Vol 3 No 3		September 2001

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.

Alert

Our April 2001 bulletin addressed "...viatical settlements that involve the sale of a life insurance policy by a terminally ill insured to an intermediary (viatical firm) that then sells the policy itself or an irrevocable interest in the death benefits to investors. More recently, viatical firms have begun purchasing life insurance policies from healthy insureds that don't believe they need the coverage anymore." I am returning to this issue again so quickly because it is becoming apparent that heavy marketing and promotion is being done to convince fiduciary advisors that they have an obligation to inform clients of the possible benefits of selling unneeded life insurance policies in a so-called secondary market, in part as a way of determining a policy's best value for gift valuation purposes. Indeed, our interest in returning to this subject so soon was triggered when a professional journal asked me to peer review an article touting this obligation.

Except in very rare situations, I have serious doubts that selling a policy in this so-called secondary market is a prudent action. To test my doubts I want to study the claims being made about such sales by closely examining the details of actual proposed purchases. If you have a client presently involved in negotiations to sell a policy we would like to study the details. We are willing to do two of these cases on a pro bono basis. We also invite any comments you may have regarding this issue and any suggestion as to the most appropriate publication to publish my findings.

Tip

Nearly every published article about buying life insurance advises buyers to pay close attention to the financial strength of insurance companies as the primary (actually only) measure of a life insurance policy's worth. With great authority these pieces direct readers to research financial ratings from Best, Standard & Poor's, Moody's, Fitch and Weiss. But the financial strength ratings of insurance companies are only the prerequisite - a necessary first barrier to be cleared. The far more important criteria is how does a financially sound insurance company treat old policies compared with how they treat new policies. Think of this as similar to hiring an attorney. The fact that an applicant has an undergraduate degree is a prerequisite, it is other criteria that will result in hiring or rejecting an applicant. The same is true with life insurance companies.

A dirty little secret is that many companies (including many with great financial strength ratings) price their old policies very poorly, apparently so they can price the new policies they are now selling very competitively. Generally, this is done by having different policy series of nearly identical policies. We always check this out and reject companies whose old policies' pricing isn't as good as the new one. (See my August 1998 AAII Journal column).

Companies that have shown a remarkably excellent history of treating old and new policies fairly are Northwestern Mutual, Guardian and Mass Mutual for participating whole life and Ameritas Low-Load and USAA for universal life.

Information

Long term care (LTC) insurance is a new hot "product" being marketed by the insurance business. Frequently sales hype stresses the positives of the sales story while ignoring important perspectives or information that may tend to halt a sale. Attached is a LTC report to a client that I think covers the important issues a wealthy client should consider in deciding whether they should even buy a LTC policy and if so which policy. Also please see several LTC columns on this website under the Articles section.