“SELL THE SIZZLE, BOYS.” With those words from the sales manager at a big insurance company, the 2003 class of newly minted registered representatives were off to the races, extolling the virtues of the firm’s products to family, friends and anyone else who would listen.
I still vividly remember that moment. Yes, I was there.
To become registered reps, the 2003 class had to pass the necessary exams to get a Series 6 securities license and a license to sell life and health insurance. These licenses are the bare minimum required to be in the business. While there are suitability tests to be met before selling anything to a client, registered reps are not fiduciaries, which would legally bind them to act in a client’s best interest.
Clients need life insurance. Clients need retirement savings. Why not combine the two? Meet the variable universal life insurance policy, or VUL. The VUL coupled life insurance with mutual fund investments.
“Listen, you’re probably not going to die before your time, but you might. So, here’s a product that’ll protect your loved ones just in case. You do love your family, don’t you? If you live, it’ll provide you with tax-free money when you retire via loans from the policy’s cash value that don’t ever have to be repaid.” That’s sizzle, and that’s what you talk about.
“Just look at the illustration I’ve prepared for you.” The illustration is a multi-page document that shows the life insurance benefit, the premiums you’ll pay, and the accumulated cash value when you retire. “Look here at the fortune you’ll have with this policy when you retire.” More sizzle.
The illustration depicted several scenarios based on market performance. The best case usually projected 10% or 12% average annual growth. That’s more sizzle—and that’s what you talk about. Keep in mind that this was happening around the turn of the century, so folks were still taking for granted the irrationally exuberant double-digit market performance of the late 1990s.
The new agents selling these things were mostly kids recently out of college. Most had degrees that had nothing to do with finance. I was a new agent as well. I had left the beer delivery and sales business, but hadn’t yet started my career as a tax preparer. Still, at age 50, I was older than the other rookie salesmen—and I knew enough to be skeptical. I was the guy sitting in training with my little HP business calculator driving the sales manager nuts.
I think all but one of the class of 2003 flunked out of the business. Many were snapped up by banks eager for new hires who already had the required licenses. Others left the financial world. It was as if this was all part of the company’s business plan: Hire folks to sell to their friends and family. When the newbie salesmen wash out, the company gets to keep all the policies they sold.
The clients left behind were known as orphan clients. The kids that sold to these clients often didn’t even understand what they were peddling. There was one orphan client who was led to believe her VUL was an IRA. Another time, a new agent stuck his head in the office of the I-Spec—that’s what we called the investment specialist—and asked, “What are IRAs paying these days?” He was apparently clueless as to what IRAs were or how they worked. I also heard an agent describe the VUL as a “legal tax dodge.”
But we weren’t trained just to sell VULs. Meet the variable annuity, or VA for short.
Several years after I flunked out of the business—I lasted just over a year—a friend told me his financial guy proposed he buy a variable annuity. My friend asked for my thoughts.
The VA can be a fairly straightforward insurance product. In its most basic form, it’s an investment in mutual funds with a guarantee that, if you die, your beneficiaries will get the greater of the current market value or, if the investment is underwater, the amount you invested. In its not-so-basic form, the VA can get really complex, with plenty of sizzle and very high fees.
My friend was a professional with an MBA and a founding partner in a successful business. I knew he was a millionaire several times over, and I knew he was debt-free with a nice but modest lifestyle. I didn’t know his advisor’s rationale for proposing a VA, but I didn’t imagine that my friend needed such a product. I suggested he seek other opinions.
In the early days of my tax-preparation business, I shared office space with a non-fiduciary advisor. Every time I heard him utter the words “downside protection,” I knew someone was about to get pitched a VA with lots of sizzle. I once overheard another advisor talking to a prospective client. He said of the advisor with whom I shared office space, “He’s a great guy to play golf with, but what you really need is someone qualified to handle your money.”
