The following letter is adapted from a response I wrote to an advisor who asked me for articles that discussed the differences between whole life (WL) and guaranteed universal life (UL) insurance. It not only addresses simple differences but also some conflicting advice/feedback the client is getting from the market.
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Hi Tim:
It was good to chat this morning. I understand what you’re looking for when you asked about articles comparing and differentiating WL from guaranteed UL products in the market. However, as I mentioned, what sounds so simple isn’t so easy to find.
I thought I’d take a stab at talking this through, and maybe this will be enough for your clients at this point.
My understanding is your client currently owns mutual WL. WL is a perfectly fine life insurance product but it comes in a number of forms, and I often discover that policy owners don’t understand what they really have. For example, one of the biggest misperceptions is that the policy they believe is traditional WL actually consists of a significant amount of term insurance. In fact, I’m currently working on a situation for a business owner in Grand Rapids who has a $1 million mutual WL policy from a well known and highly rated provider issued in 1990 with $1,000 of WL and $999,000 of term insurance. He had no idea. Given the precipitous drop in the interest-rate market and the accompanying drop in the carrier’s dividend rate that is crediting the policies, the policy is failing badly and will likely never pay the death benefit unless significant changes are made.
This is different from true traditional WL. However, many of those WL policies have some term blend, and this is greatly affected by the low interest-rate and low insurance dividend crediting environment. What’s exceedingly important for policy owners to understand is only the original WL portion of the policy had a level guaranteed premium. Many of my clients have discovered, much to their chagrin, that they have to pay significantly more premium, or more years of premium, than expected, and the cash value and death benefit isn’t growing to anywhere near original projections.
There are multiple types of permanent, cash value life insurance in the market. This includes the WL policies as discussed above, traditional UL, variable WL and variable UL, indexed UL as well as guaranteed UL and guaranteed variable UL contracts. There are additional products in the market with some unique nuances, and each of these contracts is available in a single life or survivor life format.
Most of my work with the business owner community is for trust owned life insurance to provide liquidity for estate tax planning and business succession planning. That being said, we’re generally focusing on death benefit type products more than life insurance contracts designed to accumulate significant cash value. It’s important to understand that you can’t really have your cake and eat it too in the life insurance world. It’s an ongoing game of horse trading, where you give up one thing for something else. For example, you may give up cash value for death benefit and premium guarantees. Some policies have more upside potential than others. Some perform better at different points in life. You generally can’t find something with low premiums, guaranteed premium and death benefit as well as significant cash value and upside potential.
In my market for my clients who look to life insurance for death benefits, we generally look at guaranteed products. Though guarantees are often associated with higher costs, that’s not always the case with life insurance. Given that so much is riding on the death benefit coming to fruition for planning purposes, and the fact that these business owners are already taking significant risk in the balance of their estates, guarantees are very attractive. Also, given that they’re focusing on death benefit, they don’t put a lot of weight on significant cash value though they’d obviously take it all things being equal. Many also value flexible premium products as their cash flow‘s can vary from year to year. WL life products have limited flexibility while UL products have flexible premiums to an extent.
Given these goals, for the last two decades we’ve focused on guaranteed UL along with guaranteed indexed UL and guaranteed variable UL when available. These products have a guaranteed premium and a guaranteed death benefit and generally have been the lowest priced life insurance. Traditional WL without a term blend typically has a much higher premium, and it accumulates more cash value over the long term. It likely has a growing death benefit so the projected internal rate of return on premium to death benefit at life expectancy may be similar but there’s big differences in how you get there. It’s neither right or wrong, just different.
However, given the financial dynamics of the market, insurance companies have had a difficult time making money on their money, and given some changes in the regulatory market, pricing for guaranteed UL products has generally increased over the years and many companies are no longer in that market at all.
