"We're here forever! We can stand the heat! We're number one, right? We're the dadgum national champs! Every day the competition rolls out of bed, they're lookin' at our butts."
Thus spoke one of the biggest carnival hucksters to ever hit the life insurance business, A. L. Williams, at the height of his empire's expansion in the mid-1980s. A. L. Williams had founded the ALW General Agency in Atlanta, Georgia, in February of 1977. He had spent several years in the life insurance business previously, and prior to that had been a high school football coach. He is one wild-eyed crazy bastard, I can tell you from personal experience. And he got richer than a man needs to be with this new agency he founded back in '77.
For the folks who aren't familiar with the life insurance lingo, I'll try to make this as reader-friendly as possible. First of all, an agency is just a fancy word for an office where a bunch of life insurance agents work. So, when you think "agency" it might be helpful to imagine a boiler room full of suits, or an advertising agency. And here was A. L.'s sales pitch: Buy term and invest the difference. You see, term life insurance is cheaper when you're young, but the cost goes up as you get older. And, it does run out some day if you live long enough. And it never builds any equity; it's what is called "pure protection." For these three reasons, many folks like to have what is known as permanent life insurance. That is, life insurance where the premium for the coverage remains stable. And, I know this may sound like actuarial mumbo-jumbo, but take my word for it: The only way to achieve this outcome is to have some sort of equity building up in the policy which earns interest as it grows. This is the notorious (according to A. L. Williams) "cash value" in life insurance policies. And where do you think the Williams agents suggested the clients "invest the difference?" They offered three types of Williams' own Pioneer mutual funds; funds which performed below average, at best.
"Cash-value life insurance is the biggest rip-off in America today!"
This was the constant mantra A. L. would pound into his recruits. The lucky ones at the top of the pyramid would be in the actual meetings in Atlanta, while the rest of the drones around the country would be watching his weekly meetings on a huge screen satellite TV in Holiday Inns and Ramada Inns across America. Williams referred to the ones who stuck with it as studs and the quitters as duds. They were like termites at the peak of their swarm, and that was the name given to them by the old-line insurance companies which had been in business selling both term and permanent life insurance for over a hundred years. Get it? "Term-ites?"
A career life insurance agent could always spot a termite. An honest insurance agent, when asked what he does for a living, will say, "I sell insurance." An A. L. Williams part-timer would invariably say, "I am a financial planner." (It's actually illegal to call yourself a "financial planner" unless you have what is known as a ChFC (Chartered Financial Consultant) or CFP (Certified Financial Planner) designation.) Nevertheless, companies such as New York Life, Metropolitan, Prudential, and all the other some odd 2,000 life insurance companies in America were in a hell of a mess due to the Coach from Georgia and his termites. They were losing market share to this pyramid scheme and it was damn hard to combat. The thing that made it so hard was this:
In any pyramid scheme, it's neighborhood oriented. Joe gets sucked in by Jim, and then Joe recruits his brother-in-law and then the brother-in-law recruits his co-worker, and on and on. Most of the termites were never expected to leave their full-time job; it was understood that they would sell this term insurance on the side until they built up their own empire of lower-level termites underneath them. Each time one termite brought someone else into the scheme, a portion of the new recruit's commissions would go to the one who got him into the nest. There were about as many levels of producers as there are levels here on this web site. Only, in this case, the higher the level meant that you were earning commissions from an ever-expanding pool of worker bees. The theory was that you would soon reach a level where you could just sit back and sip Pina Coladas by the pool while the French maid dusted your broom and you'd never actually have to sell jack shit again your whole life. It sounded great, and there were enough success stories to go around. But what made it so hard on the Prudential or Metropolitan agent who was losing customers to these termites was this: It wasn't another random agent replacing their business. It was the guy's uncle or his pastor or his sister's boyfriend. When the long-time career agent told the customer the evil truth about the ponzi scheme pyramid that was the lynchpin of the ALW organization, they were calling into question the character of a close friend or relative. Therefore, many long-time agents just sat by and watched their lifelong customer base get screwed, blued and tattooed by these part-timers.
"The good people of America think the only people that sell life insurance is low life and scum and people who can't do nothin' else for a living. Right? Basically they're right, too."
Well, dannye, how can you say they were getting screwed when they were just replacing one life insurance policy with another? This is a very good question. Let me tell you how. This may get a little bit complicated, but just take my word for it. Have I ever lied to you? (Well, if I did, it was for your own good.)
