Gary (pseudonym) is a successful businessman. He worked in film production in Hollywood, and his family was the envy of millionaires in the community. In July 2021, he filed a lawsuit against two life insurance brokers, claiming that he and his family were misled by the brokers into signing a $40 million “free” life insurance policy.
What’s up with “free” life insurance? A “free” life insurance policy means that the policyholder does not have to pay premiums out of pocket. Life insurance brokers work with banks or loan brokers to provide policyholders with a loan to purchase high-value policies. In a market environment of historically low interest rates for many years in a row, this may not be a problem.
Theoretically, after more than ten years of rolling interest on insurance assets, the cash value in the insurance account will be used to pay off the low-interest loan, and the excess will be left to the policyholder. In this way, the policyholder does not need to take out a penny from his pocket. When insurance salespersons sell such policies, they often use the “Illustration” of life insurance as a supporting tool, and the figures on it will be shown to customers. They will indeed use this arbitrage lever to make a lot of money.
Assuming that the annual benefits will be so great, the policyholder simply withdraws money from the policy account to pay the loan bill due each month, and the excess money becomes his own tax-free retirement fund. In other words: an essentially “completely free” multi-million dollar life insurance policy.
The Federal Reserve’s violent interest rate hikes have pierced the leverage bubble. From 2022, the one-year U.S. dollar interbank offered rate soared from less than 1% in February to 4.699% in early September. It broke through 5% within half a year, while in the same period, the policy income was 0%, which is rare in history.
If the US dollar USD interest rate does not use borrowing leverage, the impact of interest rate hikes on policyholders is not that great, but this type of policy has been mortgaged and leveraged, and the ownership is in the hands of banks or trusts. Appears relatively passive. Once there are any unexpected changes – such as the magnitude and frequency of historic rate hikes – things don’t look so good:
The cash value of the life insurance account did not grow as expected, the insurance income did not meet the annual expectation, and the loan interest was also rising, and the policyholders were faced with “Margin Call” and bills. If you are attracted by the design plan of “0 yuan purchase” at the time of initial purchase, or the policyholder participates in a program that uses “fundraising” to purchase life insurance (or XX retirement plan) with a loan, there is no actual personal name Asset control, it is difficult to have room for recovery.
Financial leverage is a double-edged sword that requires professional design and maintenance. All of these key issues focus on two points. One is that insurance brokers use high leverage for the sake of attractive numbers, which creates the temptation of “free” ; Second, in the historic interest rate hike environment in the first half of 2022, insurance brokers are also unable to provide follow-up solutions. Although LIMRA does not track and record life insurance sales for premium loans, experts in the life insurance industry believe that such policies have grown exponentially in the low interest rate environment of the past decade.
The main source of premiums for some life insurance companies comes from loans. Seeking Insurance First Aid Service Insurance First Aid Service, known as Policy Rescue in English. It is promoted by a third-party professional life insurance consultant. It is a set of remedial procedures for life insurance accounts that have hidden dangers in the design scheme or are in a high-risk environment. The main function is to reduce or compensate for the asset loss of the policyholder and improve insurance. Account health. According to TheLifeTank.com’s observation, there are still some premium loan programs with “completely free” as a gimmick selling point in the market.
The design of this type of insurance is generally considered in the industry to have no actual anti-risk ability, and only passed the unilateral stress test of the policy itself, which is tantamount to gambling. Some households that have leveraged this “free” design scheme before 2022 have already been locked into such a contract and cannot get out. Birney Birnbaum, director of CEJ (Center for Economic Justice), believes that some insurance brokers use vague language to present customers with overly optimistic insurance proposals, and insurance brokers are not obligated to act in the best interests of customers For the sake of. Seeking the insurance emergency service of a professional insurance consultant is currently the only way out for this type of insured family. (full text)
