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Episode 76: Beyond Life Insurance with Ray Caucci
185 Plays5 years ago
The insurance industry is pretty confusing for most of us. We send our money into what feels like a black box and things magically happen…or don’t. Our guest for this episode, Ray Caucci, is here to demystify the insurance business to paint a broader picture of its stability, the impact on the health of our economy, and why it matters to your finances.
Ray has been in the insurance industry for his entire adult life. He has spent the better part of twenty years on the actuarial side in product development with Penn Mutual, and he now serves on the executive management team. As an actuarial mathematician and business leader, Ray keeps his finger on the pulse of industry trends. He brings tons of value to our listeners with unique insights into the mechanics of war-room decision-making in the insurance industry. He also shares his perspective on the versatility of whole life insurance policies.
Ray graduated from UPenn’s Wharton School of Business with a Master’s in Actuarial Science, along with a Chartered Financial Consultant (ChFC) designation from The American College of Financial Services. During our conversation, he shares his expertise and provides a perspective on the role of insurance in the bigger picture.
what you will learn in this episode:- The power of assigning value to your giftings
- All of the ways you can use a whole life insurance policy to your benefit
- The role and function of an actuary in the insurance industry
- How actuaries approach product development and pricing
- The types of statistics, data, and algorithms insurance companies use to find the best bang for the buck and a product fit for all parties involved
- What insurance companies have done to adapt during the pandemic
- Penn’s perspective on the different insurance policy types
- The role insurance plays in our entire financial system
- How the protection of insurance policy cash value has evolved
Recommended
Transcript
What is an Uncommon Life?
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Speaker
Everyone dreams about living an uncommon life, but how we define that dream is very different for each of us. And for most, it's a lifelong pursuit.
Podcast Purpose & Hosts Introduction
00:00:11
Speaker
Welcome to the Uncommon Life Project podcast. We're going to introduce you to people who are living that life or enjoying the journey to get there. We're going to also give you some tools, tricks, and tips for starting or accelerating your own efforts to live an uncommon life.
00:00:27
Speaker
A life worth celebrating and savoring. Please welcome your hosts, Brian Dewhurst and Phillip Ramsey. Hello and welcome everybody to another episode of Your Favorite Show, My Favorite Show. And it's going to be soon the new listeners favorite show, The Uncommon Life Project, where I'm your host, Phillip Ramsey.
00:00:45
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And I am Brian Dewhurst. Thanks for tuning in. We have an amazing show for
Meet Ray Couchy
00:00:49
Speaker
you today. We are going to peel the layers off this onion. We are going to look behind the curtain because we have a real actuarial mathematician on the show. I cannot wait to get into it. Brian, give us the bio and let's get
Ray's Journey into Actuarial Science
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them on the show.
00:01:02
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Yeah, so we have Ray Couchy with us from Penn Mutual Life Insurance Company and Ray graduated from the Wharton School of Business with an actuarial science. I'm assuming it's like a master's degree, but it's basically been in the insurance world his entire adult life and the larger part of the last 20 years with Penn Mutual.
00:01:22
Speaker
He's been in the actuarial side in product development and now on the executive management team. I don't think there's anything that this guy is not going to know, so I'm pretty excited about it. The insurance world, I think, is confusing to a lot of people. One of the reasons we wanted to have Ray Owen is to demystify the insurance business and just talk about how stable it is and how important it is to our overall economy.
00:01:48
Speaker
and financial planning. So with that, welcome to the show, Ray Couchy. Well, thank you, Phillip. Thank you, Brian. It's a pleasure to be here. Absolutely. You know, it's fun for me. Brian is more of the numbers guy in our business. Everyone will pretty much articulate that. But so I'm excited just to hear more about your story, how you got here. When you were little, did you always just think like, I want to be an actuarial science scientist? Like what where were you at with that when you were younger?
00:02:17
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How do you start that career path? Well, um, so initially what I want to do is, you know, play center field for some major league baseball team. It was quickly early in my, uh, my teen years, that was not going to be a destination. So, uh, I did go and meet with a guidance counselor in high school who, uh, I consulted with and I said, I have a,
00:02:42
Speaker
a strong math background, but I want to be able to apply it in a business sense. You went through the typical jobs where the math and business would combine, and the first two on the list were accountant and actuary. I think I knew about the first one, didn't know anything about the second one, and it just turned out that my guidance counselor's son was an actuary. I actually got a chance to
00:03:11
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to speak to him. And I put that in the back of my mind. I went to a small college for a couple of years, because I wasn't sure what I wanted to do with a math degree, whether I wanted to be a teacher.
Recognizing & Utilizing Personal Gifts
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But then I took the first actuarial exam. So to be an actuary, you have to pass a series of exams. And I passed the first one and decided that that was the path I wanted to take. I transferred into the Wharton School at Penn.
