- 1035 exchange
Title 26, Subtitle A, Chapter 1, Sub chapter O, Part III, Section 1035
of the US tax code states that "no gain or no loss shall be recognized on the
exchange" of a life insurance policy for another life insurance policy or
endowment or annuity. That is, you can convert the cash value
contained in one of these instruments to another one without having to pay
- life insurance may be converted to life insurance, an endowment, or an annuity
- an endowment may be converted to an endowment or an annuity
- an annuity may only be converted to another annuity
- as of 1 Jan 2010, any of the above may be exchanged for qualified Long Term Care Insurance (LTCi)
- earnings from the first 3 items may be used to pay the premiums of a qualified LTCi plan
The converted policy needs to have the same insured as the original.
Converting a life insurance policy to an annuity in your
retirement years is one way of using the cash value without being suddenly
hit by a huge tax bill on almost the whole amount.
An employee or private contractor who sells insurance. He might be
a captive agent, which means he works exclusively with one company,
or he could be an independent agent, able to represent several.
His income comes from commissions on the policies he sells. Some
companies supplement the income of young agents with a salary; when you are
starting from 0, with no clients yet, living on commission can be a bit
There are so many kinds of annuities they probably deserve an entire
GlossPinion of their own. The various types can be mixed and matched
to achieve many goals. A fixed annuity
is an account which earns a guaranteed rate of
interest, regardless of how the economy or the insurance company happen
to be doing. The rate will not necessarily be very high, but earnings
on it can generally be tax-favored. A variable annuity
provides for more flexibility, allowing the owner to move the invested
premiums and earnings between various investment options (essentially
mutual funds). Because of the owner-control, no earning rate is
guaranteed -- it may even lose value in a down economy, or if
you make unfortunate investment decisions.
These two primary types in turn have two primary distribution classes.
For an immediate annuity, you pay the insurance company a big
hunk of cash in a lump sum. Then they pay you a monthly income from the
cash given them. It is simultaneously earning money and being depleted
by the payments to you. Sometimes part of the earnings on this sort
of annuity may be tax free -- I have seen several ads talking about
"90% tax-free annuities". Since I seldom have $30,000 sitting in the
cookie jar, a deferred annuity is more in line
of how I normally think of an investment. You make regular payments to
it for a number of years, and its value goes up (definitely if fixed, and
hopefully if variable). After that period, it begins making payments
to you, or it may even be transferred back to you as a lump sum. The
earnings here do not appear to be partially tax free, but simply tax-deferred,
similar to an IRA.
Terminology is crazy sometimes. There is such a thing as a
participating variable annuity, but it is nothing at all like
the variable annuity described above. It is much closer to a deferred
fixed annuity, but the word "variable" in this case implies that it might earn
more than the contracted amount. Like a participating life insurance
policy, it "participates" in the earnings of the insurance company, and
when there is a divisible surplus, some of the surplus goes to these
annuities. Unlike dividends for the life insurance, the annuity still
earns its contracted interest rate in "bad" years -- it has less risk.
Before 401k plans became popular, many company retirement
plans were based on a group investment in this kind of annuity.
Ok, that's 125% of what I know about annuities. I added this entry
only because it is impossible to talk about life insurance companies without
mentioning that these are their other major financial product. Life
insurance primarily exists to pay your beneficiary should you die.
Annuities primarily exist to pay you should you live.
- bank-owned life insurance
- corporate-owned life insurance
- trust-owned life insurance
BOLI, COLI, TOLI — Holy Moly! We're talking big bucks for these
babies. An example policy might have a single-pay premium of $1,000,000
and a Death Benefit of $25,000,000. These policies are typically a form
of Variable Life, which allows the bank or corporation to invest the policy's
cash value in a variety of stock or bond accounts. The investment
gain within the policies is tax deferred.
Normally, life insurance is bought for the primary purpose of protecting a
beneficiary or family in the event of premature death of the insured.
