Whole Life (WL) is the most complex product ever developed by the life insurance industry. Complex in the sense it cannot be broken down into its parts. It is a bundled product.
Anyone who intends to read this write should first read the “How it Works – Whole Life Box” write up. It provides a design framework that sets the stage for a more detailed discussion of WL’s various moving parts. I would also suggest reading the “WL Design Basics”, WL Guarantees” “WL Dividends” and WL Surrender Charges” write up’s before reading this one. The combination provides a sound foundation to understand the following discussion on dividends.
INTRODUCTORY COMMENTS
The WL box story focuses on a conceptual understanding of the product. The Design Basic’s write up gives an overview of formulas and assumptions that create WL illustrations and subsequent calculation of actual values. The “guarantees” write up discusses the foundation upon which dividend based values are added. These constitute an important first step in gaining a better understanding how this ridiculously complex product works. Suffice it to say, WL is not the “simple” product many who sell it seem to believe it to be.
If it were a simple product this “How it Works” series could not contain almost a dozen 20 and 30 page write-ups on the product. There would be no need for this avalanche of information.
What complicates matters with WL is the fact it is a bundled product. One where all the moving parts are obscured. No individual income or expense information is ever made available to those who sell it, or those who buy it. Only a few company executives and actuaries have access to this information.
Those who favor selling WL often base their understanding on a handful of half-truths and misunderstandings shared with them as fact by under informed or misinformed (albeit well intentioned) mentors or peers. A bold statement perhaps, but sadly one that all too often has proven to be true.
Only when a properly educated individual asks detailed questions (the answers to which they already know) does the validity of the above statement become painfully clear. Those who understand how WL works are endlessly amused (or saddened) when witnessing the floundering efforts of those who do not attempting to explain it to others who do.
Offsetting this lack of knowledge, or perhaps because of it, WL is often sold with an almost evangelical fervor. Assertions surrounding its guarantees often make the product sound as if it embodies all that is good and holy. A biblical level of enthusiasm often prevails.
Unfortunately, even those with the best of intentions and deeply held beliefs can end up making blatant misrepresentations. Which can be every bit as damaging as the falsehoods shared by those with ill intent. Or, worse since considering the level of sincerity of the person sharing the misinformation.
The WL product itself is neither good nor bad. It’s just a design developed before the advent of computers which made it possible to track every little detail of a products structure. Computers also made it possible to track and report each and every income and expense factor on an individualized policy owner basis. Imagine the challenge of attempting to do so with tens of thousands of policyholders with a manual hand based calculation and posting system.
The decade’s old design of WL allows cash values to accumulate within a policy and death benefits to be paid covering said tens of thousands of policy holders. Its design allows this to be done without the need to segregate the general account assets that support the cash values in any given individual policy. The same is true with the expenses paid from the general account.
With WL those factors are bundled together and allocated based on formulas embedded in the WL product design. This collection of interrelated formulas is often referred to as the “master” WL formula. Which differs for every individual WL product ever sold.
As with any product design WL has its plusses and minuses. What makes WL good or bad at any given point time is a function of what is, or has transpired in the real world since its sale.
So, at any given time and depending solely on economic and other realities, WL may or may not be the best product for any given person. Something that also depends on the intended use of the product and the focus of any given purchasers goals or needs.
As noted earlier, it does not require ill intent to misrepresent a products features or benefits. Ignorance works just as well. Most of those who sell WL have nothing but the best of intent. It’s just their lack of actual knowledge that creates problems. The WL product is typically sold as a product rift with guarantees that eliminate all the elements of risk. Which sadly just isn’t so.
Economic trends, in particular those pertaining to interest rates, have a tremendous impact on WL products since it is an interest sensitive product. As a result, whatever is happening with interest rates (or whatever has happened since the product was purchased) has a tremendous impact on the products ability to deliver on illustrated cash values, dividends and death benefits.
