Barnes Standard

The Barnes Standard™ entered the world in 1995 with the publication of Al Barnes's The Mortality Mortgage. This book explains how consumers can make better decisions about life insurance by using familiar financial concepts associated with mortgages; i.e, principal, term, rate, and acquisition costs. It appears that some revisions have been made since 1995, but the basic analytical framework remains unchanged.

Al Barnes's approach to comparing life insurance policies has attracted attention in financial publications and at financial planning conferences. For example, it was the cover story of the November 1998 issue of Dow Jones Investment Advisor, and one of the leading advocates presented it at an October 1998 conference sponsored by the International Association for Financial Planning.

As far as I know, it has attracted no attention in the academic community, which has done research on life insurance cost disclosure since the 1920s.

The advocates of the Barnes Standard™ of disclosure say that it provides more accurate information about the cost of life insurance policies than previous methods. They say that it will help buyers find policies in the marketplace that offer superior value and that it can be used to help life insurance policyowners decide if they should keep or replace an existing policy. They say that insurance companies are unwilling to comply with the Barnes Standard™ of disclosure because they don't want consumers to understand how life insurance really works.

» A numerical example

What do I say?

I say that people who propose a new methodology have a responsibility to review the existing literature on the subject, to explain in some detail why their methodology is an advance over what has come before them, and to provide empirical evidence that their new methodology is indeed better. And I say that the advocates of the Barnes Standard™ have failed to fulfill any of these responsibilities and that they don't deserve to be taken seriously.

I say that because the Barnes Standard™ ignores important aspects of life insurance product pricing and important features of life insurance policies, it can lead to incorrect decisions about which policy to buy and about whether to keep or replace an existing policy.

I say that because the Barnes Standard™ treats life insurance as an expense to be minimized rather than as an asset to be optimized, it can lead to incorrect decisions about case design.

I say that the advocates of the Barnes Standard™ have failed to provide evidence that the benefits to the public from using this method justify the substantial costs that are required to implement it.

I say that support for the Barnes Standard™ is driven by a foolish desire to find a simple solution to a problem that has no simple solutions.

I say that the Barnes Standard™ is harmful to constructive efforts to help people make informed decisions about life insurance and that it is nothing more than a noisy, confusing, irritating distraction from serious work.

I say that the unmerited attention that the Barnes Standard™ has received is an embarrassment for the financial planning and financial journalism professions.

I say that the Barnes Standard™ is to life insurance cost disclosure what cold fusion is to physics.

I say that the Barnes Standard™ will not stand up to scrutiny and that its advocates are turning a serious subject into a farce.

I say that for me the Barnes Standard™ has been a total waste of time and that I want to be compensated for the time that I've spent on this foolishness.

I say that I could be wrong, so let's find out who's right.

A $33,000 Challenge

(Visitors who would like to participate with me in this challenge can send a message indicating the dollar amount of your commitment. The minimum commitment is $1,000. Please include your address, phone number, and affiliation.)

Here are the rules:

  1. I (along with unnamed associates who are part of a vast conspiracy to withhold valuable information from consumers) and Barnes Standard™ advocates who accept this challenge will each put $33,000 in an escrow account to be administered by a third party.
  2. We will jointly create two or three cases to work on. These cases should highlight typical decisions that consumers face, such as the purchase of single-life or second-to-die life insurance for family protection or estate liquidity, or the evaluation of an existing policy. The cases can be completely hypothetical or based on actual assignments that we have had.
  3. For each case, we will agree on several alternatives to be evaluated. We should try to choose alternatives that are likely to lead to different evaluations using different methods. For example, we could each propose a list of policies that we believe offer excellent consumer value; hopefully, our two lists will not be the same. We can also look for alternatives that involve trade-offs; for example, a trade-off between high early cash values and low guaranteed costs.
  4. For each case, we will prepare an evaluation of the alternatives. The advocates of the Barnes Standard™ will use their new methodology, without making any significant changes from what they have presented in books and articles and at conferences. I will use other methods.
  5. If we cannot obtain the information necessary for our evaluations, we will be allowed to substitute a reasonable estimate; in other words, we can make up data, as long as we indicate that we are making it up. This is very important, because it is unlikely that we will be able to obtain the information that we need to prepare our evaluations.

The Barnes Standard™ advocates and I agree completely on one point: the current state of life insurance cost disclosure does not allow consumers to make informed decisions. The life insurance industry's concept of "informed decision" doesn't match anything that I've seen in the decision analysis literature.

The Barnes Standard™ advocates and I disagree on the solution, however. My solution is to take advantage of two relatively safe harbors that insurance companies offer consumers: (1) cheap, guaranteed, convertible term insurance; and (2) low-load cash value policies. If you insist on going into the dangerous waters beyond, you should be prepared to spend time and money. There is no simple way to do thorough due diligence to identify the many things that can go wrong with the policy that you buy.

