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Lessons I've Learned
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Lessons I've Learned
Wednesday, 28 October 2020 15:23

I'm coming up on my thirtieth anniversary since I started my career in the insurance business. Along the way, I've learned some things.

Some of these lessons I was told about in advance, and then confirmed their validity with real-world experience. Other lessons I just learned the hard way, having been told some bovine scat that turned out to be based on utopian fantasy, urban legend, or other malarkey parroted by people who have no idea what they are talking about.

Lesson Number One

There Ain't No Such Thing As A Free Lunch. This was repeated every day in class by the dean of the Nuclear Engineering Department at Kansas State University, Dr. Hermann Donnert, back when I was a student. I have learned that this axiom is correct, without exception. I don't count the cheese the mouse tried to eat before the mousetrap sprang as a free lunch. There most certainly was a cost.

Waiting costs. Acting rashly costs. Doing nothing costs. Doing something costs. Changing your mind costs. It all costs. Everything.

Caveat Emptor is Latin for "Buyer Beware."

Every purchase you make over your lifetime has an opportunity cost. Warren Buffet refers to his $300,000 hair cut because that's what a haircut back in the 1950s is worth to his portfolio today, had he invested that money instead of getting a haircut. My peers that promote Infinite Banking and Bank On Yourself do a better than average job of preaching about opportunity costs because what they say is more true than not: We finance every purchase we make. Even those purchases made with cash.

I get asked "What is the best kind of life insurance?" all the time. It's probably the question I've been asked the most over my career. And people ask this common question for good reasons, as well as nefarious reasons. People are funny like that. Rest assured, I know why some ask, and I have the most fun at their expense because their pre-planned response to my logical answer never works.

And my answer is...

Lesson Number Two

The best kind of life insurance is the kind that is inforce when the insured dies. This is the best answer. Period. Others can argue to the contrary, but they will not persuade me to change my mind. All other answers, all other beliefs, cannot be supported by nor defended by logic and reason. I've delivered too many death claims. Nobody ever asks me what kind of insurance policy it was when they ask for a claim form. They only ask me "How much will I get?" and "When can I expect that check?"

But I can modify my answer to fit the perspective of a consumer:

The best kind of life insurance to own is the kind that is inforce when you die and your loved ones (or your business) need that money.

Trust me, your loved ones aren't going to be asking what kind of insurance you owned, either. They just want to know where the policy is and who do they call to file the claim. So don't hide the policies. Don't lock them up in a bank vault, either. Make sure your beneficiaries know the policies exist and where to find them. I keep mine in a three-ring binder on a shelf. It's very easy to spot because I know I won't be here to help my beneficiaries find them. I also keep my Disability Income Insurance, Business Overhead Expense Insurance, Critical Illness Insurance, Cancer Insurance, and Long-Term Care Insurance policies inside this binder, because come claim time, I may not be able to file my own claims. I could be very sick or injured, stuck in a hospital, or confined to a long-term care facility.

Insurance Policy_Binder

I can also modify this "best kind of life insurance" axiom to fit my perspective as an agent trying to protect beneficiaries:

The best kind of life insurance to sell is the kind that someone will buy today. My biggest failures in life are the times where I met with a prospective client and walked out without an application, and then the prospective client died without coverage. Color me strange, but I keep photos of some of these people on my wall to remind me when I'm making phone calls to book appointments and I'm getting rejected. They remind me why I fight to see people every day.

More than a few times I've failed at my job and a prospective client died before I persuaded them to buy a policy. This is why I invest so much of my time perfecting my craft, honing my skills, endeavoring to make the complex exceedingly simple so that there's no logical reason to delay when there's an obvious need for coverage. It's why I sometimes pester prospects. I know I can be annoying, but I have their best interests at heart. I only pester people that I think need pestering.

It's also why I lead with convertible term life insurance, specifically Annual Renewable Term that can be converted to level term as well as other forms of permanent coverage. I can figure out how much you need using a legal pad and pen. What kind you need will change. Temporary needs often become permanent, but some temporary needs will go away, and even some permanent needs may change in the future. Even those pundits you hear on the radio trashing permanent life insurance end up buying it when they need it. They just don't tell you they bought it. We all know they are liars.

