About Mark Pace

T. Mark Pace

When there is an immediate need for cash at the time of someone’s death, it has been my experience that life insurance, when properly acquired and managed, is one of the best tools ever invented for the creation and transfer of wealth. However, life insurance is rarely acquired properly and, because it is mistakenly assumed to be a "buy and hold" asset, it is never managed. The resulting financial disasters are far too frequent and completely avoidable.

If you would like to learn more about any Pig-in-a-Poke blog posts or discuss any other life insurance issues, contact T. Mark Pace at Mark@objectivereview.com


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Pace’s Pig-in-a-Poke

About Pace’s Pig-in-a-Poke

Pace’s Pig-in-a-Poke, provides an arena for sharing the four great passions in my life. My three foundational passions are:

  1. Invest in yourself first;
  2. The genius in all of us, and;
  3. We can all live a long healthy life.

These three support my life work and my fourth passion; LIPM™ (Life Insurance Property Management).

As the blog title suggests, my focus is on debunking all of the myths, misuse, and muddled thinking that has accumulated in the life insurance industry. And, from time to time, I will go outside of the specific world of life insurance and share my views on my other three passions.

I hope you find my blog worthy of your attention, informative, and occasionally inspirational. I welcome your comments, questions and suggestions.

Mark Pace

When is a guarantee not a guarantee?

Beware of potential issues with GUL policies

The Poke:

Many advisors and life insurance owners believe Guaranteed Universal Life policies need no ongoing management. They assume that as long as the premiums are paid, nothing can go wrong and the death benefit is always guaranteed.

The life insurance industry invented this type of policy to increase insurance sales by appealing to people who want to pay the lowest price possible for permanent insurance. They marketed the policies as very simple products – the concept of simplicity neatly aligning with their low prices – and said that as long as premiums are paid, the death benefit is guaranteed to age 100 or 120 (depending upon when the policy was issued).

While there is nothing wrong with these products, it is wrong to assume they are simple and nothing can go wrong. Like all forms of life insurance, a “bought it and forgot it” approach does not work because many things can go wrong… and when they do, the guarantee is not guaranteed.

The Poke Exposed:

The fact is, these policies are complicated and have numerous property rights that are potentially beneficial but difficult to assess and manage. And, because of their complex design, it is very easy to lose the guarantee without even knowing it has happened.

To appreciate some of the things that can go wrong, we need to understand why people buy these policies and the pressure it puts on the insurance company. Typically, they are purchased to replace some other form of coverage that has become “too expensive” or appears not to  be working for other reasons. The need to match the death benefit of the life insurance being replaced, while offering the lowest possible premium, creates a situation made tenuous by the complex terms and conditions applied by the insurance companies. If these terms and conditions are always met, no problem, you have a guaranteed death benefit. But, if they are not met, the guarantee is at risk.

The rigid conditions needed to offer the absolute lowest premium possible means even the smallest mistake or irregularity can cause issues. The most common of these are:

  • Timing of original 1035 exchange
  • Home office posting errors of 1035 exchanges and premium
  • Actual late premium payments
  • Early payment of second year premium in the first year (but only when the target exceeds the projected guaranteed premium and only with certain carriers)
  • Home office internal accounting and clerical errors

The damage caused when one or more of these go unnoticed for even a short period can be almost irreparable and is compounded year to year with the outcome being a decrease in the length of the guarantee period. What was expected to last to 100 (or 120) can very quickly be reduced to 95, 90 or even shorter.

Pace’s Poke Remedy:

The best way to avoid the negative repercussions of all too frequent mistakes and oversights is to go beyond the typical (and simple) “as is” illustration provided by the insurance companies. Knowing that insurance companies recalculate the shadow accounts* supporting this type of death benefit guarantee at least every year and always when a premium is paid, speaks to the need for, and the value of, monitoring these policies on an annual basis.

To begin, an advisor needs to fully understand the assumptions that went into the original illustration – especially when there is a large 1035 exchange (the larger the exchange, the bigger the danger). For example, what was the assumed timing of policy inception compared to the actual receipt of the 1035 xchange money?

At the minimum, each year, right after the premiums** have been paid and posted, your advisor needs to regenerate an illustration showing that the guarantees are being maintained to match your expectations.

But, given the fact that illustrations are not guarantees, there are two other practices I recommend: One is to always make sure you have an official, home office produced document (e.g. annual statement, or request for certification from a home office executive) that states the guarantees are being maintained for that time period. The other is to build a little safety buffer into the whole affair by paying a premium that is slightly larger than the bare bones or absolute minimum premium originally quoted. At the minimum, doing this in the early years of ownership will give you the wiggle room to address all sorts of issues if and when they come up.

*Shadow Accounts: What the insurance companies make public is the ability to receive a surrender value for the policy. But, as there is no longer any correlation between surrender value and account value to maintain the guarantee, the carriers maintain a shadow account for their internal accounting, and… what goes into these shadow accounts… only the shadow knows!

**About premiums: In many cases premiums are paid annually; which is the safest way to manage payment as it reduces opportunities for errors. Be aware that if you deviate from an annual payment schedule, and pay in some other manner (i.e. semi-annually, quarterly, or monthly) you need to be extra diligent in making future premium payments on time and monitoring the policy guarantees. The more often premiums are collected, the greater the chances that an error will occur.

About the author

Mark Pace
Mark Pace
When there is a need for immediate liquidity at the time of someone’s death, it has been my experience that life insurance, when it is properly acquired and managed, is one of the best tools ever created for the creation and transfer of wealth. However, in my 35 plus years of experience, life insurance is rarely properly acquired and never managed… thereby creating a monumental financial disaster for many individuals that should never happen.

If you would like to learn more about this Pig-in-a-Poke subject or discuss any other life insurance issues, contact T. Mark Pace at Mark@objectivereview.com


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