July 30, 2008
I have been in the insurance business for over 15 years. One of the greatest advantages of life insurance has been the leverage it provides for individuals in regards to the death benefit. However, the underlying cash values offer living benefits to which the cash account and the interest that accumulates in the account is key to those benefits. The performance of the account is based on guarantees by which the companies then go out and invest in options and other market securities in order to guarantee the performance of the contract. Whereas for years the insurance contract has performed at approximately 3% there are companies, like Northwestern Mutual, offer dividend and guarantees that have approached as high as 8.25% when I was there during the 1990's. Indexed products have given other companies an opportunity to manage this company and offer competitive performance is the client is willing to assume the risk. Unlike mutual funds, where the client can lose money, indexed products offer clients the same safety they would have with a traditional contract. The burden is upon the insurance company to guarantee the floor and thus brings a conservative posturing to this product not found in other investment products. It would be a travesity to the industry and the client if this were to happen. The guarantees would be lower and the fees would be higher. Unlike mutual funds where the client wants to diversify and move with the market, insurance contracts are truly long term and there to protect the client. I wish the SEC paid as much attention to ETF's and the sub prime crisis as what they are doing in trying to change something which protects the living benefit options of a client.