An area that confounds even the professionals in the industry that probably had more to do with the birth of financial planning than any other single group is the life insurance business. Many of the methods that have now been refined into the process of financial planning were spawned as techniques used in the sale of life insurance. The needs approach, the estate planning approach, the educational plan approach, and the retirement planning approach were all separate markets that agents would specialize in, all using a similar version of one product, life insurance.
The present modern life insurance product that has completely turned the industry around via a “Baptism by Fire”- the Universal Life concept- is the only life insurance product that has ever been approved by an act of Federal legislation. When it was presented to the public by E. F. Hutton it was the most dramatic movement of blocks of premium dollars that has ever occurred in the history of the industry. Heads rolled at the top when the presidents of large, old life companies did not recognize this long awaited change in the basic design of whole life. People just moved their cash value from old whole life plans to new universal life plans.
The change was prompted by radical interest rates so high that the stodgy guaranteed interest rates that were built into the old line whole life contracts (from 2 1/2% to 4 1/2% interest) just didn’t make economic sense. In every form of media there was the battle cry heard around the world, “Buy term and invest the difference!” And, they were right. The boys at the top of life industry said it was just another fluke in the economy. Be cool.
As time went by, things did not change. Large loans on policies in force were requested more than ever before, and were reinvested in “money markets.” People just loved the idea of borrowing at generally 5% when rates to borrow were over 18%, being able to deduct the interest and reinvest the capital and get, at one time, as much as 20% or more during that frightening period in our economy.
Something had to be done, so the life insurance geniuses came out with flexible premium annuities and annuity riders to compete. That worked for a time, but the people started using their annuities like money markets, taking money in and out, causing an administrative nightmare for the companies. It wasn’t working as it was supposed to. The insurance industry knew they had to do something.
Then came the answer! A product that was cheaper than term by only charging the actual mortality cost to the policyholder. A product that earned current interest rates. A product that had no set premium payment except the cost for pure mortality, that excess dollars could be put into it in large sums and be sheltered from present income tax on the earnings unless withdrawn. All this was built into one policy and much more, like the increased insurance option that increased the face of the policy every time you made a premium payment, without a physical, which is of great value in particular to growing estates, for estate tax purposes or if the insured had lost his or her health.
That was the beginning of the life insurance industry fighting back. These are only some of the highlights of the product that brought the industry back to life. This product and its concept should be studied by all financial professionals thoroughly, for it is truly one of the most remarkable financial tools available to our clients today.
Over the history of modern man, there is no other financial instrument in all its forms from early term plans to modern day universal life that has more to do with providing for the rich man and the poor man in time of need than life insurance. Furthermore, the cost of insurance has gone down over its 225-year history, not up. That’s a phenomenon! Maybe that’s why it is an over two trillion dollar industry, the largest in the world.
Think about it, get involved in this “Evolution of Life.” You need to know in order to be a complete financial professional. That’s this man’s opinion. What do you think?
Michael Darany is the President of the Consortium Group, a financial planning firm, and is the Symposium Chairman for the South Florida Chapter.
The Evolution of Life,