The OLI's exist in a separate, tax-motivated realm. Their purpose is
not primarily life insurance, but living benefits to highly-compensated
executives and former executives. The bank or corporation receives the
death benefit, not the insured's family. The death benefit is tax free,
and, well, everyone dies. The death benefit can then purchase a new
policy for another executive, as well as be used to fund the current
retirement benefits of past executives. This may be the closest
thing to a perpetual money machine mankind has ever devised...
(Some OLI's do pass a portion of the death benefit to the
family. Guess what? The family has to treat their portion
as income; the death benefit is only income tax-free to the beneficiary
bank or corporation.)
The cash value within the insurance policy can be borrowed. If
executives were simply given large annuities for retirement purposes, the
bank or corporation could not use the annuities as an ongoing source of
temporary loans. With insurance policies, they can.
Banks have a second agenda. Their product is money. With
tax-free gains, BOLI can earn money quite efficiently. So long as the
primary purpose of the BOLI relates to insurance and deferred compensation,
some of the BOLI gains can be counted as part of the bank's investment
When the current executives fear that future company leadership might choose
to cut their benefits, the policies can be placed in a permanent trust.
COLI becomes totally TOLI. What use is putting ice cream in the
freezer when you think someone else is going to eat it? They
fund their own retirement with corporate money, then put a padlock on the
freezer. (This is all done under the "watchful eye" of the Board of
Directors, of course. — Of course, the board members may themselves be
benefiting from these OLI's, but goodies.)
There are two TOLI flavors. The first is a Rabbi Trust.
Benefits will be paid to the executives unless the company becomes
insolvent. At that point, the assets of the trust would become
available to creditors. Benefits derived from Rabbi Trusts receive
favorable tax treatment because the funds are not reserved exclusively
for the executives. The second type is a Secular Trust.
In this case, the funds are reserved exclusively for executive
benefits. Creditors of the company have no claim on the funds within
the trust. However, the IRS does.
The Secular Trust is considered funded for
tax purposes, which means plan participants would be immediately taxed
on accumulated funds as soon as the participant balances become vested.
Neither type is perfect from the executive's viewpoint. With the
Rabbi Trust, there is the risk that all benefits will be lost to
creditors. (Some people might view this risk as simple justice; those
who drove the company into bankruptcy lose their retirement benefits.)
With the Secular Trust, benefits will always be paid, but with an increased
"Buy Term and Invest the Difference". This is a commonly quoted
strategy -- should someone buy permanent insurance or use that same
amount of money to buy much less expensive term insurance, and then
invest the remaining money himself? How the heck should I know?
When I started The Visible Policy, I had not
yet read the "BTID" acronym anywhere, so I made up my own, "T+I".
Mine has only three characters; you are free to do what
you like with the fourth. I suggest donating it to a deserving
pre-school. But if you wish to use it to build up an alphabet
of your own, go for it.
- cash value
This is money within a permanent insurance policy which is
credited to (but apparently not owned by) the policyholder. If you
die, it is your beneficiary's. If you cancel the policy, it is
yours. In both cases, any outstanding loan will first be paid off
before the company distributes the remaining funds. Obviously it has
sufficient your-nosity to be used as collateral for a policy loan.
But if you are a living, satisfied policyholder reading your annual
statement, the listed cash value simply has the potential of being yours.
No, I don't get it either. Well, maybe a little.
The policyholder owns the policy, and the policy "owns" the cash value.
But there is a teeny problem that, as best as I can tell, has something
to do with idiot congressmen and greedy lawyers -- if the insurance company
is sued, part of the policy's money can become their money.
If Congress wrote a decent law protecting this money (the way they did for
mutual funds), the lawyers couldn't touch it. As the corrupt law
stands, the insurance companies are forbidden to shield from lawsuits
policy money invested in the general accounts.
