Vol 1 No 2		May 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 doesnít apply to all such policies identified because of different ages, ratings or policy structures).

Alexander Hamilton Life - Irresistible P 250 policy illustrations we have reviewed appear to produce very exaggerated projected policy values. Exaggerating policy performance via illustrations at the time of sale is a trick used by many marketing predator companies, but the Alexander Hamilton policyís projected values continue to appear to be very exaggerated eight years after the sale. This is unusual. The harm that can be done by exaggerating performance is it creates policyowner expectations that probably wonít be met. A policyowner who thinks his premiums will be, say, $10,000 might discover later on that premiums of more than twice this amount are needed to continue the policy. Such an increase in target premiums could be very disruptive to a clientís cash flow. Of course it is possible that my techniques for testing pricing is wrong with respect to this Alexander Hamilton policy or that Alexander Hamilton is giving Irresistible P 250 policyowners a great deal at the expense of stockholders or other policyholders. Existing policies should be independently evaluated to detect possible exaggerated policy values so a client can be forewarned that much higher premiums in the future are possible.

Security Connecticut - Designer Life, Prime Design and Ultra Design universal life policies which we gave an alert about in our February 1999 addition because they are a terrible value and which a class action was filed in Little Rock, Arkansas on January 29, 1999 (I am an expert in this case). I just learned these policies are subject to a proposed Class settlement as the result of class action litigation in Connecticut (Jacobson vs. Security Connecticut). Notice to the Class was received by our class representative April 3. The opt out date is May 3 as is the date to file an objection. The hearing is scheduled May 17 before the Honorable Julia L. Aurigemma, Judge of the Superior Court of Connecticut, Complex Litigation docket at New Britian, Courtroom 2A, 20 Franklin Square, new Britain, Connecticut 06051. This proposed Class settlement appears to be a very bad deal for Class members. The total compensation is $15,000,000 credited to policies over six years. We understand that 70,000 notices were sent out. Even if there are only 35,000 in the Class this represents an average award, credited to their policies over six years, of only $429. I calculate damages for our class representation in the suit filed in Little Rock to be around $30,000 if both past losses and preventing future losses are taken into consideration. It appears that the damages in the proposed Class settlement are based on a fraction of past losses without any provision that would prevent Security Connecticut from continuing charging too much for cost-of-insurance and crediting below market. I recommend Class members who have the tolerance for litigation to consider opting out and joining other opt-out policyholders in individual actions or to join objectors to this Class settlement.

Tips

A life insurance policy that was issued before non-smoking discounts were offered (usually before around 1978) insuring a non-smoker is very likely substantially overpriced because the insured would be entitled to the lower mortality costs granted non-smokers. Such polices should be independently tested for insureds who are still in good health. If testing demonstrates that a new non-smoker policy would provide much better value the existing policy that doesnít distinguish between smokers and non-smokers should be replaced. I recommend such replacement be done with a low-load to avoid another round of full policy loads. The companies selling low-loads I prefer are Ameritas (800 / 552-3553) and USAA (800 / 531-8000).

When considering the purchase of a fixed deferred annuity your clients should give equal attention to possible withdrawals and intended pay-outs as well as the tax-deferred build-up. The article accompanying this newsletter deals with this issue in detail. For clients who do wish to purchase a fixed deferred annuity they would use two criteria in selecting an annuity. In order of importance, the companyís financial strength as rated by the rating services. And second, rather than paying attention to the current crediting rate obtain a history of crediting rates for all fixed deferred annuities this company has sold. I am far more interested in what a company has actually done rather than what they are currently promising. Some companies use high initial crediting rates for marketing purposes, then drop them below what is competitive.

Information

See my February 1999 AAII Journal column about deferred annuities. As you will note I believe far too many deferred annuities are bought because the sellers concentrate on tax-deferral without much, if any, attention to withdrawals or pay-out.