When I think about the life insurance discourse, I reflect on the days when there were basically only two types of permanent life insurance products out on the playing field. One was whole life (WL), often blended with term insurance into something creativity described as a “whole life/term blend.” The other was the current assumption of universal life (UL), which could sometimes also be blended. These days, the playing field is more crowded, with guaranteed universal life, variable universal life, variable guaranteed universal life, indexed universal life and private placement variable universal life. That doesn’t begin to consider all the structural variations in the themes of these products that begin to blur the lines of demarcation among them. I, for one, can’t tell the players without a program.
I then wonder how today’s life insurance agents can arrive at a cogent and defensible recommendation for one type of product. In “How Agents Can Protect Themselves While Protecting Others,” I suggested a structured approach for arriving at such a recommendation. The approach is based on matching the prospect’s profile and intended use of the policy with a product’s functional characteristics. But until now, space precluded me from looking at some of those functional characteristics as closely as I’d like.
Functional Characteristics
In this and ensuing articles, I’ll talk about such functional characteristics as premium flexibility, guarantees, efficient cash accumulation and distribution, investment approach and flexibility and service intensity, which could eventually prove to be the most significant of all those characteristics to both policyholders and agents. For good measure, I’ll also talk about diversifying a client’s life insurance portfolio among carriers and products. Indeed, that kind of diversification could benefit the policyholder and the agent.
This non-exclusive list of characteristics is based on my experience as an advisor, a policyholder and a devoted follower of today’s life insurance discourse. I’ll address each characteristic individually. But, in real-time, meaning the way agents have to relate them to prospects, these functional characteristics are more like concentric circles than siloed, unrelated topics.
To be abundantly clear, I’m not passing judgment on the products themselves, nor do I favor any particular form of packaging of the characteristics. To borrow a term from the Protect article, I’m product agnostic.
Premium Flexibility
Premium flexibility boils down to who determines the premium: the carrier or the client. As will be the case with all of the functional characteristics, such a boiled-down opening understates the complexity and nuance that often boil over in controversy among agents. But I have to keep things simple to make my point, which I will try to do by contrasting two products.
WL
With traditional participating WL, for example, the carrier determines the base premium for the stated death benefit amount and guarantees that as long as the premium is faithfully paid, the policy will support that death benefit to policy maturity at, say, age 100 or 121. The policy will also provide a certain cash value at each policy year. And, the policy will endow, meaning the cash value will equal the initial death benefit at, say, age 100. The guarantees assume no dividends, which are themselves not guaranteed. I use the term “base premium” because, in real-time, the policy can be designed to include various mechanisms that allow the policyholder to supplement the base premium by putting in more money as appropriate for their intended use of the policy.
The policyholder has no choice as to the amount of the base premium or the ultimate glide path of the policy, though dividends should eventually offer some helpful options in that regard, as discussed in “A Boomer at the Crossroads of a Vintage Policy.” In parlance that’s more colloquial than actuarial, the WL policy is priced to the consumer at the guarantees, but the policyholder hopes that the (non-guaranteed) dividends will effectively reduce that pricing to reflect the carrier’s current experience.
UL
With UL, on the other hand, the carrier basically says to the policyholder something like, “Tell us to what age you want to support the death benefit and under what assumptions for credited interest, costs-of-insurance and expenses, and for how long you’d like to pay the premiums, and we’ll tell you the premium you’ll need today to achieve that result. Remember that we’ll need another conversation if your assumptions don’t pan out or you change your ‘specs.”
The point is that UL essentially lets the policyholder set the policy’s premium and glide path at the outset, albeit within certain guidelines beyond this article’s scope. It also lets them reset the premium and glide path to suit changing needs, circumstances and updated thinking about those assumptions. That flexibility allows the policyholder to effectively shorten or lengthen the duration of the death benefit or “overfund” the policy for cash accumulation, all without underwriting. Even if economic conditions or carrier practice eventually call for a mid-course correction, read increase, of the planned premium to support the death benefit to the target age, it’s the policyholder’s choice as to how to respond.
Again, colloquially, UL allows the policyholder to buy the coverage priced at the carrier’s current experience and hope against the hope that the carrier’s experience won’t worsen enough to drive that pricing back up toward the guarantees.
The Value of Flexibility
If you don’t think the kind of flexibility offered by UL (or other truly flexible premium products) is important to some clients, ask those who’d like to buy a permanent policy to protect their insurability but start with a fairly minimal premium and gradually increase it as their compensation increases, without evidence of insurability. Or ask the 62-year-old with a health issue who wants to put more cash into their current policy but can’t because the premium was the premium was the premium. Or, consider the client who, after being “downsized,” asks the carrier if they can take a breather from some or all of the premium without somehow impairing the policy, only to be asked dismissively, “What part of ‘No’ don’t you understand?” Or the policyholder who wants to “stair step” the premium gifts to their irrevocable life insurance trust (ILIT) to buy some time and save significant taxable gifts or loans while they fund the ILIT with income-producing property that will eventually enable the ILIT to handle the total premium with its own cash flow. The point is that in any client setting, the ability to set the policy’s course early and then change it can be of significant value. But there’s more to the story.
Caveats Apply
Premium flexibility is not for every policyholder. That’s because a downside of premium flexibility is, well, premium flexibility. If the policyholder doesn’t pay the WL premium, the policy loan will pay it, meaning there’s an immediate, real-time consequence of not paying the premium. But if the client doesn’t pay the planned UL premium, the result is less real-time than time-lapsed because it could take years to know if the skipped premium actually deprived the policy of the funds needed to sustain the death benefit to the targeted duration. To be clear, skipping a required or needed premium on either type of policy can be the yeast that will cause trouble to brew down the road. But while skipping a WL premium triggers a shrill alarm, the alarm on the UL policy is silent, at least early on. Indeed, for many UL policyholders, the alarm is no longer silent, thanks to declining interest rates and, in some cases, increasing costs of insurance. That’s all part of how and why other functional characteristics, like service intensity, overlap. Thomas Jefferson’s life insurance agent might have phrased it in terms of the need for eternal vigilance.
At the end of the day, premium flexibility could be just what someone wants as a foundational characteristic of their life insurance program. On the other hand, I’ve heard clients say, “The last thing I should do is buy a policy that doesn’t require a certain premium at a certain time because, well, you know…” A given prospect could consider a policy that affords premium flexibility far safer for the long term than one that doesn’t or vice-versa. The same could be true for other characteristics, such as guarantees and investment flexibility, which are the subjects of future articles.
More to Come
Premium flexibility is just the first of the many characteristics the agent has to explain, contextualize and then incorporate into the ultimate recommendation presented to the prospect and, often enough, their advisor. This may be Life Insurance 101 to agents, but it’s advanced placement material for most prospects and advisors. That’s why the agent should cover the topic in a multi-media fashion, meaning with both prose and illustrations. One small contribution to that effort is the agent’s presentation template in “A Conversation about Life Insurance Products for the Merely Well-to-Do.”
And that brings us to guarantees, which will be the subject of the next article.