and I could say whatever I wanted, whenever I wanted. I previously had lost a debate when I felt I totally was controlled by the announcer, and I was not ready to let that happen again. He looked at me with a scowl and continued reading my credentials, saying I was an expert. I said, “From the Latin ex, meaning ‘out of,’ and spurt, ‘a drip under pressure.’”
They had explained to me that the desired pattern was for the caller to have one minute to get the question out, and I should try to keep my answers to two minutes. The first caller said she was a divorcee with three children and asked if she needed life insurance. I answered her by saying: “Life insurance is only a financial tool that provides cash at your death. Will anyone need cash at your death?” She said she had nothing that would provide cash. I asked if she had a sizable bank account, securities, or a large house that could be sold for cash if she moved into a smaller one. She got a little louder and said: “I’m a divorcee. I don’t have any of those things.” I told her that in that event, she needed life insurance. She asked, “How much?” I asked how much could she set aside a year or a month. She said she was ashamed to say only $35 monthly. I told her she needed as much term life insurance as $35 a month would buy. She asked if she could buy it from me. I told her I was not licensed in Ontario but I was in the studio with officers of the local association, and if she would give her name off the air, someone would meet with her.
The next call was from a woman who said she was a divorcee with two children and asked if she needed life insurance. I asked if she had heard the previous caller, and she said no because they had asked her to turn down her radio. I explained to her that life insurance was only a financial instrument that provided cash at one’s death and asked if anyone would need cash at her death. She said no because even though she was a divorcee, it was a financially friendly divorce. The children’s father was wealthy, and he would like to take the children, even now. It sounded good for the children, but if I were working with her, I would want to see her divorce decree as part of the fact finding. She said she was certain there was nothing for income for her after the children were gone, and could we meet? Remember, this is on the radio under time constraints. I told her no but said someone in the studio could meet her. I sold four policies that day.
The third call started the ones I really was expecting. I knew I would be hearing from the “termites.” This man said in a direct, abrasive tone, “You guys only sell whole life insurance because you make more money.” I’m sure most producers have heard that before. I asked him if making more money was a bad thing if the ultimate benefit was to the consumer. He blurted out, “Yes.” I told him I had read Professor Brown’s book, Harcourt Press, Toronto, $24.95 Canadian dollars. If making more money were bad, why did Professor Brown not have the book produced on the cheapest, lousiest, thinnest paper possible and on page one tell the reader to invest $21.95? In fact, Northern Tissue would have been a good choice. He hung up on me. I also had four of those on that day.
Now they were coming at me. The next guy said that the client always could do better investing himself rather than the insurance company and that I only sold whole life because I made more. I told him in the long run I make more on term. He said that was impossible. I explained that if we made the assumption that the commissions on a permanent policy were 50% and the commissions on a term policy were 50%, ultimately, I would make more on the term. That frustrated him. I gave this example: “Let us assume the client wants $100,000 of protection and the premium for whole life was $1,000 and the premium for term was $100. ” At this point he interrupted me, saying, “ $500 commission is more than $50 commission.” I agreed that his math was right but told him that was not the end of the story for this single policy. The premium for the term was $100 today but would change in the future one way or another, and that is costly for the client. If I wanted to stick to a term-only formula, I would change the policy from time to time when the rates might be better, as we saw in the term wars a few years ago. Then the replacement policy might be cheaper than the published rates in the old policy. If the client replaces, I get paid a new commission again at a new age. If it goes on a few times, I make more.
Another thing can happen. For health or economic reasons in the future, the client may want or need to convert the policy. Then the stupid insurance company pays me a new commission on the same contract, at a much higher amount. Therefore, in the long run, I make more on that kind of term arrangement. I told him I had been in the business a long time and intended to stay a lot longer, so if money were the only criterion, I would agree with him and sell only term. He hung up on me. I had four of those that day, too.
They were after me. The next caller said: “You guys always say the cash value is your money. If that is true, why do we have to pay interest on a policy loan or even repay the loan?” I gave this example: “Suppose you had a life insurance policy with $50,000 cash value and borrowed it all out. We agree you would have to pay interest. The policy, however, is now in its 15th year. Statutorily, next year the policy is in its 16th year. Even though you took out the cash value, the insurance company will give you the next year’s published gain and any dividend due. From their point of view, the policy has all the elements still in it to make the numbers work. Because some money was taken out, there has to be a replacement to make all the assumptions work. So, although it cost interest, there was an offset or even a gain overall.
“Let us also assume you have a bank account with $50,000 in it. If you withdraw all of it, would the bank pay you interest on the vacated money? Therefore, even though the insurance company is charging you interest, they are offsetting it with gains on money that is not even there.”
I further asked him if he made a second mortgage on his home or an equity loan, if he would have to repay it or pay interest. He said yes, and I asked him why because the equity was his money. He hung up, too.
It was an interesting adventure because so many of the questions centered on the values of the equity in life insurance policies and the values of permanent insurance. Here comes another call about making more by investing the difference. I responded by asking what difference. I told him I was from the U.S., where the savings rate at that time was about 3%, and I assumed it was about the same in Canada. And the statistics showed that most people had a pitifully low amount of cash assets saved by age 65, which then was considered normal retirement age. So what is the difference if I sell them oil stocks, gold, mutual funds, real estate, cash in the mattress, a hole in the backyard at zero interest, or cash value accumulated in life insurance policies if I help them to save more than they were before they met me?
They hacked away at me. A caller asked another variation on the same question attacking permanent insurance. I asked him if he was buying his home or renting an apartment. He said he was buying, and I asked why. He answered, “Because you pay a certain amount of money for a certain number of years and you own something or it’s paid off.” I told him it was exactly the same in a permanent life insurance arrangement, no difference.
In fact, I was scheduled for one hour, but at a commercial the producer asked Lowell if I could stay another hour. I was feeling hot, and I wanted to stay. I must admit on some other debates I did not do so well because I was controlled by the announcers or hosts cutting me off, saying they had to move on in the interest of time, or overtly favoring one side over the other and steering the conversation. I was winning this one and having the time of my life.
Are there holes in whole life? I guess there are; nothing in life is unanimous or all encompassing, and different products do different things. This all springs from the fact-finding, which determines the client’s goals. But relying strictly on term is like wetting the bed: nice and warm at first, but eventually one must get up and do something about it. An old automobile commercial said, “Ask the man who owns one.” There is great gratification and peace of mind in dealing with completely satisfied clients whose comments are: “I could be a poster boy for your insurance company,” or “There is only one thing wrong with this policy. It is too small. I wish I had more like this.”
Practically every deal in the world looks good on paper, and the cheese is always free in the mousetrap. But a universe of difference exists between projections and guarantees. We have caveats and warnings all over our printouts, but there comes a time of selective memory and accusatory intentions if things do not work out as one randomly or vaguely remembers. That is a reason we live in a world of compliance departments and double or triple checking. Paper doesn’t care what is written on it, but people do in the future when theory is out the window and reality is in. If the projections are met, the producer is a hero. If they are not, he is under suspicion.
I close with this: