In “Navigating the Route to Product Suitability,” I began a series of articles to suggest ways for agents to implement a structured approach to arriving at a cogent and defensible product recommendation. The approach is based on matching the prospect’s profile and intended use of the policy with a product’s functional characteristics, including premium flexibility, guarantees, efficient cash accumulation and distribution, investment approach and flexibility and what I consider a sleeper characteristic, service intensity. I started with premium flexibility. Now, I’ll talk about guarantees.
Readers may recall that in the first article, I noted that in real-time, each functional characteristic shouldn’t be considered on a standalone basis. Rather, they’re a group of “concentric circles,” mainly because the presence or absence of one can impact the presence or absence of another. Nowhere in the suitability discussion is there more concentricity than between premium flexibility and guarantees. Yes, other characteristics will quickly demand attention, but together, these two can put on a show of their own.
I’ll add one more note before resuming. My discussion assumes a certain clinical, heuristic, almost rote take on the approach I describe. That’s necessary because if I were to do otherwise and delve into the true complexity, nuance and human dimension of each characteristic, I’d never complete the mission. So, on behalf of the agents who do this for a living, let me acknowledge that this stuff is much easier said than done.
Defining Our Terms
It’s important to clarify early on that all policies have at least some guarantees, which in terms that are more colloquial than actuarial, can include the insurer’s promise that it won’t credit less than a certain rate of interest or charge more than certain costs-of-insurance and expenses.
The guarantee we’re talking about as a functional characteristic is the insurer’s commitment to the policyholder that, “As long as you faithfully pay this premium, we’ll faithfully support the designated death benefit to a targeted age regardless of policy performance.” In practice, the prospect should see the difference in premium associated with varying durations of the guarantee and, of course, be told about, shown and reminded again for good measure of the risks associated with outliving their predictions about life expectancy.
In certain flexible premium policies, that guarantee is referred to as “secondary” because it’s secondary to other guarantees already built into the policy. From a marketing standpoint, however, be assured that the secondary guarantee is the primary reason people buy these policies and, on the flip side, a primary reason that agents sell them.
Setting the Stage for Presentation
A guaranteed premium on a cash-value life insurance policy? What’s not to like? Maybe plenty, especially after the prospect hears the full story about how guarantees can impact the cost of the policy, its premium flexibility, ability to build cash value, investment flexibility and effectiveness in a given planning application. To be clear, guarantees function differently in different kinds of products. But that makes the story behind each product that much more interesting.
Tell and Show
As with premium flexibility, the agent should use a “tell and show” approach to get the guarantee story across. The “tell” is the explanation of the guarantee, how it works and what will be required of the policyholder to keep the guarantee in force. There’s a lot of variation on the theme here. If the policy under consideration is guaranteed universal life (GUL), then the discussion starts and ends with the premium and the prescribed timeframe for paying it. But if the policy is a variable guaranteed universal life (VGUL) or any other that offers investment flexibility, there may be an additional requirement to stick to a certain investment mix or allocation to maintain the guarantee. I’ve found that the carrier’s product guide can be very helpful here. The prospect’s response to the tell is, hopefully, “I get it.” The “show” involves using policy illustrations, rendered in the key of “what if,” to unfold the story visually, column by column, with the hope that the prospect will respond with,“ I see it.”
Dropping the Other Shoe
So far, the easy part of the discussion has been the single product type tell and show. The agent has ample material and illustration capability to do that. The hard part for the agent now, technically at least, involves dropping the other shoe and explaining why the prospect might not want the guarantee. By the way, my narrative presumes that the agent will drop that other shoe because they’re “product agnostic,” a concept I introduced in “How Life Insurance Agents Can Protect Themselves while Protecting Others.” An agent who’s not product agnostic could find reasons to wrap up the conversation right here, at the guaranteed product.
In simplest terms, dropping that other shoe starts with showing the prospect another type of product that, although functionally similar to the first, doesn’t offer the same guarantee. So, for example, the agent who just showed a GUL policy with its secondary guarantee must now show a UL illustrated at a planned premium that, while adequate to support the death benefit to the targeted age, is exquisitely sensitive to the product’s performance. Incidentally, while involving a more complex, in-depth discussion that will bring in even more functional characteristics, the same illuminating comparison should be made among whole life (WL), variable universal life (VUL), GVUL and indexed universal life (IUL), which often compete with one another for the prospect’s approval and premium dollars.
This side-by-side, feature-by-feature comparison is a major step towards helping the prospect understand what the guarantee brings to the table and takes away from it, both functionally and economically. A critical part of the comparison is showing how each product would fare when deployed in the prospect’s intended planning application. For example, the prospect who’s just looking to provide coverage for family security may take comfort in the fact that they don’t have to worry about the premium increasing. The absence of certain other functional characteristics, notably premium flexibility, is of no concern to them. But the prospect who intends to use the policy as an investment vehicle or to house the policy in an irrevocable life insurance trust funded in a gift tax efficient manner may balk at the constraints imposed by the guarantee or the absence of other functional characteristics. Again, the comparison becomes more complex, nuanced and, yes, concentric, when other types of policies are involved. But the point remains.
The Endgame
After taking in the full presentation of the competing products, many prospects will say to the agent, “All things considered, I see why I’d want the guarantee and I see why I might not. My sense is that the certainty’s worth it.” But another prospect could well conclude that, “Your excellent presentation has enabled me to see what the guarantee gives me and what it costs me. In terms of the economics, I can see the differences in the premium and the cash value in later years. I can also see, or rather appreciate, what the guarantee would cost me in terms of lost flexibility for how I intend to use the policy in my financial planning. I mean, just look what happens if I skip or scrimp on a premium or, on the flip side, increase it, which is something I might well do. Bottom line, I neither need nor want the guarantee and I certainly don’t want to pay for it. I’ll go with the other product and depend on you to design it properly, recommend a prudent funding pattern and service it regularly.” In either case, the prospect will have benefited from the guidance of a professional agent and made an informed decision. Also, in either case, the agent’s file will reflect the full tell and show, along with the supporting materials, to leave no doubt that the prospect’s decision was indeed informed. I mean, just in case someone asks.
Seasoned agents will know that I stacked the deck with the above prospect responses just to make my point. In real life, a given prospect could well say, “Yeah, I get it, but I’m going with the “cheaper” product, period.” These agents know that they could have a tough row to hoe with this prospect in the years ahead.
Things Will Get More Interesting
By no means will this contest between the guaranteed and non-guaranteed products be confined to the rather straightforward context of GUL and UL, respectively. The far more interesting context involves WL, VUL, VGUL and IUL, a context in which the remaining functional characteristics are further complicated by licensing, carrier affiliation, regulation, practice risk management, agent culture and a host of other factors. That’s the subject of the next article. I guarantee it.