Anytime someone is acting as your paid intermediary, whether he be an agent,
a fee-only consultant, or some other capacity, there is a potential
conflict of interest. You want your money to be used in the most
reasonable, legal, and financially sensible way it can be. Your intermediary
wants to get paid, whether through commission or direct fees. What
easier way for him to generate this income than use and reuse your money,
making a "sale" each time. The general term for this is
churning -- someone reusing your money for no purpose other than
to make him money. With insurance, it is accomplished by trying to
convince you that a new kind of policy would better meet your needs (and,
unstated, his wallet.) There have been cases where the churning
process was not individual to an agent -- sales managers have encouraged
their whole staffs to "revisit old policies".
If it was a good deal when they sold it to you the first time, be
very suspicious why it should be changed now. If it was
not a good deal the first time, why the heck would you want to do
business with the same party (or company) again? If they want to
pay to correct their mistakes, great. If they want you to pay for
it, that's just another kind of churning.
A related, probably more cynical than unethical, concept is
reverse-churning. Under some circumstances
an insurance company may offer to pay you to let your policy lapse.
Let's say you bought a 30-year Term policy when you were 35 years old.
Now you're 50, and the insurance company sends you a letter saying, "what
a deal we have for you!". They'll pay you 2 or 3 times your annual
premium to let the policy lapse. What they are not telling you is that
for the last 15 years, the premiums you have already paid included cost
of insurance for you while in your 50's and low 60's. Think about it
-- if the money they are offering to pay actually compensated you for the
15 years of overpayment, would they be offering you the "deal" in the first
place? What they want is to have a 15-year Term policy paid for at
30-year rates. If you were going to cancel anyway, then fine. Take
the money -- it's better than a kick in the head by a mule. Otherwise
understand that their concern is profit for them, not what makes sense for you.
The bottom line is if what you have meets your needs, be very skeptical
about anyone trying to convince you that you need something else.
Sometimes your needs do indeed change. Change your policy for that
reason, not because someone else wants another sale.
This is the money paid to a sales agent which is embedded into cost of the
product he sales. Many industries pay their sales people with commissions;
it is not just an insurance term. Some states try to regulate
commissions, or at least have the agent inform his clients how much his
commission is. Even if there is no law requiring disclosure, any
customer can certainly ask the agent how much his commission will be.
If you don't like the answer (whether because of evasiveness or
the amount of money involved) you are free to find someone else to sell
you the product.
I spent a fair amount of time searching the Internet to see if I could
find out what "normal" commissions are for permanent insurance.
It varies a lot, probably depending both on the company and the actual
product sold. The number that I read several times was 150% total
commission based on the first year's premium. (For example, if
the premium is $1000, the agent would eventually receive $1500.)
Obviously the agent doesn't get his full commission the first year, which
is a good thing. He has built-in incentive to keep supporting his
clients long after the sale is made.
Commission paid the first year seem to vary from 40% to 80% of that year's
premium. Here there is a problem, in my opinion. 150% total does
not bother me, but if too much of this total is paid the first year,
the agent has a financial incentive to sell insurance to "clients" ("marks"
in this event) who he knows will find it extremely difficult to continue
paying the premium for more than a year or two. (A rule of thumb
is that permanent insurance does not reach any kind of financial break-even
point until about 10 years.) Most agents
would not do so, and would instead recommend term insurance to someone
not likely able to continue payments for permanent. Still,
if the agent is getting 60% or 80% of that first year's premium, a less
scrupulous individual might well be willing to get as much money as
he can now.
Realistically, most of the agent's costs occur during the first year,
and prior to the sale itself. So it is reasonable that he get
a big chunk of the initial premium. I am just saying that this
first byte should not be too big. I would be comfortable with the
first year's commission being about 50% of the first premium, and then 20%
a year for five more years.
"Rich, I can't believe you are saying this!
No one should get more than $189.50 total for any sale!!"
Good point. By the way, what do you recommend feeding to children
and other small mammals -- Alpo ® or the generic dry stuff?