Regulations also have a tremendous impact on the value a WL product can deliver. Among a great many other things regulations prohibit investing general account funds in equities (stocks). They allow only a modest level of stock ownership which usually relates only to stock owned in subsidiaries of the company selling the WL product. Beyond this regulations also require reserves for different asset classes that can impose tremendous cost levels and capital constraints on companies selling WL products.
The reality of interest rates today could not possibly be more different than the reality of interest rates that existed decades ago in the heyday of WL product sales. In fact, the realities today are literally 180 degrees opposite.
As the number of other “How it Works” WL write ups suggests this is only one of many factors impacting existing policy holders and new potential buyers of WL products today. But it is a very important factor that has crippled the WL product for the last two or three decades.
HOW THE ECONOMY IMPACTS WL
The economy today bears little relationship to the economy that existed thirty, forty and fifty years ago. As a result, WL products illustrated and sold today have little or nothing in common, with WL products illustrated and sold in decades past. Which oddly enough doesn’t stop those selling WL today from constantly trying to use past performance to justify its sale.
The attributes of the economy at any given point in time has a tremendous impact on the cash value and dividend paying potential a WL product can deliver. These factors also dictate the length of time premiums must be paid “out of pocket”, a fact that is often not shared with those who purchase WL products.
Referencing the past as an indicator of what is likely to occur in the future only has merit when the economic realities pertaining to both time periods are similar. When economic factors are different the ability to base future growth assumptions on past performance fades. When they are vastly different citing past performance to justify current assertions is deceptive.
Relative to WL policies sold in the last two or three decades, and those being sold today, it’s an apples and oranges situation on many levels and for many reasons.
One being economic. This pertains to interest rate realties as they exist today versus interest rates in the past. While this is just one factor impacting the value WL products can offer today, it is a big one. A reality that is and has for decades now had a tremendous and detrimental impact easily visible to anyone who takes a look.
This is important because those who sell WL tend to turn a blind eye to recent economic realities as if the past results are infinitely repeatable under any current and all future economic scenarios; which is simply not the case.
LOWER INTEREST RATES
There is one major economic reality impacting all in force WL policies sold in the past and being sold today. It is the far lower general account yields on invested WL assets being earned today versus those typical in decades long past.
There has been a decade’s long precipitous decline in interest rates to today’s abysmal levels. A decline to levels never anticipated when most WL policies were designed and sold. A decline that has persisted for far longer than anyone could ever have anticipated.
As of this writing return to the historical interest rate norms typical in the past is nowhere in sight. If anything, all the forces at work in the political and economic world suggest a dramatic uptick in interest rates is unlikely to occur any time soon.
It is impossible to overstate the importance of this situation relative to its impact on WL products and their dividend producing capabilities. Dividends in a WL product are largely interest rate dependent.
To be clear; we are talking about a decline:
- To levels never envisioned by those who designed the WL products.
- That has persisted for two going on three decades, and
- A decline with no turnaround in sight.
This market interest rate decline has two distinct and separate negative impacts on general account yields.
- NEW PREMIUMS: As each new premium is received it is invested at a lower rate than was originally assumed in the WL products illustrated dividend scale formulas when the product was sold.
- EXISTING GENERAL ACCOUNT ASSETS: As older and higher yielding portions of the general account portfolio mature (20 and 30 year bonds and mortgages in particular) those dollars are then reinvested at today’s far lower rates.
Over time the entire makeup of the assets that support any given WL product held in the company’s general account of any given company will mature. As they mature they must be reinvested. If rates are lower than in the past, the average yield in the general account will decline.
The longer interest rates remain at historic lows, the greater the impact those lower interest rates are having on the yield of the assets making up the general accounts of the nation’s life insurance companies. This is a fact. Not a theory. It’s easily provable to be the case.
The result for the last two, and now almost three decades has been a continuously declining average yield earned on the assets making up the general account portfolios of the nation’s life insurance industry. This decline is well documented in industry publications and company disclosures to regulators over the last few decades.