General George S. Patton, Jr., said "A good plan, violently executed now, is better than a perfect plan next week."

Lesson Number Three

There's no such thing as bad life insurance. The "worst" policy you can find will still pay a death claim. I'd rather sell the wrong kind of insurance today and walk out with a signed application than try and fail to sell what I believe is the right kind if that means waiting to take an application at some point in the future. I'd rather sell the client what they want right now than walk away without a signed application and a check because sometimes prospective clients don't survive long enough for me to return and persuade them to buy the kind I recommend. We don't always get a second chance to do things right. If I walk out without a signed application, I failed at my job.

Many times I have recommended a very large term life insurance policy and the prospective client rejected my advice. They ask "What's in it for me?" meaning they want cash values, they want tax free retirement, they want a return of premium, or some other personal benefit, instead of pure protection that only benefits their loved ones.

Likewise, many times I have recommended a very large permanent life insurance policy to solve a permanent problem and the prospective client rejected my recommendation because of semantics: They didn't like the name of the policy. They'd rather take advice from a charlatan on the radio than from the licensed and educated professional right in front of them. The radio dude that makes his money peddling advertising for companies that promise to get you out of your timeshare and endorsing local mattress providers will not be hand delivering the death claim check to your loved ones. I will. Pundits on the radio will not take your widow's phone calls. I will.

During my freshman year as a career agent working for a big mutual life insurance company, I delivered several dozen death claims. One of those claims was on a policy I had written only six months prior. The rest were claims I paid on policies written before I was born, sold by agents who are long gone. Agents come and go, they quit the business, move to other companies, retire, and die, same as everyone else. Their clients become "orphans" and those "orphans" get assigned to new agents for service.

We are trained to call on "orphans" to make sure their beneficiary designations are current, and while we're at it, review their needs and offer new coverage to fill any gaps. The average consumer might be shocked to find out how many people have their ex-spouse as the beneficiary, or their beneficiary is already deceased and there's no contingent beneficiary named. Their current spouse might not be pleased to find out that the insurance money is going to the wrong person after it's too late. Once an insured person has stopped breathing, you can't change their beneficiary.

Horror Story: An insured's grandchild called to file a claim on a policy she found. Her grandpa had divorced at some point but failed to change his beneficiary. His ex-wife - grandma - had moved far away, remarried, and subsequently died. Now her widow is the beneficiary of her estate. Since grandpa had not named a contingent beneficiary, his ex-wife's estate gets the death benefits, and the ultimate beneficiary was some guy that nobody in grandpa's family even knew.

This is NOT a rare event. It happens EVERY SINGLE DAY. That's why reviewing your beneficiary designations is so vital, especially after a major change in life circumstances.

Sometimes when we call "orphans" we find out the insured is already dead. As I mentioned before, survivors don't always know about any insurance. Especially if an old policy was "paid-up" or premiums were being paid using a policy's cash values and/or accumulated dividends. I've paid several claims over the years by merely making a phone call and finding out that my "ophan" was already dead. This is why I keep saying that you should make sure your policies easy to find, and that your beneficiary designations are current.

Also, don't avoid those service calls by your agent. Seriously.

The one thing I noticed about all the claims I paid on "orphans" was that they were ALL some form of Whole Life insurance. When I looked at their issue ages, I found two obvious trends.

The first trend: Most of the policies were purchased when the insured was an infant or very young. Issue ages of zero, 1, 2, 3, were very common. These are policies purchased by their parents, or sometimes grandparents, 60, 70, 80, and 90 years ago.

The second trend: The next most common issue age was between ages 18 and 22. I found out from my father that agents had historically called on people at two times early in their life. The first call was on new parents to sell coverage on the children. The second call was on those same insureds when they became adults, often age 18, but also age 22 when they either graduated from college or returned from war. The third most common purchase age was marriage, followed by the purchase of a home with a mortgage, so quite a few were issued to people in their twenties. Some of those third and fourth purchases remain inforce for life, but not as many as the first and second purchases.