00:03:40
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and continue to take exams and kind of went in that direction. So that's how I got to where we are today. Wow. Hey, what was your grades in school in math? Were they always good or were they kind of like, eh? No, they were always good. Oh my goodness. I don't know what else questions to ask. You're at another level for me.
00:04:02
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That's awesome. That is so cool. You know, it's interesting. We talk a lot about an uncommon wealth partners, our business of how you need to really capitalize on your giftings. And because it's a gifting to you and it's easy for you, it doesn't mean that it's easy for everybody. And so what would you say to the average listener out there that doesn't feel like their gifting is a value to anybody else?
00:04:27
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I think you have to find your way and eventually that you get reinforcement for the things that you do well. And people that are close to you will bring that out and encourage you. And then you have the confidence then to give back or to share your gifting with others. And that's where I came in my own mind, why I wanted to be, started to be a teacher is that I had this knowledge and I wanted to be able to share it
00:04:56
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with others and part of being in an actuary at an insurance company is you do work with a lot of non-actuaries and you have to be able to explain some concepts in a way that the listener can understand and you have to take the position of how would I interpret it
00:05:17
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what Ray's saying if I didn't have the same depth of information. So I needed to figure out how to sit in their shoes and say, all right, how do I interpret what
00:05:28
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Ray is saying, so I needed to learn how to translate some fairly technical concepts into something that someone who hadn't gone through an actuarial curriculum would be able to absorb.
Role of an Actuary in Business
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And I think that's a skill that I've been fairly effective at because I have had to interact with
00:05:47
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many more non-actuaries in the last half of my career than I did in the first half. Cause you're a center fielder. Everybody can relate to that. Everybody right. That's right. And you get to, you get to run the outfield and that's right. And the fly balls that are just over the infield. That's right. For our listeners, let's define actuarial. Cause I think some people are like, wait, who are we talking to here? Let's go there. It really is a, you know, you're, you're applying, you know, some fairly high end mathematical principles to solve
00:06:17
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business problems in particular risk management. Actuaries at Penn Mutual are involved in developing products, managing enforced business, setting up the reserves that companies have to hold to pay claims, and doing risk management over an entire enterprise, investment risk, mortality risk, compliance risk,
00:06:44
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know, those types of things. So it really is applying that math to evaluate contingent events. So virtually everything we deal with in the insurance world is a contingent event. So we're, we're paying a claim if somebody dies, we're paying a surrender benefit if somebody comes to us and says, I want, you know, I don't want my policy anymore, I want to take
00:07:08
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the cash value that's in that. I want to be able to convert my term policy to permanent coverage. All those are contingent events and what actuaries do is they assign a probability to those events and then what the ultimate cost of that benefit is and reflects that in either the pricing or the risk management effort depending on which side of the house you're on from an actuary standpoint. Perfect.
00:07:38
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And I, I think the analogy we use, you know, with clients is that, you know, McDonald's has a cost to make a cheeseburger. I think that's pretty tangible, you know, meat and a bun, ketchup and all that, but you know, you guys are figuring out the cost to ensure people's lives in these contingent.
00:07:53
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events, and it's actually very scientific, and it's been scientific for hundreds of years. That's a good analogy. McDonald's, in your example, they know exactly what they made on that hamburger when they sell it. As you said, they know the costs
00:08:15
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to all the ingredients, the labor to put it together, everything that's involved in the process, and they can determine right then and there what they've made on that sale. Life insurance policy, you're not really going to know how much
00:08:32
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surplus was contributed by that individual policy until the policy terminates. Whether it's by death, whether it's by lapse or the non-payment of premium, somebody comes to us and asks for their money or the person actually outlives their policy and they get to maturity and we give them the cash value at maturity. A lot of those events are going to occur 20, 30, 50 years down the road. You don't really know what you make until
00:09:03
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that whole block of business has come to some level of termination.
00:09:10
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So when we price a product, we build models to analyze who's going to buy our product. So we identify a population of individuals by age, by possible rating class, what's the pattern of premiums they expect to pay. Are they going to pay every year? Are they going to pay once a single deposit? Are they going to pay 10 premiums? And how much death benefit are they going to buy?
00:09:40
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Then on top of that, you also incorporate, well, what policyholder behavior would we expect from this block? What's their rate of mortality? How often will people lapse their policy? How often will people come to us and ask for a surrender? Then we also have to incorporate our costs. We have costs in
00:10:05
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acquiring the policy so that sales costs underwriting the expenses to issue a policy.
00:10:13
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And then what would we need to do to service it? You know, whether it's people costs, all the tools that we give the folks to manage their policy, all the letters we send them, telling them about options that they have, those types of things, taxes, which are, you know, federal and state. And then how much we expect to earn on the premiums we get in the investment market. And then we balance that all out with where we want to be competitively and
00:10:42
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We run a couple of different models to get to a point where we're comfortable with the competitiveness of the product relative to its competitive benchmark and the amount of surplus that block is expected to contribute.