Those who sell WL products are well aware of this decline, or at least they should be. As are the companies that continue to make the WL product available for sale at this point in time. A point in time when WL’s ability to deliver illustrated results is dubious at best and when WL products issued in decades past are lapsing in ever greater numbers.
PORTFOLIO DURATIONS
There is a negative secondary impact of this decade’s long market interest rate decline. It is the shortening of the average maturity duration of the assets held in these general account portfolios.
Some of this decline is tied to regulatory reserve concerns pertaining to both illiquid assets and assets with longer maturity durations. A factor discussed in a separate write up addressing the impact of regulatory trends on WL products.
The secondary effect discussed here relates to decisions by asset managers working for the nation’s life insurance companies. They have reacted to the steep and ongoing decline in market interest rates by dramatically shortening the average maturity of general account bond portfolios.
The shorter the maturity of a bond they purchase, the sooner it will mature. The thought is the sooner interest rates rise, the sooner the company will be able to roll over its maturing existing bonds into new higher yielding bonds.
So life insurance companies are investing general account assets as they become available (new premiums and maturing existing assets) in ten year maturity bonds (or shorter) instead of the usual twenty and thirty year maturities.
On the positive side of the equation is the fact the difference between rates paid on shorter and longer term bonds are minimal today. There is very little to be gained by investing in a twenty year bond versus a ten year bond.
So the “penalty” incurred to invest in shorter term bonds in the hopes rates will rise sooner than later is smaller than was true in the past. Still, the rate earned is lower. And far, far lower than the rates (yields) typically attainable in the not too distant past.
So the hope has been for some time now that the sooner the short term bonds mature the sooner they can be rolled over into what will hopefully be “tomorrow’s” higher yielding bonds. A hope that has yet to materialize.
This has been the thinking behind insurance company asset managers buying decisions for anywhere from five to fifteen years now, depending on the company. Sadly, the hoped for increase in interest rates has failed to materialize. In fact, market interest rates have continued to remain at abysmally low historical levels.
Generally speaking, the shorter a bond portfolio’s average maturity duration the lower the average yield of the bond portfolio. Conversely, the longer the average bond portfolio’s maturity duration, the higher the portfolios average yield.
Today’s average maturity of general account portfolios supporting WL products is at the lowest in many, many decades.
THE HARVESTING OF CAPITAL GAINS
The other more positive side of this declining interest rate equation relates to the fact as interest rates decline the value of longer term maturity bonds (with higher yields) held in these general accounts increased dramatically.
Not everyone understands how the movement of current market interest rates impacts the value of existing bonds. Briefly, as interest rates in the market decline on newly issued bonds higher paying existing bonds issued in the past go up in value. The reason being people are willing to pay more for an existing bond that pays (for instance) 10% than they are for a newly issued bond that pays only 5%.
So older bonds held in a life insurance company’s general account go up in value (creating a potential capital gain beyond the interest rate the bond pays) as market interest rates move down. The occurs because people are willing to pay a premium above the bonds par (or face) value to own it and benefit from its higher than market rate yield.
However, as these higher yielding longer term bonds come ever closer to their maturity dates, the pricing premium people are willing to pay for them declines. At the date these bonds mature, the premium is effectively zero since there is no longer an advantage in owning them.
The further the maturity date of a bond is in the future (meaning the longer they will be paying that higher rate) the more the current market value of that bond will increase. Clearly, someone would be willing to pay more for a bond that will pay the 10% for ten more years than for one that will mature the next year.
Conversely, when market interest rates increase, the value of existing lower paying bonds decline. For the same reason. So the opposite of what is described above occurs.
The rapid and prolonged decline in market interest rates has presented money managers with a choice relative to their older, longer term and higher yielding bonds.
They can sell them and immediately earn a capital gain (the value above the price paid to buy the bonds when they were issued). If they do so they can recognize the gain as added income that year. Or they can continue to own the bond and collect the higher rate it pays until it matures. That choice will allow the general account yield on invested assets to remain above market for a longer time frame.