In fairness to the insurance industry, there’s a place for its products. I know lots of people who got injured and wished they had disability insurance, but by then it was too late. Tax-deferred fixed annuities can provide higher interest rates than bank certificates of deposit. Single premium immediate annuities, or SPIAs, can deliver guaranteed income to help retirees pay their bills and not outlive their assets. Term life insurance is cost-effective protection and paramount for young families. Whole life insurance can help with estate planning and with buy-sell agreements for business owners.
But whatever the virtues of these various products, I’m happy to leave the selling to others.
For 30 years, Dan Smith was a driver-salesman and local union representative, before building a successful income-tax practice in Toledo, Ohio. He retired in 2022. Dan has two beautiful daughters, two loving sons-in-law and seven grandchildren. He and Chris, the love of his life, have been together for two great decades and counting. Check out Dan’s earlier articles.
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My thoughts about Universal Life Insurance policies differ somewhat from yours based my own experience with the policy we purchased in 2015. First of all, the current versions of these policies are quite different from earlier versions. (And, the biggest problems with the earlier versions, as you site, were the sales practices – exaggerated results, inappropriate clients, unclear explanations, etc.) The policy we purchased, a “second-to-die” policy, was and continues to be very easy to understand. It is a guaranteed, no-lapse policy as long as the annual premium is paid on time and in full. The beneficiaries, our 4 children, will receive the benefit (approximately $820,000 per child) when the second of us dies.
We took out the policy for a very specific purpose – we wanted to leave a guaranteed legacy to our children rather than the uncertain values of our investments upon our deaths. We didn’t want to have the constant worries about how much we could spend on ourselves and still leave them something. The Second-to-Die policy, in our opinion, achieves this purpose. And, if you do the math, you’d probably agree that it is a pretty good investment for this purpose. The following calculations support my conclusion.
I am not suggesting that this approach is right for everyone, nor am I encouraging anyone to use this strategy. We can afford the fairly hefty premiums without putting a crimp on our lifestyle, and we are doing this solely as the legacy component of our estate plan. I am suggesting that life insurance, if chosen for a purpose and used strategically, can be a valuable component of one’s estate plan. We hope our children will use their inheritance wisely in order to enhance their own lives and those of our 9 Grandkids.
Yours is an example I was making in my last paragraph regarding estate planning. This kind of planning requires a well trained and experienced agent who has your best interest at heart.
I was also in the insurance business. One of our products was universal life (not variable universal life). I actually kind of liked the product and ours seemed to be in the top of what was offered then (USAA being the gold standard). Our proposals (projections) were run with current interest rates and also at the guaranteed interest and insurance cost. Naturally the current interest (circa 1985) looked good projected out over 30 or 40 years. But, interest rates did not stay that high and none of the “projections” came about. In fact, a lot of those policies probably hit the minimum interest rates. That would have been ok but too many people had put the minimum amount in and had to put more money in at their then current mortality rates which were higher. In some cases, much higher.
Bottom line: (For those who skip to the last line) Just buy term insurance if you need it. When you bundle things together it just junks it up.
It’s never fun when a policy holder gets that letter telling them that their policy needs more money to remain in force.
Buying a simple annuity should be as easy (and uncontroversial) as buying an S&P 500 index fund. Plug in what you want to spend, your age, the applicable interest rate(s), your start date, your duration if it isn’t going to cover the rest of your life, and the fee percentage, and pull the lever.
I can’t agree more Martin. There are sites online that look pretty consumer friendly. I think the problem is two fold. One is that consumers don’t understand the product, and two, advisors don’t want to sell them due to the low commission paid and the loss of on-going management fees.
This article sums up nicely my past personal experience. This is that, at many firms, the financial/insurance sector is it is one of the most ethically challenged of any business sector in our nation. That is as polite as I can be and is a generalization. It does not apply to all. Hopefully, things have changed for the better over the last couple decades in that industry. Among other things, Index funds have helped the financial investment consumer immensely.
Public employees including teachers are being scaled every two weeks! They voluntarily save for retirement via their 403(b)/457(b) plans. For each $100.00 deducted from their pay roughly $95–$97 is actually invested. Why? The sales shark is selling commission based investments (variable annuities and mutual funds) with no employer oversight.
Public employees can look forward to two guaranteed retirement income streams: Their pensions and their Social Security benefit. The variable annuity is simply a waste of money. The mutual fund is a great investment provided it is bought on a no-load basis.
Not only that but public employees such as teachers are subjected to the Windfall Elimination Act (WEP) which punishes public employees who do not pay into social security. Many of whom have to get another job where they do pay into social security. When they get their social security pension they find it is cut by up to 45% only because there were public employees. Why on earth would anyone want to be a teacher, fire fighter or police officer if they know this would happen? My public employee pension is no windfall but I will be penalized by social security because I will lose $6000 a year to WEP.
I remember trying desperately to get some idea of the fees, but the rep kept saying that they were minimal. I only bought mutual funds, but they didn’t sell them as shares, like my IRAs, they sell in “units”, which don’t allow price tracking.
Sadly I think there’s a lot of politicking, schmoozing and lobbying going on that benefits few at the cost of many.
I am an actuary, although not in life insurance or annuities. I’ve always felt that if I didn’t understand how the product worked, I didn’t want it. Buy your investments and your insurance separately. When you combine them, it seems like that gives the insurer an opportunity to pack in more fees. That said, we got a fairly nice death benefit from an annuity my dad had. However, I can’t say whether the value we received was better than if he had bought life insurance and investments separately. I assume he was worse off.
Although I’m not a big fan of the VA, it can be useful for someone who is petrified of loosing money in the market. If your dad was such a person, the VA was a vehicle that guaranteed his kids getting at least as much as was invested. So when looked at in that light, you guys probably made out better then if he had the money in CDs.
Getting the invested amount back would be akin to having put the money under the mattress the entire time.
Keep in mind that the only time this happens is if the account value drops below the initial investment. Example: An investment of 100k made in 2007 may have lost half its value by 2009. The beneficiaries would have received 100k, not 50k.
I can resonate with your experience. Fulfilling a lifelong career dream, I became an independent financial advisor for a large brokerage firm at the age of 70. Faced with moral dilemmas much like the ones you describe, I exited after two years. Rendering advice is one of the last bastions of financial abuse in the brokerage industry. Commissions are discounted and fund management fees have been lowered, but advisory fees for small investors still hover over 1%. You’ve probably heard the jingle, “we only make money when you do.” Well, that’s the problem. If you must rely on an advisor, find someone who charges by the hour rather than by assets under management or by commission.
Steve you’ve got to listen to those adds more closely. The tag line is “we do better when our clients do better….” See, all that financial regulation really works!
You’re correct Tim, that is actually what they say. I stand corrected.
Funny coincidence Steve, just yesterday Chris and I each received a very expensive mailer from the outfit you refer to. I wonder how they pay for those things. Also the claim to only make money when you do is an outright lie; they’re gonna get their percentage regardless of market performance.
True story Dan. I, too received a very expensive mailer from that same outfit a few years back. I sent it back stating I would never purchase anything from someone who looked like a certain ex-NYC congressman who had been sent to prison for nefarious purposes. I never received a mailer from them again and the head of that outfit didn’t appear in their commercials again until recently.
Interesting to hear the “behind the scenes” on these life insurance products. Wondering if anyone has thoughts on structured notes, or uses them in your portfolio.
A very long time ago I purchased whole life insurance policies. The salesguy was very convincing about how I would be both protecting my family and saving for the future. Over time, they did produce some cash value, such that during our divorce my soon-to-be ex-wife wanted her half. As an alternative I offered to leave our sons as beneficiaries in perpetuity, but she wanted the money. My divorce attorney said there were some fights where it was cost effective to cave, so I did. But I also kept the policies. Around 10-11 years ago I used the cash value to purchase a single premium long term care insurance policy. Hopefully I never need it – just like the life insurance.