00:10:58
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Wow, that's really interesting. And it's like for the layman's terms, this is usually my job to try to like boil this down. And since we're using baseball, wasn't that movie called Moneyball? You're the person that makes the A's like amazing because you're looking at statistics and data and then trying to work them into an algorithm to get the best bang for your buck or to make sure that it works for all parties.
00:11:22
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I would say that that is mostly true and I would say it it works for most parties because you know if you if your goal is to win games uh that's a way to do that it has made baseball very unentertaining unfortunately and so from a fan standpoint not everybody's position is served sure oh that's great and ask the Tampa Bay Rays fans about that
00:11:49
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You touched on one thing and that's underwriting, which is like the bane of life insurance of, you know, the peeing in the cup and you got to draw the blood and nurse come out of your house. You know, you guys have recently rolled out what you call ACE, which is accelerated underwriting. How is that going? Because basically you're using kind of like we, you know, the way we explain it to our clients and you can correct us if we're wrong, but
00:12:10
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you're kind of using big data in a way. So all these data points that are out there and trying to use that as a way to predict mortality and some of the things you've shared about that go into pricing these products and trying to circumvent the nurse coming out and drawing the blood and peeing in a cup. So can you just kind of share with our listeners maybe how you came to that decision and how
Innovation in Life Insurance: Penn Mutual's ACE Program
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it's going?
00:12:32
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Sure. So we, uh, a stands for accelerate client experience. So it is the accelerator honoring is a part of it, but it's really is meant to digitize.
00:12:45
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our new business process and service process. So electronic application, potential for accelerated underwriting, electronic delivery of policies, and then online, a client portal that can be used by a client to do some, you know, some basic service type things, but Penn Mutual is a company that does all of its business through financial professionals. So that is the conduit between
00:13:14
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Penn Mutual and the end client and the end policyholder. But we've had the ACE, we've had that experience now since August of 2017. So we're, you know, into our fourth year. And as you said, it allows for certain cases that are, you know, if you're under 65, face amounts under 5 million or below.
00:13:39
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and meet the criteria that we're using to get it through there, you can get a rating without having to go through full wondering. So think of it as like a triage method. So it's sort of a fast track. If you hit some of these algorithmic decision points and we don't need any additional information, you can get a rating within a day in some cases.
00:14:08
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And we do get information that the applicant provides on their family history, their prescriptions, that sort of thing. We do interact with third-party databases like prescription databases, motor vehicle records, the Medical Information Bureau for people that might have applied for insurance before.
00:14:31
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We've also used some information regarding credit attributes, not credit scores, but credit attributes, liens, bankruptcies, those types of things. And we put all that together and determine whether we can render a decision at that point or whether we need more information. So at the start of 2020,
00:14:59
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about 60% of our applications went through ACE. And about 60% of our applications that go through ACE end up with a fluidless underwriting decision. As I sit here today, 85% of our applications go through ACE, the electronic form.
00:15:22
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That's amazing. And the reason for that is when the pandemic commenced back in March, many jurisdictions viewed, you know, paramedical examiners, the folks that you talked about coming to your home and collecting samples.
00:15:40
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Many jurisdictions viewed them as non-essential workers. So they were not able to even go out and see people. And in jurisdictions that allowed them to do that, there were many, many applicants who didn't want strangers coming into their house, even though they were
00:15:58
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outfitted like the the scene in Silkwood where you had a full, you know, full hazmat suits. But they just at that time just didn't want any strangers coming into their house. So some of our financial professionals who were reluctant to use ACE got interested in it in a hurry. It almost forced you to adapt.
00:16:21
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Yes. And I think that happened in, you know, not just with Penn mutual, but a lot of companies in our industry. And the industry has seen a greater increase in applications this year and has set some year over year or month records that hadn't been achieved before. So obviously the pandemic has put life insurance more in the front of mind for individuals because of the
00:16:49
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the thoughts about mortality and companies like Penn Mutual who got a little bit of a head start on it, but other companies have loosened up their fluid free underwriting limits. So it's made that process
00:17:02
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a lot easier across the industry. One thing that insurance companies are not known for is just how fast they move in technology. So it's good and great job for adapting to that. Here's a question I have. You mentioned COVID-19, the pandemic. I would think the two things that people are not excited about insurance wise for insurance companies are lower interest rates and higher than normal death benefits or death rates.
