Playing With Your Life
One of the areas that I spent a great deal of time in during my professional life was the arcane arena of life insurance. Somewhere over the years, the business of life insurance took some very strange turns in this country. To begin with, the lobbying army that represents the industry is formidable, and they have done a wonderful job of making an arcane arena all the more arcane by purposefully layering the tax code on top of the financial and actuarial machinations of the product. What they have created is as close to a monster as any fiscally responsible person can imagine.
To begin with, let me review my experience in the industry. It began in 1985 when I had responsibility for $4 billion of sovereign debt to countries mostly in Latin America. One of those countries was Chile and during the tenure of that notorious dictator Augusto Pinochet (1974 – 1990) he had put in place quite an impressive technocratic regime that was quite fiscally responsible in setting Chile on a very sound financial path. One of the things they did was put up for sale through privatization several companies that included the largest life insurance company in the country, called Consorcio. We were allowed to bid for the company using our otherwise devaluing sovereign debt, so we did so and bought the company. In the course of owning it over the next few years, I learned a lot about how insurance worked and the power that these beasts of long-term liquidity in the national economic fabric. I also was able to turn a $26 million investment into well over $1 billion. The thing about financial tricks is that you learn that they can often be applied elsewhere.
I used what was called this “debt previously contracted” technique shortly thereafter to launch what was called an insurance derivatives business in the U.S.. I was able to use some bad debt to buy a variable life insurance business out of the ashes of Mutual Benefit, a New Jersey insurance company in rehabilitation. I paid $11 million dollars and had 5 years to resell it, which I did in four years for $146 million. Such was the power of this thing called life insurance. It led to me launching a half dozen other companies during a window of opportunity when U.S. regulators allowed banks to own insurance businesses. All of that is to say that you would think that I have a better than average knowledge of how life insurance works.
I remember back in business school, my professor of banking, David Ahlers (rest his soul), tried to explain to us how life insurance worked and why one should never buy whole life insurance. I don’t remember the complexities of what he called the “mini-dip” methodology of proving this premise, but I do remember having it explained to us in class. Unfortunately for me, after I got married and was expecting my first child, I was gripped by the same fears that grip many young adults. What would happen to my family if something happened to me? That opened the door to my first insurance salesman, someone with far less financial education than I had, but who had been steeped in the jargon of the industry and drilled with all the snappy retorts to the natural questions that a wary consumer might ask. Like so many before me, I succumbed to the monotonous sirens call and bought my first policy in 1982. Then, again, like so many other Americans, I took the lemming’s path and kept buying more and more life insurance and accumulated a portfolio of every type and style you can imagine.
Somewhere along the path, I became convinced that by paying premiums for a few years, I would set up an ability to stop paying premiums at some point by letting the policies self-finance using their annual dividends and the earnings on my already paid premiums. With all the swings in interest rates and markets over the years, not to mention entire spans of negligence on my part, things went awry. My herd of policies had become an unruly gaggle of wild dogs that nipped at my heels with premium notices every time the end of the year rolled around. It began to clarify for me why the holidays can be such a depressing time for some people. So, several years ago, as my need for the insurance elements of the life insurance diminished, I began to try to unravel this lifetime mess I had created.
That’s when the unique posturing of the insurance industry in the tax code became most apparent. Life insurance in the back half of American’s lives is sold specifically as an estate tax dodge. Put money into this product and what gets paid to your estate at your death is not taxable the way a bank account would be. I suppose it got sold to some congressmen on the theory that widows and orphans needed a break, but I’m sure there were lots of lavish perks that were really behind the legislation. But that was not enough for the greed-mongers of the insurance industry. They must have worried that sooner or later people like me would wake up and realize that they wanted out of their financial straight-jackets created by these policies, so they imbedded a tax doomsday machine into the tax code that made cancellation of a policy a non-option. As an example, I have a policy that I have paid into for 40 years. I don’t remember the exact amounts I have paid in, but its a lot, and I have had no financial benefit other than the insurance value had I met an untimely demise. At this point, if I keep paying until I die, my estate will get a big payment that will be tax-free. If I stop paying, I will get a few bucks out and a massive tax liability that is such a deterrent that I would honestly never be able to cancel the policy. I am shackled to it. That is what has given rise to the structured settlements business that buys these policies from people like me and then relieves me of that burden and relieves my heirs of their windfall as well. Who tends to own structured settlement companies? Yep, the same guys that sell you these bear traps in the first place. They have set up a great “pick your poison” game, all playing off the fear of being an irresponsible provider to your family.
As you can imagine, what has brought on this rant at this time is that I have received another “Pay $X now or we will cancel you and you will have a tax liability of $XXXXXXXXXXXXXXX” letter from one of my insurers. Naturally, I emailed my insurance oracle, who makes it her business to interpret these tea leaves. She tells me that actually I only have to pay in 40% of $X to kick this can down the road for another year and then gives me some gibberish about the changing interest rate environment to explain why the numbers are so different from the illustration she sent me two years ago. The bottom line is that I have to send in some more money to keep this monkey off my back for another year. I will do that and I will then spend some time again to figure out if there is any way to untangle this particular mess before next year’s premium scare notice rolls around.
I just hate the fact that those of us who were more responsible than others who never bother to buy life insurance get burdened with this nonsense. If someone with my experience in the arena finds this confusing and frustrating, I can’t imagine how others less steeped in the arcane space must feel. Any way you look at it, this is just another case of smarmy people telling you that they are helping you and your loved ones when what they are really doing is playing with your life for their own personal gain.