There are two reasons why these policies stay inforce for upwards of a century.

The obvious reason is that insurance on a child has the lowest premium that person will ever pay, and that second policy purchased at age 18 or 22 is the next lowest premium they will ever pay. Moreover, quite a few were policies that had premiums limited to 20 years, or age 65, etc. Dozens of the claims I handled were on policies that had been "paid-up" for many decades. You can't buy a new policy with a premium equal to, or less than, zero. Once a policy is "paid up" it tends to stay inforce until the insured dies. The same can't be said for term life insurance, which tends to expire before the insured does.

The not-so-obvious reason some of these policies stay inforce is sentimental. When the insureds die, they are often at or beyond average life expectancy, and that policy was one of their lifelong connections to their parents or grandparents. It had been a gift from someone they loved that's already long gone.

A very sad experience I've had more than a few times: Beneficiaries bring me old life insurance policies that lapsed. They find them in file cabinets, desk drawers, bank safety deposit boxes, or in other papers that a parent or grandparent kept.

Most of them are level term life insurance that had reached the end of the level premium period and the massive premium increase in that 11th, 16th, or 21st year, wasn't affordable. This is NOT a rare event. It's a well-known fact among us insurance geeks that more than 99% of term life insurance policies never result in a claim. 

Don't get me wrong. I'm not anti-term life insurance. I'm pro understanding what it is you own AND reviewing your coverage EVERY SINGLE YEAR, or whenever there is a MAJOR CHANGE IN LIFE (i.e., marriage, divorce, the birth of a child or grandchild, graduation, career change, home purchase, retirement, creation or dissolution of a business, inheritance, as well as at certain milestones, like ages 55, 59½, 62, 65, 72 because of how the law affects people at specific ages).

Some of the lapsed policies are Whole Life or Universal Life. Why did they lapse? Some just stopped paying the premiums and never bothered to meet with their agent to discuss their Standard Non-Forfeiture Options that these policies had. That's a shame. This is why avoiding your agent can be an error that cannot be fixed after you've stopped breathing.

Whole Life has several very valuable options when you can't or don't want to keep paying your premiums: Cash surrender is only one of those. There's also Reduced Paid-Up which guarantees a lifetime of coverage with no more premiums due. There's Extended Term which uses your cash value to purchase a single premium term policy that will last for a period of time (how long varies with how much cash value your policy accumulated). There's also the Annuity option, which converts your policy cash values into a stream of income that cannot be outlived, guaranteed.

Many forms of Universal Life have lapsed because they were underfunded and interest rates have declined substantially since the policy was issued. This is another reason to review these policies every year. Remember lesson number one: There Ain't No Such Thing As A Free Lunch.

Another reason these policies lapsed is the policy owner took out a policy loan and never paid the interest or principal back. If you take out a mortgage and never make your payments, there are consequences. If you borrow to purchase a new car and fail to may your payments, there are consequences. If you don't pay off your credit cards, there are consequences. When you fail to repay a policy loan, there are consequences.

All of these consequences are predictable, and they are manageable, but you can't keep hitting the IGNORE button on your phone when your agent calls you. There are predictable consequences of abusing the IGNORE button, too.

Lesson Number Four

There's never enough death benefit. No matter how much I try, I cannot overinsure my clients. As a rule, companies won't allow a client to be overinsured, and as a practical problem, most people will not purchase the maximum amount a company will issue.

When I'm helping a widow, widower, or other beneficiaries, fill out a claim form, the one thing I have never heard is "What will I do with all this money?"

There's never, and I mean NEVER, too much money.

Sometimes, there's not enough. Especially when a parent dies early and leaves a spouse with young children behind. Social security for survivors is welfare at best, a sentence to poverty at worst. And anyone that can do math knows these welfare programs are on their last legs because our congress critters have failed miserably at their jobs, promising blue sky and leaving the bill for this government cheese to be paid for by many future generations. Prudent people do not rely upon government welfare for the safety and financial security of their loved ones.