This is important because some companies have sold off their longer term, higher yielding bonds to realize immediate capital gains. They did so to allow the company to credit dividends into WL policies consistent with those that had been illustrated at the time of sale. Even though their actual general account yields had declined with the drop in market interest rates to levels that would not otherwise allow for payment of that illustrated dividend rate.
So the goal in selling higher yielding bonds to harvest built in capital gains is to offset the lower current yields in the overall general account portfolio. This is either admirable behavior on the part of the WL company as it tries to honor its illustrated promises. Or, viewed in a more negative manner, it is an effort to disguise the fact all is not well in the general account.
The rules governing the recognizing of gains require the bonds with gains be sold to “realize” the gains on the company’s books. Otherwise, the gain may only be noted in a footnote but not actually recorded as income.
The reason it can’t be booked as income being it will fade away as the maturity date of the bonds that have increased in market value approaches. So to benefit from the gain accounting rules demand the bonds must be sold.
This effectively hides the problem of lower general account yields and gives the impression earnings (and dividends credited which typically result from them) are in line with originally illustrated levels. Which clearly is not the case.
Unfortunately, depending on what happens next with market interest rates, this temporary immediate “positive” benefit in higher dividends being credited comes along with a potentially longer term offsetting “negative”. The future yield on assets in the general account will be lower than it would have been, resulting in a decline in future dividend crediting all else being equal.
If market interest rates continue to decline or just remain at historical lows, the negative impact can be extremely detrimental. And depending on the maturity date of the bond that was sold, and the number of years to the bonds maturity, this negative result can extend for decades.
So, the problem is this strategy of harvesting capital gains on longer term bonds by selling them lowers the overall return earned in the general account.
This is true because the longer maturity higher yielding bonds are now gone. And gone forever. Instead, the proceeds from those sales had to be reinvested in newly acquired shorter term bonds. Bonds that pay a far lower coupon interest rate. So the overall yield in the general account declines further and faster than it otherwise would have.
All the policy owner sees is the dividend level originally illustrated on their recently purchased WL policy being met. So they can’t tell the portfolio of bonds is being scavenged to create this fiction. At least not without doing a level of research policy holders would typically have no idea how to complete.
The result is it appears to all but the most discerning observer that all is well relative to general account earnings levels. And yet nothing could be further from the truth.
Sadly, even most of those who sell WL fail to obtain information on the makeup of the general accounts of the company whose WL products they sell. Data that clearly shows the average maturities of the bonds held in the general account portfolio. Data that clearly shows the percentages of various asset classes that makeup up the general account.
This information is particularly enlightening in that it also clearly shows the year to year changes in the portfolios makeup as far as capital gains yet to be realized. So when the footnoted unrealized capital gains number drops from year to year, it is clear the company has been actively harvesting those capital gains to support its dividend crediting levels.
Again, while this perhaps has a short term benefit to the policy holders by allowing higher dividend rates to be credited into their policies, it comes with a potentially far more damaging longer term negative. Lower average general account yields in the immediate future. And, if market interest rates don’t quickly rebound a continued reinvestment of the proceeds from the sale of the higher yielding bond into subsequent low yielding bond purchases.
One can argue the WL company executives are attempting to deliver the positive, while one can also argue they are hiding the reality of the current lower market rates impact on general account earnings by doing so. Only the executive team itself knows the true intent of their actions. Only time will tell which action would ultimately have been in the policyholder’s best interest.
NOTE: A review was completed looking at a small group of life companies that have decided to stake their future on the sale of WL products. A cynical point of view is the likely reason for this is a desire to have these policies absorb high levels of corporate overhead with no one being the wiser.
One of these companies had a top executive tell a policyholder it was the “acumen” of its money managers that allowed it to continue to credit recently illustrated dividend levels into the policies it had sold over the last decade, while most of its competitors were failing to do so. However, upon closer examination in the above noted study it was clear this only occurred because capital gains on longer term bonds were harvested to create this fiction.