My concern over this is reduced because of the continued availability of guaranteed variable UL products. Though it may seem like a contradiction, these products, though invested in the securities markets, have guaranteed premium and death benefit as well. They remain competitive because they’re not as dependent on the interest-rate markets, and they follow different regulatory rules. Also, an often overlooked but important aspect of these contracts is that the cash values are separate accounts, meaning that they’re separate from the insurance carriers and the creditors of those companies. Even if a life insurance company went out of business, the cash value in the separate accounts wouldn’t be on the table like cash value in traditional life insurance products.
In my experience, the premiums of these policies are very competitive, policy owners have a choice in how the cash values are invested among a wide variety of sub-accounts, both the premium and the death benefit is guaranteed and there’s upside potential if the sub-accounts do well over time. What I mean by this is, if the cash values grow enough, they’ll push the death benefits up over time so ultimately, there may be more death benefit than originally guaranteed.
In the market today, the product du jour is indexed UL. There’s a great story behind these products that many agents pitch. They’re touted as life insurance products having the upside potential of the market without the downside risk. While in a sense this is true, these are some of the most complicated products in the market, very few people, including advisers and agents, understand them and they simply don’t work like many people believe them to. I have done a tremendous amount of research, analysis and writing on these contracts, and I’m not a fan. I’m not going to get into details here but I’d be happy to discuss as deeply as anybody has an interest.
I’ve always said there’s not as much bad life insurance as there’s life insurance done badly. Also, many agents are heavily institutionally indoctrinated by the insurance company(s) they primarily work with. This has been one of the most eye-opening discoveries over the years. Insurance companies create all of their training and marketing around the products that they specialize in and want to sell so their agents do the same, largely because they have little other perspective.
Another segment of the sales market will simply follow the in product of the day that’s largely been developed and promoted and placed based on temporary economic dynamics of the financial markets. They sell what’s easiest to sell at the time and change when the circumstances do. I see this happen like clockwork. From the traditional WL policies of the old days to the development of UL in the high interest environment of the late 70s and early 80s to the variable life policies taking advantage of the hot stock market in the 90s to the guaranteed policies in the 2000s that were marketed to consumers tired of disappointment to the indexed policies with aggressive assumptions that look so attractive when the insurance companies realize they couldn’t support the pricing of their previous contracts. It can be demoralizing.
Given that the fastest growing aspect of my practice is litigation support and expert witness work, I get to see a lot of what’s going wrong in the insurance world. Something that’s a bit counterintuitive to many people is that it doesn’t matter how highly rated the insurance carrier is. They all have similar products based on similar investment portfolios that are sold to similar people by executives and agents with similar biases and incentives.
It’s exceedingly important to work with somebody who doesn’t have a connection to a given insurance company or an incentive to sell certain products. An expert has to study the pros and cons of any given product and align it with the goals and objectives of a given client and the situation at hand. That’s what I too seldom see in the real world.
In recent months, I’ve discussed with you the guaranteed securities based contracts because based on my expertise and experience, these are the products that best serve many of my clients. They won’t be right for every situation, and we have a large portfolio of companies and products to choose from if they aren’t.
As I stated initially, this isn’t what you were originally looking for but it’s the best I can do today. I’ll be happy to further research articles but I’m not sure that you or your clients are going to want to spend time digging deep into them. At the end of the day, facts are facts and numbers are numbers. I’ll be happy to run anything you want to see and put it up against anything else in the market. Objective black and white data is what your clients need.
Bill
Bill Boersma is a CLU, AEP and LIC. More information can be found at www.OC-LIC.com, www.BillBoersmaOnLifeInsurance.info, www.XpertLifeInsAdvice.com, www.LifeLoanRefi.com, www.TheNAPIC.org, www.LifeInsExpert.com or email at [email protected].
The guarantees described in this letter are limited to the claims paying ability of the respective Insurance Company. Securities offered through Valmark Securities Inc. Member FINRA,SIPC
OC Consulting Group and its affiliates are separate entities from Valmark Securities Inc.
