Vol 1 No 1		February 1999

Katt & Company is a fee-only life insurance advising firm. We work with clients throughout the U.S. - primarily by phone, mail, email and telecopy. Typically, we assist clients buying life insurance, those who need existing policies reviewed and managed, and in support of litigation. For references please contact us.

Alerts

(Information about specific life insurance companies is obtained during our work with clients and as such is ad hoc and not based on a systematic analysis of all life insurance companies. Although we believe the information presented is accurate, it is possible that it doesnÌt apply to all such policies identified because of different ages, ratings or policy structures).

Security Connecticut Life Insurance Company - Designer Life universal life policies that we have reviewed are performing very poorly and are a terrible value. Security Connecticut ceased selling the Designer Life series in 1992. The cost-of-insurance charges appear to have been raised nearly to guaranteed levels, which is unheard of. Interest crediting for Designer Life policies has consistently been below market rates since 1992. If insureds are in good health your clients should look into replacing these Designer Life universal life policies. My recommendation is that any replacement be made with a low-load universal life policy such as sold by Ameritas (800 / 552-3553) or USAA (800 / 531-8000). For insureds who are not in good health and could not qualify for a preferred or standard rating with a low-load replacement policy help may also be on the way. I understand a class action law suit is about to be filed against Security Connecticut on behalf of Designer Life policyowners. I have been retained as an expert in this case for Plaintiffs. I will keep you posted on the progress of this case.

Confederation Life - A Canadian company whose U.S. operations were seized by regulators in 1994 due to solvency concerns. Within the past year various blocks of policies have been taken over by several companies, principally Phoenix Home and Aetna. Generally, policies of companies that have been seized and then acquired by new companies will not be a good value due to a higher proportion of healthy insureds replacing this coverage, leaving a higher proportion of unhealthy insureds who have been unable to leave. This causes what is known as adverse selection. Adverse selection causes mortality costs to soar in the years ahead, making it probable that former Confederation Life policies will perform very poorly. Healthy insureds who had Confederation policies that have been assumed by Phoenix Home or Aetna should consider replacing them, with an analysis to determine the most economical timing of such a move taking into consideration any surrender charges that may apply. Again I would recommend that low-load policies be used for replacements to avoid having to pay commissions twice for the same insurance need.

(Note - policy replacements are generally not recommended, but in the Alerts mentioned above policy replacement may very likely be in the policyownerÌs best interests).

Tips

A life insurance policy that was issued with a substandard rating should be monitored with respect to the reason(s) for the substandard rating with the goal of reducing and possibly eliminating the rating. In 1988 we assisted a client with the purchase of a $250,000 low-load universal life policy to fund a buy-sell agreement. This policy was issued with the substandard rating, Table D, due to the insureds past alcoholism, a battle he continues to win. In 1990 we were able to get the insurance company to reduce the substandard rating to Table B with a subsequent elimination of any substandard rating. The net present value savings in mortality costs to life expectancy due to persistent monitoring are around $15,000.

Over the years I have had many clients with seasoned participating whole life policies with large policy loans and financial ability to easily pay off these policy loans. If the insurance company is considered a good one, these policy loans should be paid back to avoid future non-deductible loan interest costs (whether paid in cash or absorbed by the policyÌs values), to let the value of the former loan balance accumulate within the policy basically tax-free and to avoid possible lower dividend distributions for policies with loans. To the extent a client wishes to have access to cash from the policy during his lifetime paid-up-additions cash values can be withdrawn tax-free (no more loans please). And the repaid loan will add additional values to the death benefits which a beneficiary will receive tax-free. Maintaining policy loans for clients who have the capacity to repay them is almost always a mistake.

Information

See my December 1998 Journal of Financial Planning column about Long Term Care insurance.