Trust as a Four Letter Word
We have a convention in this country that only partially or barely exists in many other countries. We buy life insurance. Initially, it is sold to us (note that I say sold TO us as opposed to bought BY us or sought out BY us) as a responsible way for us breadwinners to ease our guilt with the dependence we have created for our families on our income earning capabilities. It is not unlike alimony and child support in that it is intended to reinforce the extreme dependence the less productive members of our society place upon the higher earning ones.
The people of the United States pay out 30% of the world’s life insurance premiums, well more than any other country. We do the same (actually an even higher percentage of almost 60%) for other types of insurance. As a country, one might think we were highly dependent on collectivism almost to the point of socialism, where we seem to like sharing our losses and risk with one another. The fight for democracy we are undergoing these days and the strident claims of individual freedom and libertarianism would suggest otherwise. So what exactly is going on here?
I’ve looked at life insurance premiums as a percentage of national population and national GDP for the top ten users of life insurance, which overlap reasonably well with the top ten economies of the world (with the exception of India), so its fair to suggest that more developed economies are risk averse and less developed countries cannot afford such risk spreading or it doesn’t rise to the level of concern amongst all the other Maslowian needs of the moment. I suppose you might say that people who have something to lose want to protect it. I can get behind that thinking with regard to property and casualty insurance, but not so much with life insurance.
Life insurance seems less like a matter of risk mitigation and more about guilt or perhaps fear. We seem afraid that our dependents will fall into destitution without their breadwinner to save them by buying insurance and paying premiums that currently average $1,900 per year for each and every American. That is a surprising number until you realize that there are six other countries on that top ten list of economies that pay more per person in life premiums. Taiwanese pay twice per person as we do and the Brits are not so far behind them.
I have a long history with Life Insurance and it is a very strange history indeed. I bought my first life insurance policy in 1978 after I bought my first house and took on my first mortgage. I was 24 years old and fit right into the stereotype the insurance industry likes to promote. They want young men and women to worry every time they cross a life event threshold. As our responsibilities mount up, we are supposed to feel responsible for the others in our life. If we wed, have a child or buy a house we are supposed to feel the need for some burden sharing if the worst should happen.
As a young officer in a New York Bank, I was very aware of all the benefits being provided for us. Employee Benefits were a big deal back in those days and that was especially so for Bankers Trust, which was the largest employee benefit manager in the country and felt it appropriate to be a leader in benefits for its own employees. Wed had a 2 for 1 401k match up to a total of 12% of our salaries. We had a top-notch health care plan, and we got a 1x salary free life insurance policy with the ability to purchase added attractive group coverage for up to another 4x. The implication was clear, that life insurance was a substitute for our income under adverse circumstances. The more we earned, the more life insurance we supposedly deserved. The conversation was about how many years of adjustment did our families deserve should something happen to us, a difficult thought to contemplate for any of us. In addition to that, we had a travel accident policy above and beyond the basic life policy that gave us an additional 2x salary benefit should we perish while on a business trip. One of my funniest bosses was Joe Manganello, the Chief Credit Officer of the bank (hence the most careful risk manager), and Joe used to say that he had instructed his wife that should he ever have a heart attack, she should prop him up in his car with an airplane ticket in his pocket to make sure she got the extra 2x.
During those early years of my career I bought two or three whole life insurance policies (whole life was the way to go back then, or so most of us thought) to supplement the bank policy. I pretended to understand it, but in truth, almost no one understood the arcane aspects of life insurance. I’m not even convinced that most life insurance salesmen really understand the stuff. It is sold to financial professionals like me on the assumption that we are too shy to admit we don’t really understand how it works. At this point, I have been a financial professional for 45 years, I have an MBA in finance, I have taught finance first at Cornell and now at University of San Diego at the graduate level, and I have been directly responsible for buying two life insurance companies (Consorcio in Chile and the Variable Life business of Mutual Benefit in rehabilitation) and starting another four (offshore reinsurance companies in Bermuda, Jersey and a domestic life company in Delaware). So, if anyone could claim to understand life insurance, it should be me, but I don’t and I won’t. It is a product designed to obfuscate and the companies who sell it train their salesmen how not to explain it all too well. It’s a disgrace in my opinion.
What is more important about life insurance in our country (I do not know the rules and laws around the world, but I’ll bet they are similar) is that this most powerful of lobbies (now that the tobacco lobby is long gone) is the insurance lobby. They have succeeded in allowing life insurance to enjoy the most outrageous of tax advantages. Only the 401k pension tax deferral can begin to rival it…and not half as well since IRA withdrawals are ultimately taxed, but life insurance death benefits are not taxed. This may benefit the widows and orphans (the strongest selling point for the lobby, I am sure), but it mostly benefits the life insurance industry since it gives them a tax planning product to sell to rich people and generally a tax-deferred investment product that more than makes up for a rather non-stellar investment performance history by insurance investors.
So, what is the argument for the government to allow this? Well, nothing helps the economy more than long-term capital accumulation and life insurance is one of the biggest buckets of that around (in addition to retirement accounts) and long-term capital is what makes countries great.
I have spent the last few weeks trying to untangle the issues of a dead trustee of my life insurance trust that holds my three biggest policies. You know how telecomm companies make it almost impossible for you to cancel a service? Try changing or terminating a life insurance product. The tax burdens are prohibitive and I suspect the insurers prefer for the long term nature of the policies to leave them all jumbled up with dead trustees and whatnot. Nothing beats longevity of an investment program like messed up paperwork. To me, trust and insurance are BOTH four letter words.