Vol 1 No 3		September 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 doesnĖt apply to all such policies identified because of different ages, ratings or policy structures).

Vol. 1, No. 2 listed Alexander Hamilton Life - Irresistible P 250 as a policy whose illustrations appear to have very exaggerated projected policy values. The practical consequence of exaggerated projected values is that the expected premiums are much lower than they should be. We warned that such exaggerated projected values cannot continue and that many thousands of policyowners will face the reality that their premiums will have to be much higher than they have been assured. The scheme Alexander Hamilton used to illustrate much better policy performance than their more honest competitors was the promise of bonus interest paid in three stages. Typical was bonus interest of 85 basis points in the third policy year, another 40 basis points in the 11^th policy year and a final 40 basis points in the 16^th policy for a total of 165 bonus basis points. In other words, Alexander HamiltonĖs promise was current interest crediting + bonus interest = above current interest crediting giving them a huge illustrated advantage. However, I have recently discovered that these policies are no longer for sale and that the current interest crediting rate has dropped to 4.95%, well below current. Therefore, I conclude it appears that Alexander Hamilton has broken their promise to pay bonus interest above the then current rate. Instead, they appear to be using the following formula - below current interest crediting + bonus interest = current interest crediting. It will be interesting to see whether Alexander Hamilton will face benefit of the bargain law suits as a result of this.

Phoenix Home Life - Survivorship Life Protector 2 policies insure two lives with death benefits paid at the second death. This policyĖs values change at the first death. When a blend of whole life and term insurance is used there can be dramatic and unexpected changes in projected annual premiums depending on when the first death occurs. A Phoenix Home policy we are managing projects annual premiums that range from $15,000 to $22,000 (a variance of 47%) depending on when the first death occurs. The potential change in necessary premiums can be totally unexpected because Phoenix Home doesnĖt provide this kind of information without it being specifically requested. The information that is needed are in-force illustrations showing various first death scenarios with the premium adjusted so the policy continues to project endowment at policy maturity.

Tips

Phoenix Home isn't the only company that uses the kind of second-to-die pricing referred to above. You would be wise to recommend clients that are insured with second-to-die policies find out whether the policy values change at the first death. If they do your clients should request in-force illustrations that show policy performance assuming the male and then the female die in five year increments to policy maturity. That is, if the policy is in 10^th year get in-force illustrations assuming the male and female die in the 15^th, 20^th-policy years until age 90.

A recent case reminded me of a huge potential problem that can be very easily prevented. Any time there is a three party relationship to a life insurance policy it is very likely it will produce an adverse tax consequence. One example, a closely-held company is the owner of a policy insuring the majority shareholders life with the wife the beneficiary. If the shareholder dies it is very likely the proceeds will either be considered ordinary income or dividend income. Another example, Dad is the insured, Mom is the owner and the children are the beneficiaries. This combination will likely cause the proceeds to be considered a gift from Mom to the children. You should obtain insured, ownership and beneficiary information for every policy your clients are involved in.

Information

See my July 1999 AAII Journal column discussing variable life making the rather obvious argument that buying a VL policy with a level death benefit while allocating premiums primarily to equity sub-accounts will very likely produce some very interesting and unexpected results because VL illustrations are just not able to convey any reality to prospective buyers.