The data on that companies general account makeup clearly showed a constant decline in the average maturity of its bond portfolio over the prior five years. The company no longer owned any 20 and 30 year bonds. It also found the footnoted amount of “unrealized” capital gains on the bond portfolio had consistently declined year to year to the point it was currently near zero.
Clearly the longer term higher yielding bonds, those with capital gains, had all been sold to harvest the capital gains that built up as market interest rates declined. Something the company’s money management acumen clearly had nothing to do with.
The question is why the executive didn’t just tell the sales associate what was being done to allow for the continued crediting of illustrated dividends. The likely reason being this strategy had clearly reached the end point where it could no longer be implemented. Meaning the next thing that was going to happen was a steep decline in future dividends credited into the outstanding WL policies previously and currently being sold.
Only by harvesting these capital gains could the dividends credited into WL policies be supported without eating up huge amounts of the company’s capital.
The reason being, the only other way a life company can credit dividends above realized earnings is to use accumulated capital or asset reserves. Either action would impact financial ratings and if continued over a longer time frame it could also impose the risk of insolvency.
It doesn’t take any real “acumen” to sell a bond that has a large imbedded gain in value simply because market interest rates declined after the bond was purchased. In fact, it can be lobbied this is a foolish thing to do.
This is a short term strategy designed to “pad” general account earnings. It is also a strategy that quickly backfires since the offsetting result is a lower average earnings rate in the remaining general account bond portfolio.
To “salvage” this strategy it would require an almost immediate upturn in market interest rates. That alone could offset the negative consequences of this perhaps ill-advised strategy. Only then could new premiums and maturing segments of the general account portfolio be subsequently reinvested in bonds with higher yields. .
A DETAILED STUDY
Nine years ago a detailed study of the average general account maturity duration of the nation’s insurance company general accounts showed the following.
- The average maturity then was between 9 and 11 years for most life companies.
- A few decades before it had been closer to 20 years.
The study confirmed the dramatic impact on returns associated with this reduction in portfolio duration. The drop in returns was substantial.
Worse yet, with the ten year or so average maturity for general account assets that exist today, it would still take a full decade for the portfolio’s to mature and be reinvested if rates did begin to trend up.
So the lower earnings rates in today’s general accounts are “baked in” for at least the next decade. As is the impact those lower earnings rates will have on the level of dividends that can be credited into any given companies WL policies.
Since rates have yet to trend upwards this reality is likely “baked in” for far longer.
WHERE THIS LEAVES WL POLICY OWNERS
Since WL dividends are a function of earnings (after expenses) above guaranteed levels, the obvious and inevitable end result of decades of low interest rates is a dramatic decline in dividends credited into in force WL policies. Most WL companies are barely, if even, earning enough to credit their guaranteed rates.
Any crediting of dividends above actual earnings levels would have to come from the capital base of the company. If capital base of the company is scavenged to allow this the ratings of the company will decline. And, if that trend continued, insolvency would result.
The only way out of this situation is to earn more in the general account. And that would require an immediate and steep increase in market interest rates. Which seems unlikely to occur any time soon.
While reducing dividend crediting levels below those illustrated can be put off for a time by selling longer term bonds and realizing capital gains, once those bonds are gone the dividend decline will become even more dramatic. And that strategy can no longer be implemented.
The dramatic decline in market interest rates over the last two decades and extended duration of this decline is a fundamental change impacting the ability of a WL product to deliver dividend fueled returns above inflation.
If returns don’t exceed inflation, the owner of the policy is actually losing ground. If returns only make the crediting of guaranteed values possible, there will be no dividends. And for many WL companies that’s where the situation stands today. For others, that day is rapidly approaching.
Please follow the sequence of events that this situation can trigger with a WL policy.
- If earnings rates are only sufficient to pay guaranteed levels of return there will be no dividends credited into a WL policy.
- If there are no dividends, and prior dividends have all been utilized, the WL policy owner will have to pay premiums for the remaining life of the policy, which also means they will never be able to access the cash values in their policies without taking loans.
