It is the life insurance plan, how it works, that shields this industry. The Mortality Mortgage , the source of the Barnes Standard is an explanation of life insurance pricing, and a call for full financial disclosure through regulation of the industry.
High early cash values don't matter. Would you like to tell us about a lower price? An experienced analyst can use these techniques to screen out aberrant products and to raise questions for further investigation. Insurers have some latitude in choosing a computation basis for their reserves and guaranteed values; a lower interest rate and a less favorable mortality table will produce a higher net single premium. This is a ridiculous interpretation of what I was saying.
It is intended for financial consultants, tax attorneys, CPA's, life insurance agents, and other groups who advise consumers on financial matters. Insurance buyers supply this industry with millions of dollars in premiums each year. Consumers deserve a truth in lending law and an appraisal process for this financial service. Life insurance is not a product, it is financing. Four factors denote financial quality: Consumers understand these financial elements for homes and bonds, but they do not equate the fundamentals of financial quality with life insurance.
The life insurance industry, through marketing and advertising, has taught the public to focus on premiums, death benefits, and cash values; financial elements are ignored.
The Mortality Mortgage compares and contrasts three financial models: Additionally, it provides the formulas necessary for appraisal of a life insurance plan. That price tag is beyond the reach of most planners, but there are two solutions: An experienced analyst can use these techniques to screen out aberrant products and to raise questions for further investigation. Barnes proposes a different approach: His premises are not unreasonable.
The lender wants a high rate for a long time, and he doesn't want to lend more than the collateral is worth. What is life insurance collateral worth? Barnes says that it should be valued using the most favorable interest and mortality rates prescribed for determining reserves and cash surrender values; in actuarial terminology, the lowest net single premium permitted by law.
Insurers have some latitude in choosing a computation basis for their reserves and guaranteed values; a lower interest rate and a less favorable mortality table will produce a higher net single premium. Insurers also add loading to their net premiums to cover their expenses and profit. To appraise a policy using Barnes's method, you add the first-year acquisition costs Barnes calls them "closing costs" to the insurer's net single premium Barnes calls it "wholesale principal".
The sum Barnes calls it "retail principal" tells you how much you're lending to the insurer. If you're lending a lot more than the death benefit is worth as defined by Barnes , that's bad. Quality means "principal balanced with collateral. Advisors who evaluate policies this way will want to make sure that their errors and omissions coverage stays in force.
Barnes says that life expectancy is defined as the point at which half of the original population is still alive. Life expectancy is a mean, not a median. He implies that insurers use life expectancy for product pricing.
Not true; in fact, they would eventually become insolvent if they did. To see why, look up Jensen's Inequality in a statistics textbook. The CSO table provides a conservative basis for determining reserves; actual mortality rates used in product pricing are typically about half of the CSO rates.
Barnes is on more solid ground when he complains about the insurance industry's lack of disclosure. Every fee-only advisor knows how infuriating it can be to deal with insurance companies and their agents. You frequently have to make special requests for basic information needed for prudent decisions. Barnes attributes this to the industry's conspiratorial marketing strategy, but there's no need to invoke conspiracies.
Life insurance is sold, not bought. Most people don't demand much information before making a purchase, so why should companies supply it? If everyone suddenly stopped sending in their premium checks, we'd have full disclosure in a few weeks. It's just a question of bargaining power. The Mortality Mortgage may appeal to people who are easily impressed by claims of revealed secrets.
There are a lot of people like that, so the book could become popular.
The Mortality Mortgage: Pricing Practices and Reform in the Life Insurance Industry [A. R. Barnes Jr.] on loewen-group.com *FREE* shipping on qualifying offers. THE MORTALITY MORTGAGE PRICING PRACTICES AND REFORM IN THE LIFE. INSURANCE INDUSTRY - In this site isn`t the same as a solution manual.
It will not appeal to knowledgeable advisors and it will not cause actuarial textbooks to be revised. The conclusions drawn by Mr. Daily are by no means valid for most planners nor indicative of the opinions of many licensed insurance consultants such as myself. His opinion on full disclosure being assured "if everyone suddenly stopped sending in their premium checks" is ridiculous.
Is this how Mr.