Impact of COVID-19 on Insurance Industry
00:17:29
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Can you speak to both of those things? Because both of those things are happening right now. Low interest rates and obviously COVID-19, the pandemic, how are those affecting the company, the industry, policies and policy holders? Well, if you remember what I said about how we price, so we're talking about
00:17:51
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paying for promises that are 20, 30, 50 years up. The money we earn on the premiums we bring in, the interest earnings is a big component of
00:18:05
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our pricing and low interest rates put pressure on insurance company financials because as old assets roll over into new assets, those yields will fall. And that'll put pressure on earnings because some of our older policies have higher guaranteed interest rates, four or 5%. So it does put some pressure on insurance company financials because that's a big component of
00:18:34
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their pricing. On the COVID-19 side, companies as part of their enterprise risk management, they do stress test their financials for pandemics. Fortunately, we get them about once every 100 years, but you still look at it and see what will that affect in terms of your financials and your surplus
00:18:56
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Now up to this point, Penn Mutual has not had a significant number or amount of COVID-19 deaths. We've had just over 200 claims, total of $18 million. So average size policies about $90,000. The average age of the COVID deaths was 82. And the average duration that a policy had been with us where we paid a COVID claim was 48 years.
00:19:25
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But these are folks that have been with us a long time who passed away in the age group that you're typically seeing. But we have not had a significant amount of deaths as of yet. So we're obviously still monitoring that. We report every week on the number of claims that we get normally. And then we add a little more color around the COVID-19 deaths.
00:19:52
Speaker
Fascinating. Brian's just loving my friend. Yeah, like like 100 questions. I'm pulling off. Nerding out. Quick, quick question. What's your wife like, Ray? Like, does she just love it? Does she just like sit around the dinner table like, oh, Ray, you're just so hard. She is the, as, as you've, I'm sure you've heard it, opposites attract. She is,
00:20:11
Speaker
very different than I am. She's much more, she's very street smart, she's very outgoing, you know, makes friends with stones, and she is... So you're telling me we'd be friends. She actually works as a
00:20:29
Speaker
She actually took a job earlier this year as an events coordinator for a nonprofit in Philadelphia. That's amazing. Unfortunately, a lot of those events are in-person events, which have not happened, but she's been able to still drive donations to this nonprofit, so I think by sheer force of her personality. Okay, just checking. Just want to shout out to your wife. That's great.
00:20:56
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I want to dig into kind of just policy types because I think this is another
00:21:02
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You know, uh, I wouldn't say misconception, but it's just, it's
Understanding Life Insurance Products
00:21:05
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confusing. I think to a lot of people, I mean, there's, to us, there's three basic product types. You know, you have term insurance, you have true whole life insurance, and then you have, you know, kind of what we referred to as like hybrid policy of like permanent insurance or. Indexed universal life, uh, universal life or variable universal life. So can you kind of just shed light on that from Penn's perspective on those three product types? And, uh, maybe we'll just kind of spit ball from there.
00:21:30
Speaker
Sure. Well, let's start with term insurance. So that's insurance that really just provides temporary coverage, death benefit for a fixed period of time. At Penn Mutual, we offer 10, 15, 20, 30 year term. So term policies just provide a death benefit protection. There's no cash value. There's no loans.
00:21:56
Speaker
And in exchange for that, you have lower costs than permanent insurance. But what we talk about at Penn Mutual, it's the equivalent of renting and not buying a home because you're getting temporary coverage. There's no equity in that policy. If you survive the 10, 15, 20, 30 years, you don't get anything. We don't have a return of premium term policy. So you just get the pure death benefit.
00:22:25
Speaker
for products like whole life and index universal life, let's say, those products are permanent coverage. So as long as the premiums are paid to keep the policy in force, the policy will last either until age 121, which is the maturity age, or until the insured passes away.
00:22:46
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The difference there is that term insurance is cheaper, shorter term coverage. Premiums on a permanent policy are levelized across the whole of life. In theory,
00:23:00
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you pay more than the one-year mortality cost early on, and then that excess premium goes into the policy value where it grows with interest. And then later year premiums, which are levelized, become less than the mortality cost as the person ages. So essentially you prepay some of your later year mortality, and then those prepayments
00:23:24
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turn into cash value that you can access while you're alive. The main difference between, say, indexed UL and whole life is
00:23:36
Speaker
How much market volatility risk do you want to take on the growth in your cash value? Whole life's going to have a higher guarantee, but a lower upside. The volatility, the different types of outcomes, there's a fewer number of outcomes there. For index UL, you've got a guaranteed floor.
00:23:58
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which is generally lower than it is for whole life, but you have higher upside, which is capped. So you have a broader set of outcomes. So there's a little more volatility risk on the index UL compared to the whole life.
00:24:15
Speaker
And I just jump on universal life. The pure guaranteed universal life is really more like permanent term insurance. So effectively it can carry a policy to age 121, but you're going to pay a certain level of premium to guarantee that coverage. There's going to be very little cash value in it. So it's really a long-term death benefit play.