The advocates of the Barnes Standard™ have a different solution: they want to launch a crusade for cost disclosure. When medieval knights launched a crusade, their objective was Jerusalem. Principal, term, rate, and acquisition costs — that's the best objective that Crusader Barnes can think of?

If I were launching a crusade, I'd be asking for the same level of due diligence for life insurance products that institutional investors insist on for investment products. That would mean profit tests (including all pricing assumptions), actuarial reports to management, asset/liability analysis, an independent actuarial review, and whatever else could be helpful in making a decision.

I scoff at their puny crusade.

Oh, but I see that I'm digressing. Let's get back to the rules.

  1. We will agree on three judges who will decide whose analysis does a better job of helping the decision-maker make a smart choice. We will look for qualified judges among two groups of people: (1) insurance professors who are familiar with the existing literature on life insurance cost disclosure but are not familiar with the Barnes Standard™ and therefore have no opinion about it; and (2) decision analysis professors, who know a lot about helping people make decisions but may not be familiar with life insurance decisions and are therefore likely to have an open mind.
  2. If the three judges unanimously decide that the advocates of the Barnes Standard™ have a better analysis, they will get the $66,000 in the escrow account. If the three judges unanimously decide that I have a better analysis, my associates and I will get the $66,000 in the escrow account. If there is not a unanimous decision, we will each get back our $33,000. In addition, I will publicly concede that reasonable people can disagree about the merits of the Barnes Standard™ and that it is not as useless as I thought it was.
  3. The judges' decision cannot be appealed.
  4. We will try to find a third-party sponsor for this challenge (preferably a large corporation that doesn't monitor its expenses carefully). If we cannot find a sponsor, we will share expenses equally. This includes the judges' compensation and the administrative costs of the escrow account, plus the usual amount for waste, fraud, and abuse.


As of August 24, 1999, no one has come forward at the Society of Actuaries website to defend the Barnes Standard™. (See Webmaster's note, below.)

As reported in the January 1999 issue of Dow Jones Investment Advisor, Al Barnes isn't interested in accepting my challenge.

The Barnes Standard™ on the Web

In their own words

What leading advocates of the Barnes Standard™ say:

"Premium refunds, or dividends, are absolutely defined by the Internal Revenue Code Section 72. Dividends on a participating life insurance policy are tax-exempt as a return of investment. Dividends are considered to be a partial return of basis; therefore, they reduce the cost basis in a contract. Dividends, I think, can be compared to the overpayment of income taxes. Many individuals have more tax withheld than necessary, so that they get a refund at the end of the year. Premium refunds paid to policyholders are tax-exempt as a return of investment. Therefore, the policyholders have overpaid their premiums and given the insurer an interest-free loan. This dividend would be reported as taxable income if it represented a return on capital, versus a return of capital...

The traditional processes [of evaluating life insurance] reviewed have been effective in calculating returns and yields for financial problems for many years. Yet none of these have proven effective for evaluating life insurance. This historical focus on the results (illustrations) begins at the end of the journey rather than at the beginning. This is similar to walking around the world to get across the street; although it may be a scenic route, we may never reach our destination either. How else could such a simple problem have eluded decades of searching for an answer?

I think [the uncertainty about nonguaranteed elements] leads us to the conclusion that the accurate analysis of life insurance requires a change from historical evaluation methods. In order for this to happen, life insurance must be viewed from a completely different perspective. Life insurance is not a product. Life insurance is finance, and all finance is verifiable using the financial principles that you as financial advisors use every day."

From an October 5, 1998 presentation and handout by David K. Bohannon, CFP, ChFC at the 1998 Success Forum, sponsored by the International Association for Financial Planning

"Two analytically oriented life insurance agents brought a consultant [A.R. Barnes, Jr.] to see me. Since my firm enjoys a reputation for a quantitative approach to problem solving, these agents sought my opinion about this consultant's revolutionary process. Three hours later, I knew that this one man was going to cause dramatic changes in the life insurance industry...

Over the course of the last three years, professors of math and actuarial science, an actuarial consulting firm, reporters, attorneys, and insurance consultants have assisted us. Actuaries at insurance companies are even risking their jobs by secretly offering their assistance. They are sick and tired of what marketing departments do with their work. Obviously, this process poses some threat to the status quo. In fact, one huge company sent its entire in-house legal team to witness a legal case in which this revolutionary served as an expert."