- corporate-owned life insurance
- death benefit
Should you die while your life insurance contract is active, the amount of
money your beneficiary receives is called the "death benefit". However,
if a loan had not fully been repaid, the policy loan will be repaid first
from the death benefit, and your beneficiary would get the rest.
See the Demutualization Annex.
- demutualization "fairness"
I do not want it to happen.
But if a life insurance mutuality were to fully demutualize,
here is how I think it might be done fairly.
Some policies (participating ones) are eligible to earn money relative
to the core earnings of the insurance company. This money is called
dividends. No company guarantees that dividends will be earned, they
simply say you are eligible to earn them in any year there was a divisible
You are not required to invest the dividends back into your policy.
Well, at least I am not. I can have them send me the dividend each year
in a check, or I can have New York Life put the dividend in a separate, interest-earning
account (which I believe is truly, legally, and unequivocally mine), or
I can use it as partial (and eventually full) payment of next year's premium.
The default, though, is to reinvest it back into the policy. This raises
the death benefit because it purchases extra, one-payment,
life insurance. It also increases the policy's
Personally, I am reinvesting my dividends into the policy.
I can certainly understand why someone would choose a surer thing, though.
I have sufficient trust in NYL to act responsibly and avoid doing anything
stupid that would get it sued in a major way. I do know that our legal
system allows totally unfair and outrageous "punitive damages" to be assessed.
(Some states are much worse than others.) But I admit to a bit of unease
at the prospect of a 10 billion dollar judgment against NYL because
2 years from now two agents in Mississippi are found to have acted in bad faith.
I wouldn't mind so much if my cash value were only at risk from actual damages
done. (As part owner of NYL, I can understand an ethical argument which
says I share part of the responsibility for correcting a wrong.)
But punitive damages as exist in the USA today amount to an outrageous
subsidy to loud, double-talking lawyers. The "damages" are an unfair
tax which uninvolved parties have to pay; there is no element of
punishment to the actual offenders. Existing legislation
specifically declares that my cash value is not protected from the
ambulance-chasers -- how corrupt and nonsensical is that?
Some lawyers are honest and ethical. Unfortunately too many of them
are out to get as much money as they can, any way the can, no matter how
right or fair their cause. They do not care about who is
adversely affected by their distortions, half-truths, and insincere
displays of emotion -- they simply want
to win and get paid "big bucks". I openly use the pejorative
"ambulance-chasers" in referring to these crooks.
Some term policies are eligible for dividends also, but
the threshold for earning them on a term policy is much higher; it
is not simply that there was money available to distribute. The
threshold would be defined in the company's dividend policy,
which, of course, is generally secret. Realistically, my guess is that
dividends to permanent policies would be paid first, then payments to the
reserves of the company, and, if there were money left over, short-term
policyholders might get $2.78 apiece per $100,000 of death benefit.
... maybe $4.12 if only seven term policyholders died that year.
Um, I hope you can tell -- I am making these numbers up
to try to make a humorous point. Any dividends which do get paid
to short-term policyholders are likely to be fairly low amounts. Term
insurance is relatively cheap, but it is also extremely profitable
for the insurance company. Only about 3% of term policies ever
end up paying out a death benefit. I think
it would be unwise to let the "possibility" of dividends be a significant
factor in your decision in choosing the company from which to purchase term
insurance. Don't reject a company because dividends are mentioned, but
don't dream of having your premiums significantly reduced for short-term
A mutual company might well pay dividends on a level term policy with a
long term (15, 20, or 30 years). These policies are priced to cover cost
of insurance (COI) even for the last few years. Since the policyholder
is oldest then, COI is higher. But if a significant percentage of
policyholders lapse (cancel) their policies before the term expires, there
is "extra" money available because the total risk in the product pool is
reduced. (I.e., average policyholder age is reduced.) This
money can be rebated to policyholders as dividends. (For an unethical
way to handle lapse funds, see
- dividend policy
This is the set of rules the mutuality uses in distributing dividends to
policyholders. Unfortunately, the companies do not publish what
their rules actually are. The one factor which insures a measure
of honesty is that the companies provide policy projections to owners of
permanent insurance policies. If the earnings projections are
met or exceeded, there is unlikely to be controversy as to how the dividend
payments were calculated. In my opinion, the policy should be open
and published. This is particularly true for mutual companies; they
are owned by their policyholders. Keeping secrets from the owners is
I am not going to let stock companies off the hook. They may
not pay dividends, but their Universal Life policies often guarantee an
earnings rate, and say "your actual earnings may be higher.".
