This past month, there was an article on the front page of a major publication about universal life (UL) insurance policies. The Â article included a statement that many people â€śâ€¦ are sitting on a ticking time bomb, and most probably arenâ€™t aware of it.â€ť
This reminded me of another article that said, â€śToday, in this period of very low interest rates, many are sitting on time bombs. â€¦ Yet many are unaware â€¦â€ťÂ Guess when this period of very low interest rates was? 2002! How many times since then would someone have killed for a 2002 interest rate?
Effect of Lower Interest Rates
Both of these articles, separated by 16 years, attempt to warn advisors and consumers about how the lower interest rates are wreaking havoc on their life insurance policies. These pieces, and most articles in between, are focusing on UL but the same decrease in interest rates is affecting whole life (WL) policies in the same manner, sometimes with more spectacular and devastating results. Since 2002, the average decrease in dividend rates for major WL carriers is about 300 basis points and over 600 basis points since their peaks in the mid 1980s. For both UL and WL, these even lower rates for a very extended period of time mean even more policies are doing worse than ever.Â At least the ones that havenâ€™t already exploded.
If I asked a room of advisors in 2002 how many of them have dealt with these issues with their clients, a few, if any, hands would go up. The same talk today would result in many nodding heads and commiserating. Back then, I think many in my audience sincerely thought I was exaggerating the issue and often didnâ€™t believe me. â€śAfter all, if what Bill is saying was true, certainly Iâ€™d have heard about it.â€ť But if they were paying attention, they wouldâ€™ve been seeing the effects and been reading about in their respective professional journals.Â Simply because they missed it or werenâ€™t paying attention doesnâ€™t mean it wasnâ€™t happening.
Detonation and Destruction
Countless bombs are still out there with fuses getting shorter by the day, including bombs that werenâ€™t even built until after 2002. Some will blow before this piece is published. A fuse on some 60 year old might not run out until heâ€™s 85, but if he doesnâ€™t cooperate and die on time, the result will be the sameâ€¦ detonation and destruction.
Donâ€™t let the promise of interest rate increases allow your clients to think everything will be fine. While they might ease the pressure on contracts suffering marginally, the lower rates and the lost time value of money will make even a rising interest market meaningless in most situations.
Why is this still happening? The industry wonâ€™t educate and manage, consumers wonâ€™t listen and pay attention and most advisors wonâ€™t get involved unless they are forced to. I see it over and over again. Too many advisors donâ€™t want to step on anyoneâ€™s toes, and they donâ€™t want to jeopardize referral sources.Â Besides, this isnâ€™t â€śtheir thing.â€ťÂ Few people want to jump into something that isnâ€™t their thing, including me.Â Butâ€¦ if you know this is happening, do everyone a favor and find a way to bring it up. If you knew your client was driving a car with an active recall for faulty brakes or catching on fire, thatâ€™s not your thing either, but I imagine you might at least mention it when theyâ€™re in your office. If it was serious enough youâ€™d likely pick up the phone. Last week I told a friend about a great new restaurant. Restaurants arenâ€™t my thing, but I shared anyway.
I urge you to do yourself and your client a favor and join the bomb squad to help deactivate these bombs.
Bill Boersma is a CLU, AEP and LIC.Â More information can be found at www.oc-lic.com, www.BillBoersmaOnLifeInsurance.info, www.XpertLifeInsAdvice.com or email [emailÂ protected]