Charlie Haines, MBA, CFP President. Haines Financial Advisors

From "Life Insurance Due Diligence: Finally, There Is a Way!", CCH Retirement Planning, July-August 1998

[Webmaster's note: A discussion forum at the Society of Actuaries website has this invitation from one Society member: "Are there any actuaries out there who will defend the Barnes Standard? As an insurance industry, we should take offense at this ridiculous attempt to exploit consumers' lack of knowledge." As of 8/24/99, no one has come forward — even anonymously.]

"From this day forward, I will not offer any positive publicity to any insurance company that refuses to disclose basic policy information according to the new standards created by Al Barnes — who is the latest and (in my opinion) best reformer the insurance world has seen in a long time. And I ask each of you to sell or recommend only those life insurance contracts that have complied with these simple, basic standards of disclosure."

From Robert N. Veres, "My Stand," Inside Information, December 1997

Endorsement on the back cover of The Mortality Mortgage:

"I hope that life insurance agents will read this book, so they can understand what, exactly, they're selling. Mr. Barnes has offered us all a way to understand the most inscrutable financial vehicle this side of derivatives. We, as a profession and as a society, should make the most of it — and, now that the genie is emerging from the bottle, begin to learn to live with the consequences."

Robert N. Veres. Editor and Publisher, Inside Information. Editor-at-Large, Dow Jones Investment Advisor

"In finance, two indisputable laws govern: First, one party must assume the role of borrower and one party the role of lender. Second, all financial models are based on some principal, which may be amortized or paid up front...In the life insurance model, you, the insurance buyer, are the lender and your life insurance principal is amortized."

From A.R. Barnes, Jr., The Mortality Mortgage, 1995, pp. 10-11.

Impolite questions about the Barnes Standard™

  1. Barnes is not the first person to view life insurance as a mortgage. In "Three Views of Life Insurance" (Journal of Risk and Insurance, June 1981), Professor Michael L. Smith presented a detailed discussion of the installment payment view.
    1. Why wasn't this article included in the bibliography of The Mortality Mortgage or discussed anywhere in the text?
    2. Professor Smith states clearly that the buyer is the borrower and the insurance company is the lender. In The Mortality Mortgage, Barnes states clearly that the buyer is the lender and the insurance company is the borrower. When people take out a mortgage, they are not confused about who the borrower and lender are. To avoid confusing life insurance buyers, shouldn't the advocates of the Barnes Standard™ meet with Professor Smith to sort out who does what?
    3. In Professor Smith's installment payment view, a life insurance policy consists of three contracts: (1) single premium life insurance; (2) an installment loan; and (3) annual renewable term insurance for debt forgiveness at death. Barnes's analysis looks nothing like that. Why didn't he explain in The Mortality Mortgage why Professor Smith's analysis is flawed? Surely, he must have thought long and hard about Professor Smith's analysis before proposing a different one, so why didn't he present both analyses side by side and explain why his is better? Is that too much to ask of someone who claims to have a new vision of life insurance?
  2. Barnes is not the only person who has proposed a new cost disclosure method. Professor Dongsae Cho has also proposed a new method ("The Cost/Benefit Ratio: An Ex-Ante Life Insurance Cost Disclosure Index," Journal of Insurance Issues, Fall 1997). The two methods look very different. Professor Cho is just as confident as Mr. Barnes that his own new method is useful ("The author suggests life insurers make this ratio available, along with a brief description of its nature, to the potential buyers in brochures, shopping guides, and consumer magazines. Once this ratio is made available, regulators are urged to consider making it mandatory for all life insurers.").
    1. Suppose you need to choose between two policies, A and B. And suppose that Policy A looks better than Policy B using the Barnes Standard™, but Policy B looks better than Policy A using the Cho Standard. Which policy should you choose?
    2. Several financial journalists have written about the Barnes Standard™, and one has strongly endorsed it. No financial journalist has written about the Cho Standard. Why is that? Did financial journalists study both methods carefully and conclude that the Barnes Standard™ will lead to better consumer decisions than the Cho Standard, and that therefore it makes sense to tell everyone about the Barnes Standard™ but not the Cho Standard?
  3. A mortgage is not the only financial product that can be used in an analogy to explain life insurance. I have found the analogy of an interest-bearing checking account to be very useful. In the scientific world, the merit of a theory is judged by its explanatory power; that is, how many things can it explain, and how succinctly can it explain them. Which analogy — mortgage or checking account — has greater explanatory power for life insurance?

Exercise: Using the Barnes Standard™, explain why it is reasonable to expect that the dividend interest rate on a traditional whole life policy will be higher than the credited interest rate on a universal life policy if all pricing assumptions (including investment yield) are equal.

Exercise: Using the Barnes Standard™, explain why the cash values and dividends of a non-frasierized second-to-die whole life policy jump up at the first death.

  1. "Life insurance is not a product," the Barnes Standard™ advocates say. "Life insurance is finance, and all finance is verifiable using familiar financial principles."