When? What criteria is used to determine "higher"? There is a
conflict of interest between the policyholders and the stockholders of a
corporate insurance company. The less the policyholders earn, the more
profit will be available to the stockholders. So, even though the
policyholders do not own the company, they should be protected from this
conflict by having their earnings thoroughly and publicly defined.
What if you were rich, 40 years old, and only wanted life insurance until
age 65? And what if you also wanted to accumulate a large retirement
fund? You could buy an endowment. It operates like cash-value
life insurance until the owner's contracted age of endowment. At that
point, the cash value is passed on to the owner. (Like life insurance,
the cash value can also be used to purchase an annuity via what the IRS calls
a "1035 exchange".)
At the end of the annuity entry, I said that annuities
were the other major product of life insurance companies besides life
insurance. The statement is true in the USA, but endowments are still
popular in many other countries. I also said that an annuity existed
primarily to pay the owner should he live, and life insurance existed
primarily to pay the beneficiary should the owner die. Endowments
are in the middle.
They are still available in the USA but are not very common.
Both annuities and life insurance typically offer the benefit of tax-deferred
investment, but endowments lost this tax-favored status several decades ago.
What is the difference between a life insurance contract and an endowment
contract? Simplistically, how old the insured is when the cash value equals
death benefit (ie, when the policy "matures"). If this age is past the
person's statistical age of mortality, he has purchased life insurance.
If this age is younger, he has purchased an endowment.
Why did endowments lose their tax-favored status? It was considered a
tax loophole for the wealthy. Since the endowment only has maybe
25 years to mature, the premium payments were much higher, and only rich
people could afford them. (I purchased a whole life policy at age
42. My statistical age of mortality was 79, and the policy matures
at age 100. This gives it 58 years to mature; many middle-class
Americans can afford such a policy.)
- excess credits
Stock insurance companies may pay dividends to stockholders. If they
offer whole life insurance, they may not want to confuse people by paying
dividends also to policyholders. So, what a mutual company calls
dividends, many stock companies call excess credits. Like
dividends, the payments are not guaranteed. When paid, they can usually
be used for the same things dividends are used.
- buy paid up additional insurance
- receive as cash
- help pay premiums
- remain on deposit with the insurance company, earning interest
Some stock insurance companies do call these payments to policyholders
"dividends". Generally if the company had demutualized, it is too much
hassle to alter the terminology both the company and the policyholders
had been using for decades. If the dual meaning of "dividends"
confuses stockholders, so be it.
Note that if the terminology "excess credits" is used, the policy is not
a participating one in the sense of ownership. It may be called
"participating", but the stockholders own the company, not the
policyholders. I would expect that there is probably even more
secrecy in "excess credits" policy as dividend policy. The company
doesn't want the stockholders to think the policyholders are given too much,
and it doesn't want the policyholders to think they are given too little.
(Solution? Don't tell nobody nuthin'.)
- fee-only financial consultant
A person who provides financial advice and usually able to sell a variety
of financial-related products, including life insurance. The "fee-only"
part is to emphasize that he does not work on commission, but instead earns
income directly from his clients. In theory this means he works directly
for you, not the companies he represents. I presume if any of the
products he sales do have a commission associated with them, he lets you
know exactly how much, and deducts that amount from his fee.
- full demutualization
See Commonality of Greed.
