INSURANCE MELTDOWN - Part 1
[Golden Crest Affiliate Services, LLC would like you to know that the mortgage practices listed below were never used by our professionals. Our professionals consistently recommend the best solutions for the customer.]
The practices that created the mortgage crisis have some dangerous parallels in the practices of the life insurance industry. In the articles that follow, we'll take a transparent look at some industry practices as well as sales techniques.
What most people fail to realize is that both mortgages and insurance policies require an annual review. However, in both fields there is a practice with regard to sales commissions called "frontloading". What this means is that the agents are paid the bulk of their commission at the beginning. Thus, the agent is not motivated by anything but his or her sense of responsibility to monitor the policy's performance. There is no financial incentive to actively monitor and maintain the integrity of the policy. By integrity we mean that as the circumstances of life change so do the needs for insurance or a mortgage for that matter.
In a practice similar to that of mortgage companies, insurance companies rather insist that their agents push their own company's "in-house-products" regardless of whether or not that product is the best that is available for that client. If an agent wishes to recommend a product that is not sold by their own company, many times the agent must receive special permission to sell a policy outside their employer's proprietary product list. Thus, persons who are good at sales may encourage clients into accepting products which may be inferior to other life products.
Regarding mortgages, it is no secret that some loan agents were motivated by the commission structure. They guided the client to one or another product in order to receive a higher commission. The same "motivation" exists in the insurance business. It often forms the basis for an agent's recommendation of one product versus another.
You must understand that there is a backdrop for all of this. It is statistical analysis. You don't have to understand statistical analysis, but know that it forms the basis for any potential insurance meltdown.
When an agent projects for a client what might be the performance of a policy, that agent is "illustrating". Often the sale of the policy turns on the appeal of the "illustration" done by the agent. The problem is that there are many policies out there right now that are not performing as they were originally illustrated at the time of sale.
On Variable Universal Life policies (VUL), consumers received illustrations showing a projected 10-12% annual rate of return. This led consumers to assume that these rates were sustainable over an extended period of time. However, based on analysis and performance, these projections were overly optimistic. Many of these VUL policies are now in jeopardy of expiring worthless!!! What action can a consumer take to remedy this? That will depend on a number of circumstances. The key here is to be aware if your VUL is in jeopardy of expiring. There are ways an experienced professional can identify this potential problem and help to solve it.
How would you know that you should talk to a professional? Well, if it's been more than 14 months since the policy was issued or reviewed, that would be an indicator. But, let's consider a typical scenario. It's a typical VUL scenario. In this scenario, you (or your parent) is told "I'm going to insure you (or your family or your estate) for $4,000,000. It's going to cost you $25,000 a year for 15 years. Let's say you get a 10% return. Your policy will be kept in force for the rest of your life".
Now that's just four short sentences. But what does it mean? In the coming weeks, we're going to drill down a bit and examine these statements and projections. In our next article, we will go into greater detail about the reality of your policy, as well as its potential to meet your expectations.
Click here to read Part 2
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