First of all, there are the three reasons I gave above for why term insurance may be a bad deal for some folks. It is a great deal in certain situations. For example, you have a young couple who have a house full of kids and very little disposable income? They need term insurance to protect those kids, and the fact that it'll go up some day and expire some day is not really their main problem. They can always switch over to some sort of permanent insurance as their situation changes and dad gets promoted down at the chicken-plucking plant one day. Or, a guy takes out a large loan to expand his business and is going to pay the loan back in five years. He needs life insurance to cover that loan for five years so that his family isn't stuck with it if he gets hit by a bus as he's coming out of the strip club early one morning, doesn't he? Term insurance is the way to go for him. So, term insurance is not always a bad idea, and any reputable life insurance agent has sold his share of it. But here was a major problem with the contract that A. L. and his drones were selling:
It was being underwritten by MILICO (Massachusetts Indemnity and Life Insurance Company) and they had some squirrelly underwriting procedures. All these part-time termites were quoting the cheapest rate possible to all their clients; it was called the Preferred Non-Smoker rate (a common rate classification among many life insurers). But with MILICO, there were some questions in the application that you would not find in applications from other companies. Questions such as:
- Does your regularly scheduled exercise program consist of: (1) Less than two hours a week; or (2) fewer than three sessions a week?
- Have you ever been told you have any form of cardiovascular disorder, diabetes, cancer, or any other significant medical history?
- During the past three years, have you received any motor vehicle traffic citations other than parking violations?
- In the past three years, have you operated or been a passenger on a motorcycle, or have you engaged in or do you intend to engage in any hazardous sports such as skin or scuba diving; mountain climbing; hang gliding; parachuting; etc.
I don't think you have to be a lawyer
to figure out that these questions can lead to trouble down the road, if the client dies. For instance, just what does "such as" and "significant medical history" and "regularly scheduled" actually mean, in plain language? You see, any life insurance policy has what is commonly called a contestability period
. It is normally two years. This means that after the policy has been in force for two years, the company cannot legally deny the claim when the client dies for any reason, even suicide
. It's sometimes referred to as the "suicide clause." There are plenty of stories about husbands offing themselves
either one day before or one day after this clause expired, out of either hate or love for their wives. I know a couple of amusing stories along these lines, but I won't bore you with them right now. Here is the point: During the first two years, if the client dies, the company has the right to investigate (as fully as it damn well pleases, and how much it damn well pleases usually depends a whole lot on the amount of money
at risk) the client and make sure that every little thing he told them on the application was true. And claims are sometimes denied.
"What's the average denial ratio of claims, dannye?" I can just hear those of you in the back of the room waving your hands and annoyingly asking this question. Well, for most reputable life insurance companies, it's around 2%. "Well, what was it for MILICO back then, dannye?" I'm glad you asked, little Johnny. It was around 16%. "Who gives a shit?" Well, I think someone needs to go see the principal.
How about the families who are left with a dead daddy who had a perfectly good life insurance policy in place which was (more than likely) over two years old and would have paid no matter what, until the guy down the block talked him into switching over to this A. L. Williams policy? How about the kids who won't get that college education which dad wanted them to have in case he wasn't around? I could go on, but I think you get the point. There were hundreds of thousands of families across America who got hurt by all this, and I didn't like it then, and I was reminded of it today when I saw a writeup (which used to be in this node) about Primerica.
"Your reputation is everything . . . Sooner or later, people are going to find out the truth about you. They're going to smell you out."
In November of 1989, Williams sold his company to the New York-based Primerica Corporation, a diversified financial services company. A. L. had been on leave for a few months at this point, pending the outcome of an investigation by the U.S. Attorney in Jacksonville, Florida, into marketing improprieties involving some disgruntled ex-A. L. Williams high-level sales executives. It was a nasty business of infighting, and I won't go into the whole story here. Suffice it to say, the name change was strictly for the purposes of getting Mr. Williams' name hidden as far out of sight as humanly possible.
So, where does all this stand today? The lapse ratios of the policies sold by the gang of termites has been horrendous. Since most of them were sold by part-time folks who soon became disillusioned with the pyramid scheme that didn't ever work out for them, the clients were left holding a policy with no one to contact locally. Many of these clients have gone back to the long-term agent with the reputable company which they had before they got involved with the Coach and his clones. Of course, they were a few years older and the rates had gone up, but that was the price they had to pay for peace of mind.
In 1993 Primerica Corporation acquired the retail brokerage and asset management operations of Shearson Lehman Brothers from American Express and combined them with Smith Barney, creating the second largest investment banking and brokerage firm in the world. Primerica Corporation purchased 73% of The Travelers Corporation common stock and changed
its name to Travelers Inc. You can still see Primerica offices scattered around the country, and they still sell a lot of insurance. But they don't do it with a pyramid scheme any longer, and they don't have pep rallies every week where some wild-eyed egomaniac huckster goads them on with quotes like:
"One person runs this show, just like a dictator, and you're lookin' at him."