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Elan Moas. Credit: Moas

Life Health > Life Insurance > Permanent Life Insurance

Clients With Universal Life Need Performance Updates: Elan Moas

By Allison Bell

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What You Need to Know

  • Insurers call universal life insurance permanent coverage.
  • Elan Moas contends that, for most UL policy owners, the math is wrong.
  • He says typical UL policies are designed to lapse when the insureds are in their 80s.

Elan Moas, a veteran life insurance agent, says clients with universal life coverage need regular performance reality checks.

Moas argues that typical clients have no idea how likely their UL policies are to run out of cash value and lapse.

“These policies are dreadful across the board,” Moas said earlier this month in an interview. “They are horrifically designed.

Moas has made a name for himself as one of the most visible critics of typical uses of universal life insurance. He is the author of “Lapsed: The Universal Life Insurance Whistleblower,” a book about his belief that more than 90% of individual and group universal life policies will lapse without paying death benefits.

Moas has critics of his own. Some colleagues argue that his views are based on incomplete policy lapse data or unrealistic expectations for the policies. But even many of those opponents agree with Moas that clients need better information about how their universal life policies are really doing, based on the insured’s current life expectancy and realistic investment performance assumptions.

What it means: If you’re trying to help clients understand how their stocks, bonds and retirement accounts are doing, maybe you also help the clients get and analyze in-force illustrations for their universal life policies.

Moas: Moas has a bachelor’s degree in finance and real estate from Florida Atlantic University. He entered financial services as a broker at A.G. Edwards in 1998.

Over the next decade, he worked for several other financial firms. He survived the “dot-com” crash that hit the early internet stocks around 2000, and then the subprime mortgage lending crisis.

In 2008, he began selling term life insurance and whole life insurance.

He sold one universal life policy. After he read the policy, he decided that it was troubling and avoided selling any more universal life insurance. His hostility toward universal life policies increased after he analyzed his clients’ policies and heard critiques of universal life policies from whole life sales trainers.

“Once you understand why whole life works, you understand why the other policies don’t work,” Moas says.

Today, Moas focuses mainly on selling term life insurance and whole life insurance.

Whole life: When a life insurer sells whole life insurance, it promises to keep the premiums and the benefits stable for a term that will last until the insured reaches an age ranging from 100 to 121.

The policy builds cash value until it matures. When the policy matures, the cash value is the same as the death benefit. If an insured survives until the policy matures, the issuer may either pay the policy death benefit to the insured or extend the policy.

The issuer of a whole life policy assumes all of the investment risk associated with the policy and all of the risk related to the insured’s mortality.

Before the policy matures, the insured can get cash by borrowing against the policy’s cash value.

The weakness of a whole life policy is that the monthly premium for a young, healthy insured may look very high.

Universal life: The issuer of a traditional universal life insurance policy, or UL policy, separates the underlying cost of insurance from the performance of the investments supporting the policy.

The policy crediting rate for a traditional UL policy depends on changes along with an interest rate benchmark.

The crediting rate for a variable universal life policy, or VUL policy, depends on the performance of investment funds.

The crediting rate for an indexed universal life policy, or IUL policy, depends on the performance of one or more investment indexes.

Like a whole life policy, a universal life policy builds cash value. But the issuer can let the death benefits and the premium payment schedule change.

Because of the modular nature of a universal life policy, the cost of a given amount of death benefit protection might be lower for a young universal life policy user than for a young whole life policy user. Advisors can change a variety of policy characteristics to fit with estate planning goals or other goals.

If the policy owner wants to keep the policy in force, the cash value must exceed the cost of insurance, or the owner must add premiums.

Moas’s critique of universal life insurance: Moas does not base his criticisms of universal life insurance on the view that insurers generally fail to make good on binding promises spelled out in the policies.

He argues, instead, that insurers mislead consumers by using absurdly low life expectancy figures and absurdly high investment return assumptions in the policy performance illustrations.

“The illustrations make no mathematical sense,” he says.

For clients who are in their 70s now and bought their coverage in the 1990s, insurers may have illustrated the policies using 1980s U.S. Census data. The illustrations assumed that the insureds would live to age 78.

For VUL and IUL policies, the typical illustration depicted constant 8% returns, rather than scenarios showing returns varying from year to year.

In the real world, Moas says, many people who qualify to buy medically underwritten life insurance when they’re in their 40s will live into their 90s, and stock prices change in an unpredictable way from year to year.

If a client buys a universal life policy at age 50, and the compound annual growth rate over the next 30 years is just 6%, the actual cash value at age 80 will be much smaller than what was shown in an illustration based on the assumption that the compound annual growth rate would be 8%, Moas says.

Meanwhile, he says, high mortality rates for people ages 80 or older mean that the cost of insuring an older individual is very high.

The result: When a client lives past 78, and a 6% compound average growth rate squeezes the policy cash value, the policy is likely to lapse sometime after the client turns 80 but before the client dies.

A client in that situation can keep the policy in force by making extra premium payments, but the premium bills for insureds in their late 80s or 90s will be extremely high, Moas adds.

Moas concedes that the policy illustrations are supposed to show clients how a policy could work in one specific scenario, not how the policy will actually perform.

Disclaimers usually warn clients against thinking of the illustrations as forecasts, he says. But few clients understand the warnings, and even some agents know too little about investments to recognize that expecting the S&P 500 stock index to go up 8% every year for decades is absurd, Moas says.

Non-permanent life: Moas admits that many universal life policies will pay significant death benefits at least until the insureds are in their 70s, but he contends that most clients believe their universal life policies will cover them until they die.

“Ninety percent of these policies will never pay a death benefit,” he says.

Clients can prevent policy lapses by buying coverage with no-lapse guarantees, but the typical no-lapse guarantee ends around age 85 and does nothing to help clients who live into their 90s, he says.

Agent compensation: Universal life policyholders could improve the policy funding levels by “overfunding” the policies, or making extra premium payments.

Moas says compensation arrangements discourage agents from promoting overfunding.

Agents typically get much higher commissions on the premiums used to support a scenario with an 8% compound annual growth rate for cash value than on the premiums needed to support a compound annual growth rate of 6% or lower, Moas says.

New regulations: The National Association of Insurance Commissioners has tried to rein in IUL policy illustrations by developing the Actuarial Guideline 49, AG 49A and AG 49B. The guidelines are supposed to discourage issuers and marketers from putting unrealistic investment return assumptions in policy performance illustrations.

One problem is that the guidelines do nothing to help the holders of the universal life policies already in force, Moas says.

Another problem, he says, is that the guidelines continue to let insurers and marketers create illustrations implying that the S&P 500 can go up every year.

“Where is the 0% interest-rate year?” Moas asks in his book.

He notes that MassMutual requires agents who sell universal life policies to include at least one 0% interest year in every universal life policy illustration.

The solution: Moas wants the SEC, Congress and state legislatures to step in.

For now, he says, one thing agents and advisors can do is to help clients ask the issuers of their universal life policies for in-force illustrations.

Life insurers do send annual statements showing a policy’s cash value and a variety of other figures.

The statements do not show how the policy cash value is likely to change, Moas says.

An in-force illustration will use the client’s current age, the client’s current life expectancy and current investment market data to show how the policy might perform in the future and when the cash value might fall to zero, Moas says.

Elan Moas. Credit: Moas

Allison Bell

Think_Allison

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