Vol 5 No 6		July 2003

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 and those who need existing policies reviewed and managed. We also assist clients with disability income and long term care insurance. The June 2002 Forbes magazine, and a July 16, 2003 Wall Street Journal article, name Peter Katt as one of only four nationally recognized advisors. The Forbes article states that, "…advisers are well worth the money… These savants are working for no one but you…" For references please contact us.

Financial Strength Ratings - That's It

Nearly every article about life insurance in the mainstream press reminds readers to check the financial strength ratings of companies before buying life insurance from them. This mantra has also been picked up by many advisors. Paying attention to financial strength ratings is a prerequisite, but should not be determinative in selecting a life insurance company and policy any more than hiring an associate into your firm should be based on their having an undergraduate degree. Of course they have an undergraduate degree and of course such-and-such insurance company has sparkling financial ratings - but what are their real attributes. Regarding the purchase of permanent life insurance, among the list of companies with outstanding financial ratings you need to know those very few companies with outstanding current pricing that give fair pricing treatment to old as well as new policies. These few companies are in sharp contrast to the many companies with outstanding financial ratings and excellent current pricing that do not provide old policies with the same excellent pricing. Because the probabilities are that permanent life insurance is a very long-term asset, it is critical that you judge companies by their fair treatment of old policies relative to the current pricing on newer policies. Almost all companies selling universal life have a history of repeatedly coming out with newer versions of their basic policy, with each newer version being better than the versions being replaced by having lower insurance costs and higher interest rates. Many mutual companies (but not all) have done a much better job of providing old policies with fair pricing relative to new.

Most companies selling universal life (UL) have repeatedly replaced existing policy series with new ones. The older UL policy series typically have cost-of-insurance (COI) charges that are much higher than the newer series and often the interest crediting rates are lower. I was an expert consultant in lititgation against a particularly offensive company (a subsidiary of a highly rated insurance conglomerate) whose COIs were not only much higher relative to their newer UL policy series, but were much higher than what they had been when the subject policies were sold in 1985. This is absurd because mortality has improved not declined since 1985. Specifically, the 1985 UL policies' COI rates were 100% to 300% higher than their 1997 rates and 40% to 60% higher than the COI rates in effect in 1985. In addition to the difference in COI rates, the 1985 UL policies' interest rates were 50 to 100 basis points lower than the 1997 version. In another case I worked on last year another highly rated company's UL policy sold in 1987 was a replacement target by the same agent because its pricing was no longer competitive. The recommended new policy was a new UL from the same company! That is, the company was telling the world that the only way to have competitive pricing is to buy another policy from us.

When I raise howls over such behavior, companies, agents and friends who are actuaries very calmly explain that underwriting standards and investment strategies are different, and that I am placing too high of a standard on life insurance companies, blah-blah-blah. Companies have added more rarified underwriting categories like the super-preferred-delux-ultra and I strongly suspect that lower interest rates on older ULs are being used to subsidize rates for newer ULs to be more competitive in the marketplace. But underwriting standards and investment techniques aren't different. Regarding my expectations that companies treat old policies fairly instead of constantly screwing them in favor of newer ones, if anything I am not hard enough on them. They have utterly failed consumers and no one in the life insurance business much cares. When UL came onto the market in the early 1980s there was a torrent of articles and advertising about this revolutionary policy type. It was proclaimed that a UL policy would be the last life insurance policy buyers would ever need to buy because it would participate in changing interest rates and mortality experience. Typical of this was a May 1982 article in Life Insurance Selling that listed these as advantages, as developed by the self-proclaimed independent Life Insurance Marketing and Research Association. This was the party-line surrounding UL until around 1986 when the first wave of UL policies began being sidelined in favor of newer versions. It has been downhill ever since.

The antithesis of this behavior is how companies like Northwestern Mutual, Guardian and Mass Mutual have continued to treat old policies as fairly as new ones in the way they distribute their dividends. The difference in value earned by Northwestern Mutual, Guardian and Mass Mutual policyowners compared with UL policyowners from the 1980s is huge. Using financial strength ratings as a determinative measurement for life insurance companies is foolish. Financial strength should only be a prerequisite for developing a list of companies whose fair treatment of old policies can be tested.

Bartender Who Put Rum in My Rum and Coke

As a bartender during the latter years of my college experience a patron ordered a rum and coke, took one sip, and complained about the rum taste. I accommodated him by changing it to a bourbon and coke. Every now and again an informed client nevertheless comes back at me with that awful rum taste in his mouth that always takes me back to those uncomplicated days of my youth with the sounds of muffled conversations and ice tumbling into glasses. Late last year I was hired by a client on the cusp of buying a large amount of life insurance from his broker buddy and the firm's insurance expert. I warned him not to use my work to start a debate with these salesmen, because any analysis I did that was perceived negatively by them would be met with ferocious defenses and counter-attacks. (There were commissions of $250,000 at stake for them). Such debate, I warned, would be very time consuming for me and expensive for the client. I asked not to be hired if such was his intentions. The client laughed about this insight and proceeded to play us off against each other anyway. After six months of battle the client did not buy life insurance from his broker buddy, the insurance expert ultimately discredited himself by using aggressive tactics, and the client was shocked and angry at the fees he had paid me when no life insurance had been purchased due to his confusion about who to believe. Being offended by the rum in an ordered rum and coke is one of three insights needed to understand almost all dysfunctional human behavior. Remind me to get to the other two someday.