low load life insurance
Beliavsky
people who insist on buying cash value life insurance (the media like term)
should buy a low-load policy with no agent commission. To test this advice, I
sent an illustration of an agent-sold universal life (UL) policy I just bought,
funded up to the
MEC limit, to a representative of a direct-sales, low-load company and asked
him to illustrate a UL policy with same death benefit (DB) and premiums.
I found that the low-load policy had higher cash surrender values (CSV) in the
first nine years but lower CSV after that, with the ratio of low-load to
agent-sold CSV equal to 69% by age 70. I think the reason the low-load policy
illustrates lower CSV and DB after many years is that it has
(1) an interest crediting rate that is 0.7% lower
(2) only a standard nonsmoker class, compared to a select preferred (nonsmoker)
for the agent-sold policy. Maybe having agents in the field, who meet
applicants in person, helps the home office to make finer distinctions in
underwriting.
I think that for a cash value policy, how it performs over the long run is most
important, so the agent-sold policy looks better to me. Other people comparing
different companies could draw different conclusions, but I've seen no evidence
that journalists recommending low-load policies in the financial media have
done careful comparisons. Furthermore, for a complicated product like cash
value
insurance, a relationship with a good agent could be valuable.
Brent D. Gardner, ChFC
I've done these comparisons myself, and come to the same conclusion.
For that matter, if I want to beat the no- or low-load version with
high early cash values, I can do it and STILL beat them long term with
literally dozens of leading carriers.
There's always a trade off for early surrender values, and it often
appears in late duration policy values.
This is just more proof that the media is a very poor source for
advice and invormation regarding insurance products.
HW "Skip" Weldon
Gardner, ChFC) wrote:
>> I think that for a cash value policy, how it performs over the long run is most
>> important, so the agent-sold policy looks better to me. Other people comparing
>> different companies could draw different conclusions, but I've seen no evidence
>> that journalists recommending low-load policies in the financial media have
>> done careful comparisons. Furthermore, for a complicated product like cash
>> value insurance, a relationship with a good agent could be valuable.
>
>I've done these comparisons myself, and come to the same conclusion.
I certainly agree that a good agent can make the difference, and if
the insured needs one, that would justify the higher costs.
But my sense is that this is a lot like the infamous <grin> threads on
load versus no-load investing. In other words, if the consumer does
not need the value that a local agent would bring, how can the higher
cost product beat the lower cost product unless you permit different
growth rates or other policy features to intrude into the analysis?
-HW "Skip" Weldon
Columbia, SC
Beliavsky
>the insured needs one, that would justify the higher costs.
>
>But my sense is that this is a lot like the infamous <grin> threads on
>load versus no-load investing. In other words, if the consumer does
>not need the value that a local agent would bring, how can the higher
>cost product beat the lower cost product unless you permit different
>growth rates or other policy features to intrude into the analysis?
>
>-HW "Skip" Weldon
> Columbia, SC
A commissioned life insurance policy does not necessarily have higher costs per
policy, for the following reasons:
(1) agents' commissions are partly a marketing expense, and a company without
agents may need to spend more on media advertising.
(2) a company without commisioned agents still needs to pay qualified staff to
prepare illustrations anwer questions over the phone.
(3) agents can help companies screen out bad risks, which is good if you are a
good risk. As I wrote earlier, the low-load company did not have preferred or
select preferred ratings, unlike companies with agents.
(4) since life insurance is generally "sold", not bought, a company with agents
can sell more policies and spread its costs (actuaries to design policies,
information technology costs, money management costs, etc.) over a larger base.
(5) a larger company can invest slightly more agressively than a smaller one,
because the liquidity needs as a proportion of assets are slightly smaller. If
the deaths of insureds are independent events, the standard deviation of the
dollar amount of claims paid should scale as the SQUARE ROOT of the face value
outstanding. Partly for this reason, size will be positively correlated with
the financial soundess of an insurer.
Whether the direct costs of having commisioned agents outweigh the indirect
costs of not having them is an empirical question. The fact that the
commisioned policy looks better to me than the low-load policy suggests that
the indirect costs can be larger than agent commissions.
Brent D. Gardner, ChFC
> I certainly agree that a good agent can make the difference, and if
> the insured needs one, that would justify the higher costs.
>
> But my sense is that this is a lot like the infamous <grin> threads on
> load versus no-load investing. In other words, if the consumer does
> not need the value that a local agent would bring, how can the higher
> cost product beat the lower cost product unless you permit different
> growth rates or other policy features to intrude into the analysis?
Skip,
TANSTAAFL.
No- or Low-load life insurance is a misnomer, or oxymoron, if you
will.
There are better buys available through any agent, not just good ones.
The best products, and I mean the BEST, are all sold via agents. There
is zero comparability between direct channel life insurance and direct
channel investment company shares. The only people who buy direct
marketed permanent insurance are the tiniest fraction of closed minded
people who have been bamboozled by talking heads into thinking that
they can cheat the system by cutting the agent out.
The only person they screw is themselves.