- guaranteed cash value
Many (most?) permanent insurance policies guarantee that they will
have a certain cash value each year. This is part of the contract between
you and the insurance company. Even if there are no dividends (in a
participating policy), the guaranteed cash value will increase over
An indispensable financial calculator for agents and consultants.
EF Moody says
about the hp12c.
(Glosspinalia before the GlossPinion!)
- lapse-supported pricing
Gambling. This is an unethical
pricing method used by many insurance companies for life insurance and other
long-lasting insurance policies (such as long-term health care). The
insurance company makes a presumption that, say, 50% of policyholders will
lapse (cancel) their policies within 20 years. This enables them to
offer a premium payment which is lower than their honest competitors.
Even with the lower premium payment, if 50% of policyholders did in fact
lapse their policies, the extra money they had paid-in subsidizes those
policies which continue for 30, 40, or 50+ years.
There are at least three problems with this.
- Clients are not told that their premiums are being subsidized.
The silence amounts to a lie. There is no way for a consumer to
really compare prices when some insurance companies offer subsidized premium
rates and some do not.
- If the lapse presumption proves wrong, someone suffers.
It might be future policyholders of the insurance company, who have to pay
more than they should, because the rates on those policies are raised to
correct for the earlier mistake. Or it might be (and in certain cases
already has been) the non-lapsing policyholders themselves. Once the
insurance company realizes that it is going broke because not enough people
are lapsing, they can go before state insurance commissioners, and attempt
Either let us alter the contract and drastically increase
rates on current policyholders, or we will go bankrupt. This will
leave many of them without insurance at all. Many of our policyholders
are now too old to acquire new insurance at reasonable rates from other
companies. We're real sorry; our predecessors here at the
Hookem&Hokum Insurance Company messed up.
The regulators then have to decide the least bad way to undo the mess.
(Of course, if they would forbid lapse-supported pricing in the
first place, this particular problem would never happen.)
- It increases risk.
The purpose of insurance is to decrease risk. If the policyholder
cannot be sure that his policy is sufficient to fund his benefits, what
he has purchased is not actually insurance. It is a gamble, presented
by the "insurance" agent as insurance. Honest insurance spreads risk
among all policyholders, decreasing risk for each. Lapse-funded
"insurance" adds additional risk to all policies. Admittedly there is
benefit to all (lower premiums) if the lapse presumptions are met. But
there is a cost to all when they are not.
Glenn Daily wrote a more thorough examination of
It is worth a look. Also, review the churning
definition above. It will probably be clear that one reason an
insurance company would practice reverse churning is to compensate for
errors in their lapse-funding presumptions.
Rich, some policies do lapse. Why can't I get a price break?
You can. Mutual insurance companies offer dividends, which can be
viewed as a rebate for overcharge of premium payments. There is no
reason stock insurance companies cannot do the same sort of thing. As
actual lapses occur, appropriate rebates would be sent annually to
policyholders of that kind of insurance contract. Marketers will not
like this idea, because it is not as clear as offering a low, fixed (and
dishonest) price in the first place. However, policyholders could
actually benefit if lapse experience turns out to be higher than the company
would have presumed in a lapse-supported pricing scheme.
- modified endowment contract (MEC)
It is possible to purchase a cash-value life insurance policy (typically
a Variable flavor) and heavily overfund it (put a lot of money into it
over and above the premium due). If too much premium is paid
"too quickly" (don't ask!), the policy will lose
some of its tax-advantaged features and convert to a modified endowment
- Similar to an IRA, cash value withdrawn from an MEC before age 59½
will be subject to a 10% penalty tax.
- Backwards from normal cash value insurance (CVI), money withdrawn from an
MEC comes out "gain first", immediately being taxed as normal income.
If money is withdrawn from CVI, the cost basis (what you paid in) is
removed first; nothing is taxed until all the cost basis is used up.
- not lost: Death benefit is passed to beneficiary free
of income tax.