Exercise: Try to buy life insurance without buying a product.

  1. Suppose you're going to explore France. To prepare yourself, would you study Chinese? Now suppose that you're going to explore the world of life insurance pricing. Does it make more sense to learn a language that will not help you communicate with the actuaries who design life insurance products, or to learn their language? Which course of study is more likely to lead you to the questions that you should be asking if you want to understand the strengths and weaknesses of a product?

Exercise: Attend the Society of Actuaries' Product Development Practicum, an educational program for pricing actuaries. (a) Count how many times the instructors talk about principal, term, rate, gross premium, net premium, and annuity factor. (b) Count how many times the instructors talk about profit test, sensitivity testing, macro pricing, and asset/liability management. (c) Tabulate the results.

Exercise: Using the Barnes Standard™, explain how I might have anticipated that the company that issued my variable universal life policy would raise the cost-of-insurance rates by 30% a few years after I bought it.

  1. Suppose you're buying life insurance as part of your estate plan. And suppose you're looking at two universal life policies, A and B, and suppose that a Barnes Standard™ evaluation shows that Policy A is better than Policy B. Now suppose that Policy B allows you to pay a higher premium because it has a higher guideline annual premium. And suppose that when you compare the probability distributions of the death benefits using the economists' tool of stochastic dominance (or as an alternative, when you compare the rates of return on death for all ages), you find that Policy B is better than Policy A. Which policy should you choose?
  2. Option pricing theory is one of the major accomplishments of modern finance, and some researchers are now applying options analysis to insurance decisions.
    1. The advocates of the Barnes Standard™ claim that their method is based on the principles of finance. One principle of finance is that, to use Professor Stephen A. Ross's words, "the ability to delay a project means that almost every project competes with itself postponed." How does the Barnes Standard™ take account of this principle?
    2. Suppose Policy A has high early cash values and Policy B has low early cash values. Will the Barnes Standard™ and options analysis always agree on which policy is better? If not, which method should you use?
  3. One insurance company estimates that it takes an actuary about one hour to fill out a Barnes Standard™ questionnaire for each policy application. Who should bear the cost of the actuary's time?
    1. the applicant
    2. the agent who is selling the policy
    3. the insurance company's policyholders and/or shareholders
  4. Why should anyone spend time on the Barnes Standard™ when you can reach the same purchase decision just by looking at the guaranteed values on a sales illustration, without paying any consulting fee or waiting for an actuary to fill out a questionnaire?


Conference Postponed

For security reasons, the First International Conference on the Barnes Standard™ has been postponed indefinitely. According to published reports, the advocates of the Barnes Standard™ are being assisted by professors of math and actuarial science, consulting actuaries, reporters, attorneys, insurance consultants, and insurance company actuaries who are all afraid of losing their jobs if their identities become known. Unfortunately, the only security arrangement that I can offer is paper bags that these distinguished folks could put over their heads. (I also have see-through plastic bags, but they would be ineffective for concealing identity and could also cause suffocation.)

Conference planning will resume as soon as adequate security measures are in place.

First International Conference on the Barnes Standard™

I am pleased to host the First International Conference on the Barnes Standard™. The conference will take place on Tuesday, December 8, 1998 in my living room. (The advocates of the Barnes Standard™ are loud, but they appear to be few in number. If necessary, the conference can spill over into the kitchen.)

This First International conference will focus on two topics:

1. Who is the borrower and who is the lender?

There has been much confusion about who is doing the borrowing and who is doing the lending in the life insurance transaction. We’ll listen to a person who thought he was borrowing but was actually lending and to a person who thought she was lending but was actually borrowing. Barnes Standard™ theoreticians will be available to provide transactional therapy.

2. The global conspiracy to suppress the Barnes Standard™

We’ll hear from a private investigator who successfully broke into an insurance company's home office and discovered secret information about principal, term, rate, and acquisition costs. A Barnes Standard™ microbiologist will explain how life evolved from mortgages.

The conference will last from 3:00 pm to 3:20 pm, which should be more than enough time to cover these topics and everything else related to the Barnes Standard™. BYOB.

The Silly Party Contest for

Best Life Insurance Cost Disclosure Method

You remember Monty Python's Silly Party, don’t you? They challenged serious candidates in British elections.

The Silly Party has now come to America and has moved from politics into life insurance cost disclosure. It is looking for a method to adopt as the official Silly Party method to challenge the serious methods that have been proposed by academics and other unfunny members of the Establishment. Contestants will be judged in these areas:

  1. Ability to create nonsense from sound concepts
  2. Ability to attract media interest
  3. Ability to gain credence among financial advisers
  4. Ability to sell books and analytical services
  5. Ability to sound like a consumer advocate

Enter the Silly Party contest now!