00:24:40
Speaker
Perfect. I appreciate you walking through that. Here's my question. My uncle Dave Ramsey, which is really not my uncle, but I say it anyway. By term and invest a difference. What would be your thoughts when I say that? My thoughts are that generally the part before the end gets done.
00:24:58
Speaker
It's the part after the end that you can't necessarily count on. People don't necessarily invest the difference, they spend the difference. And what Penn Mutual has been doing over the last few years is to convey the notion that
00:25:16
Speaker
life insurance is more than just the death benefit, that you have the cash value that you can access while you're alive. And then there are other riders, like a chronic illness rider, that you can access the death benefit if you become chronically ill, which is close to being long-term care, but it's not long-term care, but it has some of the same triggers as long-term care.
00:25:42
Speaker
But that's our thought and I'll quote our CEO. She made this comment when if you take, it's kind of the difference between how people view their place in the world. If you're around my age, you know, in the mid fifties to folks in their teens or twenties. So our CEO, if you took her phone,
00:26:08
Speaker
and you looked at her photos, there'd be pictures of other people. And so that's kind of the thought that life insurance for a lot of people has been about somebody else, not necessarily about them as the insured, because it's going to benefit somebody else when they pass away. If you took our CEO's daughter's phone, most of the pictures are going to be of her. So you've got a kind of a generation that's
00:26:36
Speaker
thought about themselves as well as other people. And that's where I think permanent insurance has a place because it has aspects where you're benefiting others if you pass away. Your spouse, your kids, even your parents, if you passed away prematurely, would benefit from that.
00:26:58
Speaker
But while you're alive, you have access, if you're the owner of that policy, to the cash value that's in it to utilize it for any reason. It's your money. If you come to Penn Mutual for a policy loan, we don't ask you for a business plan or why you're gonna borrow money from your policy. It's your money.
00:27:20
Speaker
What's the VIT number? No questions. I love that you went there with that, Ray. We do obviously full disclosure, I think, with all of our content online. People know that we do a lot of whole life insurance business and we do it with you guys and we're proud partners with you. But one of the things that galvanized that for me early on when I first learned about all the different things you can do with life insurance, I
00:27:45
Speaker
I was with a broker dealer at the time at a previous firm and got a trip to go to Disney World in Florida. And I'm down there by myself, and I'm kind of just strolling around. And if you've been down there and you've been there, you know this, but there's a little movie theater that plays like a 10-minute movie about Walt Disney. And I can't even believe they say this in the movie, but they do.
00:28:07
Speaker
But the genesis of the theme park was he was taking his daughters on daddy-daughter dates and he was bored. He didn't know what to do with them. That was back in California. And that was the actual genesis of the theme park. And he went to the bank and they basically laughed at him like, you're crazy. And so the actual seed money he used to do a lot of what he started was from a whole life insurance policy.
00:28:30
Speaker
And I can't believe they even say that on the movie, but they do. And it was just like, I got chills and I heard that. And I think the thing that we say to a lot of our clients, cause you know, our adage is, you know, you are your best asset and invest in yourself. And, and the stock market is great as, as a channel or avenue to build wealth, but there's a lot of other avenues, especially now, you know, and it's like, what, what was the return of, you know, Walt Disney's whole life insurance policy, you know, at the company level, it was just the policy level. And then you look at what was the return of what he created, you know, infinite.
00:29:01
Speaker
And so I think that is why we're so proud to partner with you guys and to partner with our clients in this aspect.
00:29:10
Speaker
because it's about options and optionality. You've talked about that on the show about what are all these potential outcomes? I think a lot of times, people don't appreciate the potential outcome that they have betting on themselves, embedding on their own creativity, in addition to our economy or the global economy and the stock market and those types of things.
00:29:31
Speaker
That's kind of my soapbox. I don't know if you have any further thoughts on that topic, but I just thought that's really important. No, I think I agree. And I, and we have, we have used the, that fact about Walt Disney in, um, you know, some of our marketing that, you know, that was, you know, what helped him build the, the empire that the Disney world is. And that's part of our rationale at Penn mutual to have a broad
00:30:00
Speaker
product portfolio because we want to give you folks as financial professionals as well as your clients a variety of choices because people have different needs, different wants, have different feelings about how much risk they want to take.