These changes aren't necessarily bad. Some wealthy individuals may have
valid estate-planning reasons to acquire an MEC. (When
someone writes the Estate-Planning GlossPinion or the IRS
GlossPinion, they can explain all the gory details. Suffice it to
say if you could benefit from an MEC, you can afford to pay someone to help
you plan your estate.)
- The following four terms are at the Demutualization Annex:
- non-participating policy
This is a permanent insurance policy which is not eligible to earn
dividends. For Whole and Universal Life policies, the
premiums would typically be cheaper than a corresponding participating
policy. Also the premiums would only be due for a fixed number of
years. There is more guaranteed up-front in a non-participating policy,
but less potential to significantly surpass the guarantees.
- participating policy
An insurance policy which is eligible to earn dividends from the core
earnings of the company.
On permanent insurance policies, premiums are generally due until the policy
matures (in my policy, when I turn 100). However the company projects
that earnings from dividends will eventually be able to pay the
premiums. This is not a guarantee, however. A participating
policy is normally sold by mutual companies; if you purchase a
permanent participating policy from one of them, you also become
part owner of the mutual company.
- permanent insurance
The general name for life insurance which can provide a death benefit
until after the day you die. Several classes exist, including
Whole Life, Universal Life, Variable Life,
and Variable Universal Life. Almost all types
of permanent insurance can build up a cash value that you can borrow
against or receive should you decide to cancel the policy. The cost
of permanent insurance is higher than term because of the cash value
they accumulate along with the death benefit.
- separate account
This is something like a mutual fund; they are associated with
variable and variable-universal insurance policies. Part
of the cash value within those policies is eligible to be
distributed as the policyholder desires within his available separate
accounts. I do not know what the transfer restrictions may be
for these accounts (3 transfers a day? 3 transfers a month?
unlimited? -- I don't know). I'm guessing each company would
have its own rules.
Here's something pretty strange. In the
cash value entry,
I make a point about that money not being protected from creditors of the
insurance company. But if you have a variable life policy, the money
you put into the separate accounts is protected, similar to the way
money in mutual funds is protected. The legal difference appears to
be where the money is placed. If it is in the general investment
accounts of the company, there is no protection. A lucky
fast-talking lawyer with a gullible jury might be able to steal some
of it away. He'll probably tell the jury how the huge, rich, insurance
company must be punished until it hurts. Of course he won't tell them
that the bulk of that "wealth" comes from the premiums and reinvested
dividends of policyholders, and that it is actually the cash value
associated with those policies.
Why the difference? Why is money in separate accounts specifically
protected and money in the general accounts specifically vulnerable?
Well, I did say something about "idiot congressmen" above.
That's my theory, and I'm sticking to it!
- Single Premium Life
This is a form of permanent insurance which is paid for all at once.
It will generally build cash value over time. On the net, it
seems like this is generally given as a gift to young grandchildren,
or purchased by the grandparents for themselves. If bought for children,
I read that it is better to wait until the child is a few years old, because
it is cheaper than when bought for infants and toddlers. It's probably
also better not to ask the kid: he'd rather have an
Actuary Action! cartridge for his game console, and she'd rather
have Insurance Agent Barbie ®. If bought as some sort
of financial planning vehicle for yourself, then, well, you're way out of my league!
- sponsored demutualization
See Scoundrel's Reward.
- Term Insurance
The general name for life insurance which is purchased for a specific
period of time. It provides a death benefit only; if you live,
your money is gone. However, the premium is much cheaper than if you
had bought the same amount of insurance with a permanent policy.
The period is called the term, and there is
a premium payment due each year of that term.
It may be renewable,
generally at a higher rate. The rate will be much higher
if you choose not to get a new health examination at the end of the
term. The companies are not stupid. They realize that some
people will become ill during the current term, so they protect themselves
by guaranteeing an expensive rate at the end of that term. If you
are healthy and have a renewable policy, make sure you get the best rate
you are eligible for and get a health check! If you are not healthy,
be very glad you were smart enough to have the guaranteed renewability.
If it makes sense to continue your insurance, accept the expensive rate.