If you earn $50,000 per year and I recommend $1,000,000 of life insurance, you are NOT "worth more dead than alive."

Let's do the math, shall we?

If you invest $1,000,000 for current income, about the best you can expect, without taking excessive risk, if you are prudent, is about 4% per year.

$1,000,000 × 4% = $40,000

or

1,000,000 × 0.04 = 40,000

That's an 80% replacement of your Human Life Value, your ability to produce an earned income. That's not over-insured. That's adequately insured. If you owed a lot of money (mortgage, credit cards, student loans), and/or were early in a career with the potential to have a substantially increasing salary over time, then $1,000,000 may actually be grossly UNDER-insured. Some companies are now allowing agents to submit applications for 30 and even 40 times income for insureds up to age 40. If they own a business or are in certain high-income occupations, an even higher multiple of income can be justified mathematically.

Conservative planning generally requires 25 times an annual income need in capital (cash) in order to produce a replacement income stream. To replace $50,000 requires $1,250,000 of capital. To invest that capital in order to offset reductions in purchasing power due to monetary inflation will require an even larger capital sum, because risky investments produce stochastic results that never reflect the deterministic projections used by failed financial planners that are mired in big tech toys, fintech tools, low-touch apps and other inhuman piles of confetti designed to confuse and confound.

I know I'm disregarding inflation with my 4% figure. I know your radio pundit who has no skin in the game, who has no duty to perform, who has no fiduciary responsibility, will wax off about how you can do better with four very specific mutual funds he recommends to every person on the planet, without regard to the suitability of his one-size-fits-all broken record recommendation. All of us professionals know he's full of excrement when he says "anyone can get 10 to 12 percent" per year, Ad Infinitum. When he lies this often, it's very easy to discount 100% of what he says, because his advice is literally dangerous.

Fred Schwed wrote a book aptly titled "Where Are the Customer's Yachts?" that was first published in 1940, and has been revised and re-published several times since then. The book is often cited by finance people such as Warren Buffett, Jack Bogle, and Michael Lewis as one of the most authentic, timeless, hilarious, and true descriptions of the culture of Wall Street and investment firms. When a prospective client wants to use what I believe are absurd rates of return, I ask the question "Where are the customer's yachts?"

Because if a 10% return on a portfolio was easy, then everybody would be doing it, and America would have many, MANY more millionaires than it already does. The fact is most affluent people in America get rich slow. The Zuckerbergs, Bezos, and Musks are the exception to the rule. The Millionaire Next Door got that way by living within his means much more than by gambling at the casino, buying lottery tickets, and speculating on stocks.

If you want to take more risk, then you need more principal. Argue with me all you want, I know how widows and widowers invest their death benefit checks. Overwhelmingly, it's NOT the stock market, it's NOT mutual funds, other than money markets. Way too many will park it in bank savings accounts earning less than one percent.

As one of my mentors once said "Having a million dollars in mutual funds is very easy. All you have to do is start with two million."

This is not a joke. Peter Lynch, who was one of the world's best money managers, admitted in an interview that more than half of the investors in his mutual fund, Fidelity Magellan, lost money even though his fund was beating the literal snot out of the stock market indices during his tenure. He, along with Warren Buffett, John Bogle, and Ralph Wanger, who are collectively some of the best money managers in world history, have the following to say that's worth repeating over and over:

"Never invest in anything that cannot be illustrated with a crayon" - Peter Lynch

"Rule No.1: Never lose money. Rule No.2: Never forget rule No.1." - Warren Buffett

"Our favorite holding period is forever." - Warren Buffett

"Only buy something that you'd be perfectly happy to hold if the market shut down for 10 years." - Warren Buffett

"I try to buy stock in businesses that are so wonderful that an idiot can run them. Because sooner or later, one will." - Warren Buffett

"If you have trouble imaging a 20% loss in the stock market, you shouldn't be in stocks." - John Bogle

"If you believe you or anyone else has a system that can predict the future of the stock market, the joke is on you." - Ralph Wanger

When older beneficiaries on Social Security realize this lump sum is all they will ever have, they become very risk-averse. Your anecdotal exceptions do not make the rule. Widows keep their cash in the bank. Yes, the spendthrift types exist, but in my experience, widows, especially those with a mortgage and young children, or who are already on a fixed income, hoard their cash. They want their money safe. That means bank deposits, and maybe fixed annuities, or government bonds (at least, until their interest rates finally hit zero, then interest in Uncle Sam's offerings has waned severely).