Life Insurance as a Financial Planning Tool
00:30:18
Speaker
And we want to be able to offer as many
00:30:22
Speaker
tools to a financial professional so that they can position our products for the, that fit the needs and the wants of that particular client, because it's not, you know, you may run into somebody who just wants basic term coverage and that's, that's all they want. They want to invest, they maybe do file the bi-term and invest the difference and they are faithful to that. Uh, and then there are others who are like, I'd like it all, you know, I'd like to have my insurance in one package where
00:30:51
Speaker
I can grow cash, I can have coverage, I can have protection against disability, you know, all that into one, in one instrument. And I can feel comfortable at night that I have access to cash if I need it. My spouse has a death benefit if I pass away and I have
00:31:11
Speaker
protection, my insurance company, my insurance policy is protected if I become disabled. And we offer a product that can do all of those things. And I think that when you have the conversations with potential clients or real clients, that sometimes is a surprise that I didn't realize life insurance could do all that. Exactly. You know, one of the things I want to get into, and I know we kind of got to be careful because of proprietary information, but
00:31:38
Speaker
One of the things that we talk about with our clients is the three-legged stool of just, I would say, the industry and the financial system. You have banks, investment, or brokerage firms, and then you have insurance companies. Not just necessarily life insurance companies, but reinsurance companies. I used to work at Deloitte and Touche, and Berkshire Hathaway was one of our clients. I got to work at the National Indemnity Company,
00:32:01
Speaker
Geico insurance company, they have a lot of different insurance arms. So in general, in the insurance industry, speaking in general terms, not just specific to Penn Life, or Penn Mutual, but can you talk, like the insurance industry is such an important part of the overall financial system, especially in America, especially in England, Australia, you know, some of the more developed parts of the world, the insurance leg of that stool, if you will, is so critical to the other two components.
Insurance Industry's Economic Contribution
00:32:30
Speaker
I just
00:32:31
Speaker
Will that be your perspective on that for what you've seen in the industry in your role within Penn Mutual? Well, I would say that the insurance industry is, I believe, the largest purchaser of corporate bonds. We finance a lot of projects that companies outside of our industry invest in.
00:32:54
Speaker
you know, holdings across a whole bunch of different sectors. So we keep making sure we tell the folks, the politicians in the states and in Washington, D.C. that, you know, how important our industry is to
00:33:10
Speaker
the American economy and what we do for it. And the fact that we serve 80 million households and we pay billions of dollars of benefits a year that are coming from private insurance and not being paid for by government programs. So we try to reiterate that position very frequently when we're talking to our
00:33:37
Speaker
our friends in state capitals and in Washington. But insurance companies also have reinsurers. You mentioned them that that's the company that helps us ensure some of our risks. So every company has an amount of death benefit that they'll retain and then anything in excess of that
00:34:00
Speaker
they will buy insurance on with a re-insurer and we'll pay for that extra coverage. And then if the, you know, we'll pay premiums to the re-insurer while the person's alive and when they pass away, then we'll collect the, you know, that part of the death benefit. So from the re-insurer.
00:34:20
Speaker
But it is an important part of our economy and not just between the people that the industry employs, but it's also what it does for the other sectors of the American economy. Yeah. Because I think obviously the investment firms, the big banks, it seems sexier, the returns, but also like 0809 bears turn collapses, Lehman Brothers collapses.
00:34:48
Speaker
few others probably should have collapsed, you know, in hindsight, there is a lot of bailouts. And you didn't hear really, you know, beyond AIG, you didn't really hear a lot of negative news, you know, on the insurance side, and it's kind of that old, you know, tortoise in the hair. You know, you guys are the tortoise, but I just think
00:35:08
Speaker
the weight that you carry in the industry and the consistency that you bring. One of the analogies that we use with people, and you mentioned term versus whole life and renting and buying a home, is that you guys aren't building a home for 20 years or if you go and find a home builder, you're not building that to the last 20 years. You want that thing to last 100 years. That's the way you guys are building your permanent policies, your whole life policies. Can you just talk about that? You've mentioned going to age 121, which most people are like, oh man, I'll never
00:35:38
Speaker
live that long. Can you kind of shed light on how your philosophy and how you construct the actual policies themselves and the view that you have corporately?
Penn Mutual's Insurance Philosophy & Tax Benefits
00:35:47
Speaker
I do want to go back to your 2008, 2009. The issues with AIG had nothing to do with American General, the insurance company. They remain strong as did the rest of our industry because of how well capitalized we are. So that's the back to your tortoise and hare
00:36:08
Speaker
uh analogy that We are in for the long term and particularly mutual companies because you know the the master that we serve are our policyholders So that those folks that Buy our stuff is who we work for uh, so you have a lot of mutual companies that have been around for
00:36:28
Speaker
a long time, and Penn Mutual is 173 years old. We've been thinking about how do we manage the company in the long term to provide the best value for the surplus that we accumulate on behalf of our policyholders. That's what we do when we get up in the morning as an executive team, as leadership at Penn Mutual is what are we going to do today to help
00:36:56
Speaker
provide value to our policyholders. How we build the products is really, I kind of touched on that before, is that we're looking at these long-term models and managing them after we build them to the extent that we can through dividends, through returning experience back to the policyholders, through managing the
00:37:22
Speaker
the credited rates on a universal life policy or the caps on an index UL policy to make sure that we're able to continue to deliver value and reflect the current economic environment as we manage those policies. But we're also, as you've seen in working with whole life, we're also big proponents of having guarantees. And that's, I think,
00:37:50
Speaker
where clients have gotten more comfortable with our products and financial professionals as well is that we do put a lot of weight on guarantees. And if people come to us because they want more certainty and we're able to give them that through guaranteed cash values on whole life, guaranteed bonuses on index UL, guaranteed premiums on term
00:38:19
Speaker
whole life and guaranteed UL. So that's been a big, a big rallying point for our marketing has been to say, you know, we're, we're the company that offers guarantees. Sure. You keep talking about 121 age. What's the highest number you've ever heard of?
