I’ve always had a nerdy fascination with financial products: what they’re “made” of, how they’re structured, and (my favorite) where the various fees and expenses are quietly buried in them. As far as I’m concerned, the more complicated the better, and virtually nothing is more complicated than insurance “products.”
Many years ago (January 1988 if you must know), I had the pleasure of delving into the loads on the then new variable life policies, using the Linton Yield calculation developed by the venerable actuary M. Albert Linton in the 1920s, and a far less complex “cash-in, cash out” method proposed at that time by Bill Brownlie in Boston. Variable life was invented during the Reagan bull market to allow policyholders to benefit from the climbing stock market by directing the investment part of their policies into mutual funds, which would still accrue tax-free within the insurance wrapper.
But VL was also ripe for financial abuse as these complicated policies could and often did have fees and expenses charged at each of three levels–the policy level, the account level, and the subaccount–plus the death benefit. Sorting out the actual return that insureds got on the premiums they paid into these “products” required, well, an actuary, and often it wasn’t pretty. But I was in spreadsheet heaven.
I’ve always thought the practice of calling insurance policies or any other financial vehicles “products” was a pretty nifty bit of marketing misdirection. They aren’t “products” of course. Products are produced by someone, somewhere: Cars are produced by auto workers most anywhere other than Detroit, milk is produced by cows in Wisconsin, and iPods are produced who knows where–by God as far as I can tell–but they are produced somewhere.
What Your Peers Are Reading
But insurance “products” aren’t produced anywhere–they are created, usually by one person or a small group–so they aren’t really products at all: they are ideas. Sounds like some inside semantics, doesn’t it? But this distinction is important, trust me. Products themselves are morally neutral, it’s how we use them that can be valued. A car can be used to rush your pregnant wife to the hospital or be driven by a drunk. A baseball bat can be used by the Indians to beat the Yankees, or in an armed robbery. But the products are neither good nor bad.
Ideas, on the other hand, are often inherently good or bad. Riding your motorcycle without a helmet is a bad idea. Trusting your financial future to an independent advisor is a good idea. By categorizing insurance policies as neutral “products,” insurance marketers have quite successfully removed them from scrutiny as either good ideas or bad ideas. For instance, buying any kind of a whole-life policy in which the hidden loads and fees greatly outweigh the benefit of the tax-free compounding, is a bad idea (you’d be far better off buying term and investing the difference). While “products” that enable us to manage risk at a fair cost or that help to customize cash flow for a clearly stated price (think ATMs) are good ideas.
A Problem from the start
The problems with most insurance or financial “ideas” stem from their creation by folks at large institutions working to benefit those institutions. And any benefit to the end users of these “ideas” is often purely coincidental. One silver lining to this sad state of affairs is, of course, that people need independent advisors to protect them from just such products and institutions. Another silver lining is that the financial industry also includes a few far-sighted mavericks, who have come up with good ideas for helping people to solve their financial problems with relatively simple “products” at a fair price. These are the folks that advisors get paid the big bucks to know about, and I try to bring to their attention whenever I come across them.