Sell The Need, Not The Hype

Some very dangerous marketing strategies for selling life insurance have emerged in recent times. They include stranger-originated life insurance, equity-stripping and “hyperfunded” or “turbocharged” insurance.

These gimmicks are dangerous for several reasons. They are causing consumers to be so skeptical of the industry that they forgo purchasing coverage they very much need. The strategies are also forcing up the ultimate cost of life insurance, as insurers respond to changing lapse rates and new product pricing pressures. Worse, some insurers are just ignoring the types of business they are taking, to keep sales momentum going in hopes of impressing various stakeholders.

A few years back, STOLI business dealt largely with higher net worth individuals. Today, the industry is still grappling with appropriate regulations to curtail these abuses. But, 2 other gimmicks have also caught on, and they are troubling.

Equity-stripping. This strategy targets both the mid- and upper-income markets. It entails stripping out the equity from a home and using the funds to purchase life insurance.

A few books on the subject have argued that, since home values always increase, why not borrow against home value to fund life insurance? If the life policy is tied to the market in some way, this strategy says, the owner will, over time, have a double gain–i.e., the house and life policy values will both keep on increasing, with the latter producing gains sufficient to overcome the payments on the home equity loan.

A while back, this concept looked great on paper, especially since there were rising home values, low interest rates on loans, and a rising stock market.

The promoters even had a solution to a potential catch. Variable life, with its unlimited upside potential, couldn’t be used for the insurance because VL can’t be financed. No problem, said the promoters. Use index universal life–because it’s a fixed product outside the domain of securities regulators.

Then came 2008. Average home prices have decreased nationwide by about 14% from a year ago, and they are expected to fall further. The stock market has been turbulent due to energy costs and a weak U.S. dollar. And, though the Federal Reserve has lowered interest rates, regular home loan and home equity loan rates remain stubbornly high. Additionally, IUL policies have not proven to be a panacea, as they do not permit unlimited upside potential, no matter how well the stock market performs.

So, is equity-stripping a good strategy? Ask those who bought into this strategy, and you’ll probably get a hail of complaints.