Popsicle Sticks, Rubber Bands, and Risk Management
Imagine this scene:
Two young kids sit in front of a pile of popsicle sticks, glue, and rubber bands.
The first kid sees all the components to build a perfect princess castle. There will be a balcony, a drawbridge, and a tall tower. She’ll put her favorite dolls inside the castle and make sure they’re comfortable with a bed and a dining room table.
The second kid sees a slingshot.
Both of these visions are creative, but one of them can cause trouble if it’s wielded by a feisty kid with a bad attitude. That’s how tinkering works, and it can be how financial tools work, too. Just like those popsicle sticks, financial tools can be shaped into castles or slingshots. And when misused, they can cause real damage.
A Headline Story
Now, let’s consider a recent headline story that exemplifies this damage in the real world: NASCAR driver Kyle Busch and his wife, Samantha, recently sued Pacific Life and their insurance agent for selling policies that ultimately failed in every respect.
Here’s what the complaint alleges:
- Pacific Life issued a handful of Indexed Universal Life (IUL) policies to the Busch family between 2018 and 2022.
- An IUL is a type of permanent life insurance with a cash value that can accumulate over time. It’s one of many “popsicle sticks” in the world of life insurance.
- The Busches claim the policies were marketed as “tax-free retirement plans” that were sold via misleading illustrations, undisclosed costs, and false promises related to performance multipliers.
- They claim to have paid $10,400,000 in premiums and lost around $8,600,000 despite expecting to take around $800,000 in annual withdrawals during retirement.
- That retirement income goal is a big castle to build, especially considering that the $800,000 is roughly 7.6% of the total premium paid.
Okay, this looks bad.
So, what went wrong?
Well, all we have is the complaint, and some industry commentaries like this and this. But this is the picture being painted currently:
These policies were designed to maximize the agent’s compensation, with an adverse impact on the client. The unfortunate thing about permanent life insurance is that the policies can be so complex that catching this as a client is a real challenge. A client might think their agent is helping them build a castle to meet their goals and objectives, but it could look a lot like a slingshot in different lighting.
After the issue, there was poor follow-through in aligning the policy with its design on both sides of the Busch family and the agent.
The Busch family did not pay the premiums as planned, which made the policies lapse earlier than they might have otherwise. Some in the industry might blame the Busches for the reason the policies lapsed. It appears to have moved the timeline forward, but I think the lapses in care on the part of the agent are the real issue.
The agent made critical mistakes in managing the policy. These are the two that I found most egregious, reading the complaint and the follow-up analysis:
- The agent failed to make a policy change that would have dramatically reduced the internal charges. Basically, the death benefit was artificially high in the first year (greatly enhancing the agent’s commission), and it was designed to be reduced in the second year. This is a manual process that a client would be hard-pressed to remember to act on. It was never initiated by the agent, so the policy remained extremely expensive.
- The agent kept the policy allocated to the fixed account for 3 years, earning 2.25% instead of allocating it to the available indexes. Again, this is something a policyholder can change, but it’s a huge lapse in care for the agent to miss it. To my mind, it’s like your financial advisor failing to invest your 401 (k) and keeping it in cash for 3 years.
These mistakes (and others) led to a lapse in coverage for the Busch family, and that’s how they lost $8,600,000.
What can we learn?
This case might make IUL policies look like scams, but the real issue is design and oversight. Think back to the popsicle sticks. Where one person uses life insurance as a responsible risk mitigation strategy, another sees an opportunity to make a lot of money through improper tinkering. The tools themselves are not scams.
This is a case of misdesign, misallocation, and misjudgment in trusting an individual who is not a fiduciary to make financial recommendations.
If you’re considering complex financial tools, work with a fiduciary who prioritizes your interests, and make sure you understand how the design works. At The Bahnsen Group, we solve for this by having an internal Risk Department to review clients’ current life insurance, disability insurance, long-term care insurance, and annuities and place new coverage that coordinates with the client’s full financial plan.
Financial tools aren’t inherently good or bad. They’re neutral, like popsicle sticks. The outcome depends on design, oversight, and intent. At The Bahnsen Group, our Risk Department exists to ensure these tools serve your goals, not someone else’s commission. We act solely in your best interest. No quotas, no gimmicks, just fiduciary advice.