00:38:38
Speaker
So we have statutory mortality tables that are used to determine reserves and certain premiums. And the most recent version of that table goes out to 121. I think you've seen more people living past age of 100 than we've ever seen with all the
00:39:06
Speaker
the medical improvements, the improvements in people's health, particularly around the use of tobacco. That's extended life spans for many people. So we want to make sure that we're covering folks
00:39:21
Speaker
well beyond the age that they think they're going to live. But we have a number of folks that really do think they're going to live to 121. But I think the oldest person in recorded history was 118. And I think she was from France and drank a lot of red wine. That's what her secret was. Yes. Well, I think there's something to be said for that. This is super fascinating.
00:39:50
Speaker
You've been in this industry for a long time, and I don't think you have any intention of slowing down. What are you most excited about as it relates to the industry, maybe in personal finance, financial planning, and pin mutual's role in that? Well, I think we're seeing some of that today through the digitization of our processes. Insurance companies have
00:40:14
Speaker
really ramped up the, and the pandemic I think has, has certainly accentuated it is being able to service their clients in a, in a digital way, you know, through the, you know, in electronic delivery of, of policies of statements. Uh, but this is by no means a way to, you know, we're still working with financial professionals there at Penn mutual, no,
00:40:42
Speaker
client becomes a policyholder without being brought to us by a financial professional. We are not a direct-to-consumer company, so we work closely with financial professionals because they're providing advice and we believe that
00:40:56
Speaker
the advice that you folks provide is more important than it's ever been. And I think there's a great opportunity for financial professionals to work with clients to help plan for their futures and to use life insurance in ways that people just don't think of. But I think the movement toward
00:41:21
Speaker
making the underwriting process smoother. Because if you ask and I know you guys have had clients that the biggest impediments to buying life insurance is the process. It takes too long and it's too invasive. So that was our thought with ACE is that if we can get a product out there or a process out there that got us the same relative the same protective value from an underwriting standpoint and could shave
00:41:51
Speaker
20 days off the process, 25 days, that's huge. That gets more people interested in buying coverage because they have a great experience and they can share that experience with other clients.
00:42:06
Speaker
You folks see it. You see it a lot more than because you're dealing with multiple clients. You can talk about that process. We had many financial professionals go through the ACE process on their own lives so they could actually talk about what the experience was like before they had a client go through that. That's been the big thing I think is going to be being able to use
00:42:34
Speaker
big data responsibly. The information we get has to be justifiable from an underwriting standpoint and being able to target individuals through marketing programs to get people that we can determine are most interested in buying life insurance, drive those leads to folks like yourselves, and then have you folks work with them to define a plan that meets their needs and their wants.
00:43:04
Speaker
One of the biggest things that we get, especially with whole life is, you know, once they fully understand it, obviously, you know, we can, you know, we call it over funding with kind of a paid up additions writer to kind of accelerate, you know, the cash on cash growth, break even point from, you know, what you've put into what it's worth. Some of those things, I don't want to get too technical, but
00:43:26
Speaker
You know, a lot of times people are like, this seems too good to be true. You know, and we're like, it's really not. It's actually some of the longest term planning you can do. It's just, you know, a lot of other people haven't shown you the different ways to fund a policy or design a policy. But then their next question is invariably like, well, what if the government shuts this down?
00:43:45
Speaker
What if the government changes the tax treatment of this? Can you walk our listeners through how the tax protection or the tax deferral protection of life insurance policy cash value started and how it's been protected over time and how you see that moving forward? The history is really around that life insurance has a couple of, I'd say, tax
00:44:09
Speaker
not preferences, but they're taxed appropriately. Death benefits are received tax-free by the beneficiary in individual cases. And then the growth on the cash value is gross tax deferred. So you only pay tax when the cash value exceeds the premiums you've put in
00:44:31
Speaker
to the policy. So the reason for that is that, you know, the government wanted life insurance to have a particular place and have folks buy life insurance to protect their families and to, again, to avoid having
00:44:50
Speaker
folks rely on government assistance to cover happen if a premature death or if somebody needed access to funds. So that's really what drove the way life insurance has been taxed historically. And that was from like a long, long time ago. Yes, that's recent. That's over 100 years. Yeah. Right.
