December 29, 2011

An Unlikely Marriage: The New Term UL

If your clients would benefit from a low-cost, term-like product with permanent features, take a look at Term Universal Life (Term UL). But do not make the mistake of assuming that Term UL is your father’s convertible term policy.

Gone are the massive premium increases at conversion that cannot be predicted when the term policy is issued. Term UL gives your clients a clear view of future premiums, making the product suitable for long-term planning  without the high premiums of other permanent products.

What Is Term UL?

Term UL is a relatively new product that starts as a term policy but automatically converts to a UL policy after the policy’s term phase—be it 10, 15, or 20+ years. Although not every carrier offers Term UL, it is offered by a growing number of carriers, including Genworth Life and Annuity, West Coast Life, and Protective Life.

What is the big deal about Term UL? After all, most carriers allow insureds to convert their term products to permanent products. The difference  is that the conversion is automatic after the term phase and, more importantly, at the time the contract is signed, the insured knows what his premiums will be throughout the policy’s life cycle–both the term and UL phases. Contrast that with conversion options, where the insured will not know the rates they will be paying on the permanent product until they make the decision to convert.

Although Term UL offers certainty after the term phase, that does not mean it is a level  premium product throughout its life. Premiums jump when the product converts. The difference between Term UL and convertible term is that the size of the jump will be known ahead of time, and after the jump, premiums will remain level through policy maturity.

Term UL offers a level of certainty unavailable in convertible term products, making it suitable for long-term planning and some estate planning needs. But keep in mind that Term UL does not build up much cash value, so it will not be suitable where the insured may have a need to access cash in the policy.

The Economics of Term UL

Term UL was designed by insurers to offer lower rates than typical term and whole-life products. Term UL offers lower premiums than straight term because it allows carriers to utilize the lower reserve requirements of AG38. AG38 is used to calculate reserves for UL policies that have a secondary death benefit guarantee—policies with a guarantee that they will remain in force through maturity, regardless of whether the cash value drops too low to sustain the policy, as long as minimum premium payments are made.

Classifying the product as UL moves the policies out from under Model Regulation XXX, which dictates the reserves that a carrier must hold for many term products.

Unlike AG38, reserves under the XXX regime are redundant, meaning

that they are higher than would be required to satisfy the policy’s liabilities under conservative current assumptions. Because lower reserves are required for policies under AG38, carriers are able to offer the policies at a lower price than similar products that require higher reserves. And because Term UL doesn’t build significant cash value, it tends to be priced lower than similar whole life products.

Conclusion

As the price of term products increases, Term UL is filling the gap by offering lower premiums and permanent features without the uncertainty of convertible term. Regardless of insurability at the time the product converts, the product will convert to a permanent product at a premium rate that the insured is aware of at the time they purchase the contract.

Term UL may be a good product for young professionals and entrepreneurs who need term now but are likely to need a permanent life insurance solution down the road. A switch on the policy flips, converting it from an income replacement vehicle to an estate preservation vehicle.

For a business owner, the product may be a viable funding mechanism for a buy-sell agreement. Instead of using a permanent product that may be cost prohibitive in the early stages of an enterprise, Term UL will keep costs low during launch and then kick up to permanent protection as the business develops and can better afford the UL phase.

With its lower premiums, Term UL may be more than just a niche product. For clients who want or need term, and who aren’t likely to  make changes to their policy down the road, Term UL may be a viable term replacement with its lower premiums and greater flexibility.

For additional coverage of this issue and similar ones, we invite you to sign up with AdvisorOne’s Summit Business Media partner, AdvisorFX, for a free trial.

You may also be interested in signing up for a free trial with another Summit Business Media partner, Tax Facts Online.

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