- Loans are often used to pay premiums. This will ultimately cause the policies to lapse if the policy owner doesn’t pay the interest due on the loan. Instead, most borrowers simply borrow even more to pay the interest. Once the maximum allowable borrowing level has been reached, usually 90% of guaranteed cash value, no more loans can be taken. At that point both the premiums and loan interest must be paid out of pocket.
- When policy values are borrowed to make interest payments the loan balance compounds. Then the interest amount borrowed will quickly exceed the premium level the policy owner was borrowing to avoid paying out of pocket.
- The result is a vicious circle ending in the lapse of the policy when the policy owner is faced with paying both the interest billed and the premiums due “out of pocket”. This occurs once the loan maximum level is reached which occurs sooner if cash values are borrowed to pay interest.
- The IRS treats a loan balance at the time of lapse as “income” to the policy owner to the extent it exceeds premiums paid. At lapse there is little or no cash value left in the policy (above the loan balance that must be repaid from cash values at the time of lapse). The policy cannot provide the funds needed to pay the taxes due on the loan balance.
This is a disaster befalling an ever growing number of unsuspecting and under informed seniors today as they are surprised (if not stunned) to find their WL policies have, or are at risk of, lapse. Something they typically learn one day when they open their mail. Prior to that they have no idea this situation is about to unfold. Even if they did realize it, by then there is likely nothing they could have done to have avoided it.
The fact is the mix of assets and durations that allowed for higher returns in the past no longer exist in the general accounts of the nation’s life companies today. Instead they have a bond portfolio consisting of low yielding short term and mid-term durations.
Only life companies with sky high capital levels can forestall the impact of this reality. The reason being regulators require massive asset reserves be established if longer term, less liquid investments are made in the general account.
It requires a huge amount of capital to allow these reserves to be established when longer term duration bonds and higher yielding illiquid assets are acquired. Levels of capital most companies simply don’t have.
NOTE: See the How it Works WL write up discussing regulatory realities today.
Making matters worse, as noted earlier at today’s somewhat level yield curve companies can no longer earn much of a premium by investing for longer durations. Those durations are not paying a great deal more than ten year midterm maturities now pay. However, the risk of loss of principal values that apply to longer duration bonds if market rates rise is extreme.
That means even if companies have sufficient capital to allow them to buy bonds with longer term 20 or 30 year maturities they only receive modestly higher earnings rates.
The other consequence, aside from principal risk, is they won’t be able to roll over until they mature. So if market interest rates start moving up it will be decades before the general account can benefit. If market rates move up rapidly the level of losses that would be incurred to liquidate out of longer term bonds would be prohibitive. They would have to be held to maturity.
NOTE: For every 1% market rates rise a thirty year bond declines in value by about 10%. If market rates move up rapidly the damage to a company’s capital level caused by holding long term maturities can be extreme. The reason being GAAP account rules require the write down of these bonds to their current market value and the immediate recognition of the resulting loss. Subject to some level of judgement if it is deemed the bonds are being held for the longer term. A topic too complex to digress into in this write up.
There is no simple solution to the problems created by holding longer term bonds in a time of rising interest rates. Which is why regulators have imposed severe asset reserve requirement levels relating to the ownership of longer term bonds.
Without a crystal ball to know what interest rates will be doing in the near or long term future there is almost nothing a money manager can do to address this situation. Other than sit, wait and see what happens. A dismal situation for WL companies indeed.
WHAT IF MARKET INTEREST RATES INCREASE
Some who sell WL believe once interest rates trend up the problem of low yields and resulting low dividend levels will resolve itself. They feel this way because the average maturities of the bonds in the general account are at historic low levels.
Unfortunately, this is not so for two reasons.
The first reason is the amount remaining invested in most companies general accounts (supporting the WL policies sold in the past) is less than half of the amount that was originally projected to be there.