I know that I can get 4% without any market risk using the boilerplate Period Certain Annuity tables with any large life insurance company, and that brings the risk down to as close to zero as possible. Even in our very low-interest-rate environment, I can get more than 4% guaranteed for upwards of 30 years, so I use the minimum guarantees built into contracts as my guide. I'd rather under-promise and over-deliver.

Lesson Number Five

Everybody dies. I don't know when, but I'm pretty sure each and every person alive today has an expiration date. My job is never finished. All the estate plans I help design and implement are a never-ending work-in-progress. Course corrections are the norm. Situations change. People get divorced, they get fired, they get replaced, their work gets outsourced, they get forced into bankruptcy, they get robbed, they get ripped off, the government screws them, their business fails, they gamble and lose, they take risks and come up short, they get sick, they get hurt, they have to become a caregiver for someone else that's sick or hurt, they plan and their plans sometimes fail.

As Dan Peña says "Man plans – God Laughs!"

Along our paths in life, we all will cross a hidden line, too. That line is when our health changes. It can be sudden. You might be fine one moment, and the next you have a heart attack or stroke. But most of our health changes will be subtle and over time. You feel tired one day, a few months later, you feel some pain. Before you know it, you've taken ill, and find out that your condition is chronic but treatable. If you wait until then to purchase life insurance, you might find it's impossible to obtain, or very expensive.

Even with the best medical care, we're all headed to the same place, eventually. I mention this because the average age of a first-time life insurance buyer was around 22 when my father entered the business back in the 1960s. Today the average age for a person to purchase their first policy is 39. Some don't bother buying any personal coverage until they are in their fifties and sixties, often after their health has had one or several turns for the worse. The average age of my new clients is 51, right about the time where underwriting starts to become a challenge.

Life insurance is a lot cheaper when you are younger and healthy than it is when you're older and have some aches, pains, and several pre-existing co-morbidities. So buy some when you're young. Get a final expense policy when you're in your twenties. Lock in your insurability with some 20, 30, and 40-year convertible term life insurance. You can thank me later.

Lesson Number Six

Everyone has limited resources. Even the richest people can't buy all the things. They end up with term insurance when they really want more cash value insurance. They buy the lower cost Guaranteed Renewable Disability Income with a 5 year benefit period instead of the Non-Cancelable Disability Income with benefits to age 70, so they can afford one extra day of vacation this year. Instead of saving 15% of their income into their 401(k), they save 5% and put it ALL in that one fund that returned 23% last year, hoping it averages 23% per year, every year, for the next 60+ years, because that's what their financial app on their phone said was enough and they can now afford to lease that new Land Rover and get rid of that Camry.

I didn't get it when I was a new agent and my manager told me that my competition wasn't New York Life or Northwestern Mutual, but the TV Guide and Monday Night Football. Not only do we all have limited resources, but we all also have limited time, and as we have become addicted to social media and our smartphones, many of us now have limited attention spans. Everybody is busy doing something they'd much rather do than sit down with me and talk about death, disability, living too long, and running out of money. My competition today isn't just other things you want to buy with your money, it's Instagram, Snapchat, Etsy, Facebook, YouTube, and TikTok. There are people right now that spend more time editing their selfies per day than they do managing their financial risks all year long.

It's harder to fight to see people today than it was a decade ago. I'm not complaining, though. I'm just saying this: When your life insurance agent calls you, answer the phone.

Your beneficiaries will appreciate it.