The Financial Services Online Weekly Newsletter consistently delivers good information and penetrating insights into short and long term trends in the insurance and financial services industry. Here’s a short comment on a practice that might bring down a few aggressive life insurers who promote the sale of life insurance to “investors”. You might want to check into where your life carriers stand on this issue.

“IOLI THREATENS INSURERS – S&P reports steady growth for life insurers, but part of the sales increases came from strong sales of investor-owned (also known as stranger-owned) life insurance. IOLI-type life insurance policy ownership could put the future profitability of issuing insurers at risk, because insurance companies underwrite life policies with the assumption that a certain percentage of them will lapse. As IOLI policies are bought as investments by major financial institutions, they are far less likely to lapse. This means life carriers will pay out claims on a far higher percentage of policies than they had assumed.”

There is a precedent for this concern in Long Term Care Insurance. In the early years of LTCI dozens of insurance companies jumped into the market. They based their persistency assumptions – the number of policies they thought would stay on the books in the long term – on the performance of their life and disability insurance books of business. They were very wrong. 95% or more of LTCI policies tend to stay on the books while a much lower percent of life and disability policies stay in force until there is a claim filed. The result was that many of those companies experienced or anticipated higher than expected clailms and had to get out of the LTCI business just as quickly as they got in. They then either cancelled  the policies they issued or sold those plolicies to another insurance company, which then was free to raise rates.

The down side for the consumer was that they either lost their policies or the new rates were often so high that the policies lapsed. Imagine, this occurred in many cases just as the insured reached the age when they most needed the benefits.

While IOLI threatens the insurers directly, it puts policy owners at risk also. The company may not be able to deliver the interest and dividends it projected and you may find yourself with a policy that doesn’t live up to the projected values you were shown when you bought it.

When you get right down to it, it’s always about the money.

Coming soon Money for Life…in good times and bad – How to thrive in the 21st century www.TheMoneyForLifeBook.com

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