Hey, everybody Steve Parisi here with IBC global. Hope your day is off to a great start
so I am here with Scott Witt again president of WITT ACTUARIAL SERVICES, Scott how you doing?
Good, how are you Steve? Good, thanks for asking
so we've got a good topic today which which I learned quite a bit from Scott on which
really just has to has to do with paying premiums and the frequency in which you pay a premium if you're going to pay annual
or anything else really other than annual I dimension mainly monthly is the other option
but the difference between paying premiums and that the frequency as far as how that works, so
if you want to shed a little bit of light on that kind of what we were talking about earlier, I think
listeners would would love it.
Yeah, so this is this is a dirty little secret within the insurance industry that generates a lot of profit for insurance companies
and so I'd like to shed a little bit of light on that for our listeners and it's sort of uh,
it's sort of some low hanging fruit that they can implement immediately and improve their financial well-being
and basically I'm talking about
almost any insurance product other than Universal Life
Universal Life is very flexible and very transparent and it's processed on a monthly basis
so if you pay premiums
more frequently
that's automatically reflected in the INC and incorporated in the calculations for a universal life policy
but for whole life insurance
term insurance
long-term care
disability for those products for the most part there is an internal financing charge if you elect to pay
other than annually
and what is so
sneaky about it is that when these policies are sold and illustrated everything is shown on an annual basis
and typically the consumer decides that they're going to make the purchase decision
and then once that decision has been made the agent or the company will say well wouldn't it be convenient to pay
on a monthly basis directly from your checking account. Maybe do some sort of electronic funds transfer
and there's no doubt. It's more convenient
but
Steve, would you be willing to pay
eight percent interest for that privilege. If they told you that and they don't they don't tell you what the interest rate is
and
let's say it is some somewhere between five and eight percent on many of the policies that are being sold today
that's a very high internal borrowing cost in today's
extremely low rate environment
and for somebody who may have the money sitting in their checking account or savings account already or sitting in a money market
why in the world would they agree to a five six seven eight percent financing charge
for the privilege of paying monthly rather than annually
and
what's staggering is if you look at the present value impact over the the life of a typical policy
by you choosing to pay on a monthly basis
rather than an annual basis the present value cost today
is typically more than one whole premium
so, you know people people get excited about
reducing agent compensation and we can save roughly a whole annual premium
by reducing or virtually eliminating agent compensation
but you can do the same thing by being smart with how you pay premiums and
does it require you to be a little bit more
diligent with your cash flow if you're paying on an annual basis than on a monthly basis?
It does
but you're well compensated for doing that
what I find even more shocking and what should be more compelling for the listener is that there are many
policies that were sold in the 80's and the early 90's
that the internal financing charge is double digits. I've seen rates as high as 15 or 16
and now for people to continue to be paying monthly
or quarterly or even semi-annual premiums
on a policy
with that high of a financing charge is beyond absurd. Yeah, they probably just don't know
they have no idea and companies are not required to disclose it. Joe Belf is a long time
consumer advocate within the industry. He's a retired professor and just a brilliant man
we're lucky to still have him with us pumping out good content. He has
a blog online
I think it goes by the insurance forum. That was his publication too
he has long been an advocate of mandatory disclosure
of what he calls an annual percentage rate and he has made available a calculator
on his website. I don't know the URL of the top of my head
but I know for those that are interested in looking for it
you can find that. It's a simple calculation anyone who has
a basic knowledge of EXCEL
could probably figure out the annual rate equivalent and there are some rough rules of thumb
a lot of people make a mistake though in you know, they'll take the monthly premiums multiply it by 12
and they'll say well that's four percent bigger than the annual premium and they'll think that it's a four percent interest rate
but really it's closer to an eight percent interest rate because on half
on average you only had half
of that money being borrowed over the course of the year. And so
when the sum of your premiums
is four percent greater
than the annual premium you could have paid that's more like an eight percent internal financing charge now that that's rough
but it's much closer to eight than it is to four. Yeah. Yeah now it's interesting and I see I've seen
one insurance company disclose something like exactly what you just mentioned
and I remember an agent that sat down and did the Math before they said hey I'm looking at the difference between
you and monthly I calculate it
it comes out to four percent yet disclosed within the the full contract
you see here's your annual premium and then if you pay monthly
quarterly or
semi-annual it range I think it was between nine point five to nine point six percent the actual percentage charge that was disclosed
so that
yeah it's interesting where I don't see it disclosed a whole lot. But no, I mean that's great
I mean the way you explain that too because normally
that's not something I went into a whole lot
