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Screening Life Policies in a Vast Universe

Thursday, September 19, 2013

In a recent article Laura Lutton, director of fund research at Morningstar Inc was interviewed by InvestmentNews and there are direct comparisons between what she says about using Morningstar for funds and how this also applies to Veralytic for life policies.

When ask “How important are fund fees and expenses?” Ms. Lutton stated “research has shown consistently that fees are the best predictors of future performance. If a fund is expensive, you have to be really comfortable with that fund.” She goes on to say that “high fees would be a red flag” to watch for when screening funds.

How does a financial adviser screen for that sort of thing?

In the same way that Morningstar has transformed the way advisors use databases to find and evaluate funds, Veralytic is transforming the life insurance industry by providing a database and benchmarks in which to measure policy pricing and performance.

Before Veralytic advisers had no alternative but to use illustrations to try to dissect expenses and charges. Office of Comptroller of the Currency (OCC) says that policy illustrations [are] subject to a high degree of fluctuation[s].  Comparing illustrations of hypothetical policy values is NOT useful to EITHER the overwhelming majority of financial advisors OR their clients as a decision support tool for determining which products are more suitable in each client situation.  In fact, advisors who are not trained in the life insurance pricing and performance principles, but who nonetheless compare illusions of hypothetical policy values to determine which product is “better”, can instead actually cause harm to clients. 

For this reason, the chief regulatory body of the financial services industry “strictly prohibits” comparisons of such illustrations of hypothetical policy performance because they can be “misleading”.  Similarly, the chief actuarial body of the life insurance industry commissioned a study that concludes “illustrations should not be used for comparative policy performance purposes” because such “usage for illustrations is fundamentally inappropriate.”  Instead, both the chief regulatory body of the financial services industry and generally-accepted Prudent Investor principles prescribe separate examination of expenses independent of performance assumptions. 

History also shows that comparing illustrations of hypothetical policy performance has not produced good results for clients.  In the 1980s, illustrations of hypothetical policy performance were used to market universal life (UL) products when prevailing interest rates were high, which gave the APPEARANCE of lower costs.  When high interest rate assumptions proved unsustainable, many UL policies became underfunded and are now at risk lapsing without value and without paying a death benefit.  In the 1990s, variable universal life (VUL) illustrations using high earnings rates again gave the APPEARANCE of lower costs, but many VUL policies are also now underfunded and risk lapsing without value and without paying a death benefit. 

Had more financial advisors been able to actually examine policy expenses and performance assumptions separate and distinct from each other, instead of simply comparing illustrations of hypothetical policy values, there would almost certainly be fewer disappointed clients with UNDER-funded UL and/or VUL policies.  These “flavor of the day” marking practices using illustrations of hypothetical policy performance continue to this day with indexed universal life (IUL) and emerging litigation and case law reveals just how harmful this practice has been (i.e., see “A Shot Across The Bow” in the December 2010 issue of Trusts & Estates magazine). 

Veralytic’s mission to widely-publish life insurance pricing and performance research is not unlike Morningstar’s mission to widely-publish mutual fund pricing and performance research.  Morningstar also received its fair share of criticism over the years.  However, few would argue that Morningstar didn’t empower both A) more financial advisors with more information needed to better advise clients, and B) provided more clients with more (albeit not necessarily all the) relevant information needed to make better investment decisions. 

Explain the importance of stewardship

Life insurance is increasingly being promoted and considered as an asset. However, it remains the last, largest, most-neglected asset on most clients' balance sheets because wealth managers and fiduciaries and even life insurance brokers have struggled with the MANAGEMENT of life insurance as asset for a variety of reasons, namely:

-Brokers struggle because prevailing industry marketing practices are not consistent with, and in some cases actually violate, the Prudent Investor principals near and dear to wealth managers and fiduciaries,

-Wealth managers and investment advisors struggle because they have not been able to look up the pricing and performance of life insurance products the way they can for most every other type of asset they manage, and

-CPAs, tax attorneys, and particularly trustees struggle because they lacked standards for the prudent selection and proper management of life insurance as an asset like they have and follow for most every other type of asset in their care.

In response, a group of industry leaders gathered at West Point in April 2013 to finalize a Best Practices Standard for Life Insurance Stewards. In attendance were representatives of nearly every profession who has clients who own life insurance, to include: the largest trust and estates law firm; the largest TPA of TOLI; the largest association of financial planners; a leading financial planning university; and, most of the largest independent distributors of life insurance. These standards apply the same universal decision making framework to life insurance already widely-accepted in the investment business.

What are some common mistakes investors make when researching the broad universe?

Ms. Lutton says “the most common mistake is chasing performance”. Veralytic believes that the most common mistake in life insurance research is chasing a hypothetical projection from an illustration.

Few clients know what they are actually paying for cost of insurance charges (COIs), fixed administrations expenses (FAEs), cash value based “wrap fees” (M&Es), and premium loads or what they are actually getting in the performance of invested assets underlying policy cash values. In addition, most financial advisors don’t know what their clients are paying or what they are getting. Given findings from independent studies[1] indicate there can be as much as 80% difference between best-available rates and terms and poorly-priced products, the opportunity to bring reduced policy expenses and/or improved performance of invested assets underlying policy cash values can be both significant and meaningful today. Also, because the neither cash‑value‑based investment expenses, cash‑value‑based insurance expenses (e.g., M&Es discussed in the Cost Competitiveness section above), nor life insurance policy earnings are generally reported in a standardized manner, measure cash value performance and cash‑value‑based expenses.

Instead, take a break from the hard labor of calculating and comparing some large number of illustrated hypothetical policy values that produce incomplete and “misleading” results, and give Veralytic a try. Veralytic is simply the fastest, easiest, and most comprehensive and cost-effective way to independently verify to clients and their advisors whether or not the pricing and performance of existing or proposed life insurance is in their best interest. Only Veralytic is accepted for independent client representation, endorsed by the New York Bankers Association (NYBA) and compliant with industry regulations and established case law.

Use the Veralytic Reports to determine the appropriateness of pricing, the reasonableness of performance expectations for invested assets underlying policy cash values, and overall suitability for your (client’s) policies based on the 5 factors of suitability. Click here and get up to 3 Veralytic research reports under our NO-Risk trial subscription.


[1] “Low Fees Outshine Fund Star System” Wall Street Journal 08/09/2010


[i] Veralytic is a provider of insurance product information and does not endorse any broker/dealer, financial planner, registered representative, insurance professional, insurance product, or insurance company. If used as supplemental sales literature for a variable product, this report must be accompanied by the name of the registered representative; the name of the broker/dealer through which the policy is being offered; as well as a prospectus, disclosure statement, complete and compliant illustration of hypothetical policy values, and any other supplemental materials necessary to provide a fair and balanced presentation of all policy features. You may obtain a current prospectus from the financial advisor named herein. Please read the prospectus carefully.

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