00:45:15
Speaker
So, you know, the industry does take, you know, it does get brought up a fair amount about more of the taxation of the growth in the cash as opposed to the death benefit piece, because that's, I think people feel that that's a worthy way to address taxation on death benefits for individually owned policies.
00:45:39
Speaker
But I think you still have growth. You don't not invest in stocks with dividends because they're taxed. I don't think it changes the way people should view it. Right now, it has a special
00:46:02
Speaker
arrangement, but even if it became taxed like a savings account, I still think it would be, it's still valuable. It still gives you access to money that you can have to do other things and still provide protection in one item.
00:46:19
Speaker
Yeah, it's still doing multiple things at the same time. As you can still find on a tax after tax basis, you can still find other investments that might be better than whole life, but it doesn't have the guarantees. It's got more volatility. So it all comes down to what's the risk tolerance of the client? What are they willing to, uh, you know, some folks come to us and say, I'm going to put my life insurance here and I'm going to do my,
00:46:46
Speaker
investing over here. I'm going to buy either term or guaranteed UL with you and I'm going to put my at-risk assets with an asset management firm. Others say I'd like to have all that in one spot. Sure. This is like years of questions pent up being able to be asked. Thank you for your candor being with us today. It's like
00:47:11
Speaker
You know, I think, you know, we do business with all these companies and, you know, we're saying some things obviously to our clients and representing some things. So it's refreshing to have you come on here and say the same things, you know, and, and back up what we're saying. And we do want to do good business. You want to do good business. We're here to help people. And, and it's, you know, largely I think, I don't have to say confusing. It's just not what people deal with on a daily basis. So I think to get kind of this bird's eye view from, you know, an executive of a company like that mutual is like super helpful.
00:47:40
Speaker
And you folks know way better than I do that, you know, this is a tough subject to talk to people about is, you know, planning for a possible death. And that sometimes, as you know, derails the conversation, but the more you have with them, the more you, that's why we've tried to get folks, at least
00:48:02
Speaker
from Penn Mutual side to look at this as not just a death benefit product that it has other features that you can use while you're alive. Yeah. And I think, you know, especially with like whole life or permanent insurance, you know, the, the other analogy we use is the death benefit is the hall pass to kind of, you know, borrow against the cash value and to take some risks, you know, starting a business or buying a second home that, you know, is a rental property or,
00:48:29
Speaker
doing some of these more entrepreneurial things because you still have that coverage wrapped in, you still owed dividends on the money that's borrowed on some respect, and you have maybe a more flexible repayment schedule than if you take that money from a bank. There are just a lot of neat things you can do. I think Philip has a great thing that we talk about with clients is people want to crystal ball in terms of financial planning.
00:48:52
Speaker
And if you had a crystal ball, would you use it? And obviously, the answer is invariably yes. And that's really what a whole life policy is, you know, the company like pen or
00:49:02
Speaker
There's obviously other strong mutual insurance companies, but largely that is about as close as you can get in our business to a crystal ball. These are contractual agreements that are bound by the word guarantee, and we largely can't use that term in any other product or investment that we're talking to people about. It's incredibly important as a foundational piece to a financial plan.
00:49:29
Speaker
I would also say too, just the death benefit alone is something that you can account to your estate. And if you have a term insurance, you just can't do that. Cause who knows when you're going to graduate on us. And so, yeah, we do a lot of talking about just the accumulation of cash value because talking about living is a lot better than talking about dying. So yeah, I think, I think you can't minimize the talking about dying, but you, it's a, it's a package. It's, it's, here's what,
00:49:58
Speaker
this particular instrument can do for you. And we talked about, we used the analogy in the past of a Swiss army knife. So you could build something, a product that has the way to protect you. If you die prematurely, if you get disabled, if you become chronically ill, and if you live and you want to access money, say for a supplemental retirement, it has that too.
00:50:25
Speaker
I think that's really good. And I think it's important to talk to an advisor that knows how to use this for a comprehensive plan. It's not just one thing, here's one product, there you go. No, it's part of a comprehensive plan to be able to address, is this a good idea or is it not? Or is the term and invest the difference a good idea?
00:50:44
Speaker
Who knows? But if you talk to somebody that you know I can trust, have a little bit of background of kind of how they practice, it is nice to have, hey, should I invest in another company or how does this for it? Or I want to start this company. Whatever you're thinking about, it's always nice to just have some more eyeballs on the situation. So you have different perspectives.
00:51:03
Speaker
Ray, thank you so much for just your insight, your wisdom, and your candor. You have been listening to the Uncommon Life Project. I've been your host, Phillip Ramsey. And I am Brighton Dewhurst. Tune in next time. Until then, be uncommon. Thanks, everybody. That's all for this episode of the Uncommon Life Project, brought to you by Uncommon Wealth Partners. Be sure to visit uncommonwealth.com to learn more about our services.
00:51:28
Speaker
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