This means an earnings rate of twice what was originally assumed in illustrations would be required to just equal the amount of dividends in dollars assumed to be credited into inforce WL policies when illustrations were run.
A scenario that his highly unlikely to occur.
The second reason is the fact most life companies will “close” the block of assets supporting previously sold WL policies when rates start trending up. At that time they will open a new segment (block) in their general accounts to support newly issued policies then being sold.
This means the higher rates earned on the new WL premiums collected will only benefit the new policy owners. This is fair to the new buyers of WL, but leaves the prior generations of buyers trapped with the lower yielding assets their premiums purchased.
This is known as the “new money” approach to investing general account assets supporting WL policies. The alternative approach is known as the “portfolio” approach. That approach averages the yield on all general account assets in that block of the general account and credits the average rate to all of the inforce policies supported by that block of assets.
Which could mean selecting a company that is using a “portfolio” approach would protect a WL policy buyer from the situation faced by “new money” policy owners today. At least to some degree.
Unfortunately, companies can pivot from one WL money management approach to the other at will. And, they do because often they must.
If a WL company attempts to sell new policies in a higher interest rate environment while mixing the new money with the lower yielding assets (the portfolio method) supporting older policies, their dividends illustrated on new policies will be far less than those illustrated by any other company that is using a “new money” focused approach to investing new premiums.
Meaning they won’t sell many policies.
Since the operations of WL companies are largely supported by new life policy sales, this would be a catastrophe for most WL oriented companies. One they won’t allow to happen.
The truth is most WL companies simply can’t afford to lose business by letting older policy holder’s benefit from the new premiums paid and invested by newer WL policy purchasers.
“IN FORCE” ILLUSTRATIONS
Those who own a WL policy today, and who still have the illustrations they were shown when they made the purchase, have an easy way to verify the truth shared in this write-up.
All they need to do is call the insurance company and ask for an “in force” illustration. The key is to also clarify they want it to reflect whatever recent premium payment scenario they intend. Including how loan interest payments are to be handled (paid out of pocket, or by additional borrowings).
The resulting “in force” illustration will show dramatically lower cash values than were originally illustrated when the product was sold. It will also very likely show the policy will lapse many years prior to the likely mortality of the insured person.
Meaning all the payments made over the years will have been wasted and there will be no death benefit paid when the insured party dies. The reason being the policy will have lapsed and it will no longer be in force.
Even worse, if the owner of the policy ever used loans from the policy to pay premiums (as many policy holders do or have) or for other purposes there’s another very big problem. It’s the previously mentioned tax issue. The lapse will turn the loan balance into immediate and taxable ordinary income. A 1099 will be issued.
WRAP UP COMMENTS
It only takes a casual review of the general account makeup of the nation’s insurance companies thirty years ago versus today to understand the results discussed above are true.
It’s not complicated, it’s not a mystery and it’s not going to change. It’s not a theory. It’s a fact. It’s no one’s fault. It’s just the way it is.
The main point here is that clinging to the past returns earned in WL products decades ago when market rates and general account yields were far higher as a basis for selling todays WL policies is foolishness.
It’s actually wrong. It’s deceptive.
The reality has changed relative to economic facts. Returns are now very low and unable to duplicate the very favorable results enjoyed decades ago by those who owned WL policies.
These economic disasters are unfortunately befalling a great many WL policy owners around the nation on a daily basis. It started as a slow drip a decade ago as a small number of policies began to lapse from low earnings rates. It’s now turning into a flood of lapses since low interest rates have persisted.
Not only is WL no longer a “good value” from a product standpoint. These policies are now for many little more than financial time bombs waiting to explode to the detriment of the owner and the family who the death benefit was intended to protect.
This is why it makes sense to understand the products one owns. Especially, when the reality of the world today differs dramatically from the reality that existed when the policy was sold.
Relative to WL there are other realities that have changed. And many mysteries as to how WL works. All addressed in the other “How it Works” write ups available for the reading on the website.
Food for the inquiring mind.