I mean a lot of people we work with pay annually, but if we look at it monthly we say, okay
there is an additional charge. It makes sense to pay annual and we kind of
leave it at that. But the breakdown now that
thanks for shedding that light there. I mean that that's something especially the additional amount of money
the character making from that
I think that's a great example of what
having someone like a fee-only insurance advisor in your corner
can do for you because there's nobody involved in that process
from the insurance companies perspective
that is motivated
to really be upfront with the client about the ramifications of choosing monthly versus annual the agent
really is neutral. It's not going to affect their compensation and they're all for what what makes their their their job easier
what makes life easier for their client and they want to make a sale so if electronic funds transfer
is a means for them to keep that policy in force and and to keep the commission's coming they're going to be all for it
I would say I would go so far as to say the insurance companies
have
a disincentive
to educate the consumer because that is
a vast source of profit if you have a big block of business on which you're receiving monthly premiums
and the internal charge is 12 or 14 or 15 percent
that is helping
sustain profitability on that product. Now, they may have factored it into when they originally priced the product but
nonetheless
there is a financial motivation
for the company
to keep the client's head in the sand with respect to those internal financing charges. Yeah. Yes, certainly. No
Thanks for shedding light on that
I've got got one question. Just and this kind of goes in with their planning and the individuals we work with
How much
of if any of
this would apply to the topic of unscheduled PUA some companies allow a consumer a policy holder to throw PUA's in
at leisure some require underwriting and really if they do or don't that's not really my question. It
does any of that go on with unscheduled PUA's where you can see?
Hey, you're going to get hit with additional charges that are in excess of what you normally would there
Sure, so just just to to expand on that when you say PUA I think you mean Paid Up Additions, correct?
So, if a client is going to put in some additional premium in the hopes of making their policy more cash rich
and more accumulation efficient
that's a great question
you know, we're probably talking about a dividend paying policy there
with that terminology and it's probably going to have annual processing
and so I think the important thing there is to understand when you put that premium in
is it going to be treated as if it was there for the entire year
and there could be some incentive for let's say
making that premium payment
20 days after the anniversary rather than 20 days before the anniversary, you know from an insurance company
perspective
they may treat those exactly the same and from a processing perspective. They're probably going to have to assume
that any Paid Up Additions (PUA) that they received came at the beginning of the policy year
and so the only word of caution I would give you there is if you're halfway through the policy year
and you want to dump in
a lump of money into your policy
just clarify how that's going to be treated, is the company going to treat it as if it was received six months ago
are they going to treat it as if it's received six months from now, or do they have some sort of?
process whereby they can accurately reflect that it came in the middle of the year and that's very difficult and sophisticated for
a whole life policy that really is set up with annual processing, right?
Right and I think that just kind of speaks to your value there as well because that is
is not that transparent because I mean we we have that incorporated into our practice where people hey I've got a lump sum of money
I got a bonus. I sold a piece of property. I got inheritance whatever and they'll add it to their policy
some companies one comes to my mind specifically
actually states in their contract language. Hey, if you throw PUA's in at a random time, you'll have a prorated dividend
They provide a little bit more transparency
Whereas most I read I'm like all right, did I have to read it again? I don't see anything. It's very vague
so
having someone to ask those questions and just know how to ask them as well because
like you and I
are
we live and breathe insurance and you to a much greater level versus a consumer
like if you're working with someone their profession is their profession they're
they don't have time to do this all day just like I'm going to hire a lawyer or something like that
to to focus on a certain area or CPA I'm not going to sit there and try and figure out my taxes
he's going to do it
with a CPA so it's the same thing in my case where
as a policyholder, right if I'm someone and I say hey, I want to add money into a policy and I'm expecting
it to produce a certain value and then it doesn't
that's where the disappointment comes in the frustration where if I talk to someone like you first to say, okay
make sure you ask these questions or here's how it will actually work now all of a sudden like okay now I'm prepared
so this is why the value shows, you know
199,000 instead of 100,000 something like that, which some people might look at as an agent
it's not a big deal, but it is people's money that you're dealing with like you've got to be as transparent as possible
to prevent frustration, disappointment or any bigger issues for that matter.
Yeah, I completely agree. Yeah
Yeah, no a great topic. Yeah. Thanks so much for for sharing some light on that I enjoyed that.
Well, I appreciate you taking the time again to connect Scott and we will we'll talk to everyone
next time sounds great. Thanks. Steve
Hi
Hey guys, Steve Parisi here
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