Seven Geeky Facts You Probably Didn't Know About the Life Insurance Industry
The average American has very little understanding of the life insurance industry. These facts will bring you right to the top!
- The United States Congress
The United States Congress has almost no authority over the insurance industry. Every state has a Governor, and that Governor has a State Insurance Commissioner who regulates all insurance matters in the state. There are 50 different sets of insurance laws in the US. - The NAIC
The 50 State Insurance Commissioners share information and cooperate through the NAIC - National Association of Insurance Commissioners. NAIC members (the states), together with the central resources of the NAIC, form our system of insurance regulation. Among many other things, the NAIC coordinates state complaint data, and sets general guidelines that all 50 states will support. However, an NAIC policy is not binding on its members. Each state is still free to do what it wants with regards to regulating insurance products and the insurance companies themselves. - Why There Are No New Insurance Companies*
Working with and meeting the endless requirements of 50 state insurance commissions is a massive undertaking for every insurance company. Imagine the endless pages of audited financials required every year to every state, and complying with thousands and thousands of regulations, restrictions, and fees imposed by each state.
This is why there are hardly any new insurance companies. It would be almost impossible to start a new insurance company today from scratch.
* There is one interesting success story - Lemonade. Founded in 2015, Lemonade is a digital insurance company that created a new and narrow niche (renters) and served them perfectly. Bravo! - IRS Section 7702 - Whole Life Policies Are Tax-Free
In 1985 the IRS published Section 7702 - specifically naming cash value whole life insurance as tax-free. The cash value growth through the years, policy loans you take out, and death benefit paid to your children are all tax free which makes whole life - specifically high cash value life insurance - the perfect tax-free, compounding vehicle to create and pass on generational wealth. - MEC Limit (Super-nerdy, but important)
In order to keep this invincible shield of tax-free status, Section 7702 defines very specific rules and guidelines for cash value whole life policies.
Without getting too technical, the IRS wants to make sure the policy is really a life insurance policy - not simply an investment - and so they place limits on how much extra cash you can put into a whole life policy (above the cost of the basic life insurance). If no limits were in place, then every rich person in the world would put every dollar of their money into whole life policies and earn a lifetime of tax free growth!
So the IRS ties the maximum amount you can put in a whole life policy based on your age and how much insurance coverage is included. In the industry, this is referred to as the MEC limit. If you go over that MEC limit, then your policy is no longer tax-free.
You'll hear this referred to as "maxing out a policy," or "max funding a policy," or "funding a policy to the MEC limit."
This is where expert policy design skills are required. When you work with Whole Life Pros, we will design your policy for maximum cash value - trying to stretch you close to the MEC limit. Do not ever buy a whole life policy from an agent who doesn't design whole life policies every day - there are a lot of nuances. By our own estimate 80% of whole life policies throughout the industry are issued with base life insurance only - the worst possible design for the client. - Janitor Insurance
From the mid-1990's to the early 2000's (as corporate greed came into the spotlight) - certain corporations came up with the truly brilliant strategy of taking out whole life insurance policies on all their employees - without the employee's consent. The executives jokingly called it janitor insurance. They put billions of dollars into a tax-free compounding asset, and the cash value sat on their books as an asset. In the mid-2000's many corporation's listed the cash value in their whole life insurance policies as their single largest asset.
This became known as STOLI (Stranger Owned Life Insurance). The executives and shareholders became ultra-wealthy. It was a perfect scheme, perfectly legal, and the longer the employees lived, the higher the death benefit the company would collect. They had mastered the use of whole life insurance and the compounding growth of money. - Insurable Interest
In July, 2010 the NAIC declared that STOLI (Stranger Owned Life Insurance) would no longer be allowed. Two rules that still stand today. First, no insurance company will issue a life insurance policy without the written, informed consent of the insured (a minor requires parental consent). Second, you must prove an insurable interest in the person. Spouses have an insurable interest in each other. Parents have an insurable interest on their children, and vice versa. Grandparents, business partners, key employees, and creditors. Even beyond these categories, insurance companies will consider unique / creative situations and relationships.