Many term policies are also convertible to permanent
insurance. You will pay a lot more for a permanent policy, but in the
long run (more than 10 years), it may not be a bad deal because of the cash
value permanent policies can accumulate.
- trust-owned life insurance
An unethical sales mode similar to churning.
It occurs when an agent from another company tries to convince you
to "trade-in" your existing policy for his company's great product (and
his fatter wallet). Typically the agent will try to convince you that
your policy is too costly or does not provide enough benefits. If
he tells you false things, it is a criminal act. Thus he will probably
imply rather than state, or perhaps ask you leading questions trying to get
you to make a faulty conclusion. Your protection is time.
Do not hurry. He wants to have you make a decision as soon as
possible. If you are interested, tell him to call you back in a
week. During that time, give your current agent a chance to explain
why this guy's offer may not be in your best interest. If you are
still confused, do more research on your own or contact a financial
- Universal Life Insurance
A kind of permanent insurance designed for fairly low risk, but with
extra flexibility in both premium payments and death benefit amounts.
Universal Life is generally considered more transparent than Whole
Life. Your policy is not tied to the mysteries of a mutual
This allows the annual statements to be very specific in saying what part
of your premium payment did what. You can see cost of insurance,
fees (such as commission), and how much was invested for future cash value.
The possibly negative feature is that, by not placing your
trust in the mutuality, much less is guaranteed. The $900 premium
you paid last year might have to be $1100 this year due to depressed
earnings from your cash value. Similar things can happen with
participating Whole Life, but they are much rarer. The Universal
policy depends on how the underlying investments did last year, whereas
the WL policy responds very slowly to changes in market conditions.
I understand and respect the decision of people who choose
Universal or other types of permanent insurance. My personal choice
was to get participating Whole Life insurance. Concerning policy
transparency, I am doing my best to document and describe it at my web site
called The Visible Policy.
It is that study which led to my strong opinions concerning mutuality.
- Variable Life Insurance
A kind of permanent insurance which allows a higher risk and the
possibility of higher earnings. Only stock companies can sell this;
the equity risk taken up by VL policyholders is incompatible with the
fundamental conservative nature of a mutuality. As I understand VL,
part of the investment portion of your premium goes to separate accounts,
part goes to pay the cost of insurance, and part goes to a conservative
common investment fund (and of course part to fees and commission).
The separate accounts are like mutual funds; you have control of what portion
of your "separate account" cash value is in what fund. If the fund(s)
go up, you do well, possibly very well. If they go down, you lose,
possibly a lot. The cash value within the common fund has little to
no exposure to equity risk, so that portion should never really lose
significant value (and typically it should "beat inflation" in its earnings).
- Variable Universal Life Insurance
A kind of permanent insurance which merges features of both variable
and universal policies.
- Whole Life Insurance
A kind of permanent insurance which is designed for low risk.
Over time it will build up a cash value. There are two primary sorts,
participating and non-participating. A participating
policy is eligible to earn dividends -- it "participates" in the core
earnings of the company. Payment of dividends is never guaranteed,
however. Presuming they are paid, the policy will eventually become
self-supporting (the annual dividends will be high enough to pay the
premiums). Premiums are generally due for the life of the policy.
Mutual Insurance Companies generally offer participating policies, and the
policyholders of the mutuality are the owners of the company.
A non-participating policy does not earn dividends, but premium
payments may only be due for a certain number of years. The investment
portion of your premium will be guaranteed to earn some interest rate, such as
4%; it may be higher than the guarantee. Since stock companies sell the
non-participating policies, the share-holders of the corporation expect a
return from your business. In counterpoint to this, the premium payments
for non-participating policies is generally lower. Even though this page
is glosspinion, I won't render an opinion as to which is better. I
will say that the web sites of stock insurance companies I have visited seem to
emphasize other kinds of permanent insurance over their own non-participating
whole life product.
A thorough study of my participating Whole Life policy is located