and Lori W. Denison
The never-ending debut of variable life, low-load, and “secondary guarantee” universal life insurance contracts continues to transform the life insurance landscape.
With computer illustration software capable of showing virtually anything, policy design is limited only by the creativity and character of the retailer delivering the product.
Sadly, although they sign a sales illustration compliant with National Association of Insurance Commissioners standardsan illustration that acknowledges the difference between guarantees and current “hoped-for” performance–few clients appreciate what lurks in the chasm between the two extremes.
Clients can no longer bury their policy in a drawer and simply pay the premiumsunless the purchase is based solely on a contracts guarantees.
Does it make sense to rely on guarantees alone? We believe the answer, in many cases, is “yes.”
It is sophistic to assume that guarantees are important to everyone. Likewise, its inappropriate to advocate variable life as the silver bullet for every insurance need. So, which policy is “best”?
Clients tend to rely on the expertise of a trusted advisor for the answer: their CPA, financial planner, attorney, banker, or perhaps even their insurance agent.
The advisors recommendation is usually jaundiced, based on experience, background, knowledge, employer, and the number of notches in his or her own “performance disappointment” belt.
Clearly, the most objective and effective way to design, place, and administer a policy that will provide long-term client satisfaction is to engage the client as an active participant in the design process. By so doing, the client gains an appreciation for the trade-offs between low initial premiums, performance potential, and guarantees.
The end result will be a policy built around the clients feelings, priorities, fears and objectives, rather than the retailers bias.
After taking hundreds of clients on this journey, we found that conservative and sophisticated investors alike often conclude that Guaranteed Universal Life is most appropriate when lifetime death benefit is a priority. They find comfort in taking a more “hands-off” approach, and not having to worry about actively monitoring performance to measure the effects of adjustments to underlying mortality, expense and investment factors.
Unlike a whole life policy that is fully guaranteed (without a term rider, of course), UL products boasting (secondary) guarantees are not all created equally! For purposes of this article, “Guaranteed UL” product means the policy will:
–Remain in effect until death, even if the cash value is zero;
–Pay the face amount at death, even beyond age 100;
–Have no underlying deductions after age 100 (except loan interest); and
–Be issued by a financially sound carrier with a well-rounded portfolio.
Guaranteed UL also serves as an interesting benchmark for other, more volatile policies.
On many occasions, prospective clients and their cadre of advisors have concluded, “Geez, we pay 8% more in premiums every year and the policy is guaranteed forever?”
They weigh the potential for higher returns against the ability to schedule their life insurance lobotomy, and elect the latter by securing a guaranteed policy.
Guaranteed UL policies are also popular among trustees. Trust Owned Life Insurance fiduciaries are bound by standards of prudent investment. Essentially, the trustee must:
–Evaluate the need and purpose of the trust and determine the appropriate risk level; then
–Decide on an appropriate long-term investment policy suitable for that level of risk; and finally
–Implement the investment policy and monitor performance annually.
Since the purpose of the trust in an estate planning situation is to maintain death benefit, i.e., not to grow equity, trustees love guaranteed death benefits.
Our goal is to help clients design a life insurance policy that will be a cornerstone of their estate plan, not a disappointment.
In your product evaluation process, dont overlook guaranteed UL products. Rather, look them over carefully. And remember, the guarantee is only as good as the company standing behind it!
Richard M. Flah, CLU, is president and Lori W. Denison, CLU, is vice president of
Flah & Company,
West Palm Beach, Fla.
Reproduced from National Underwriter Life & Health/Financial Services Edition, July 20, 2001. Copyright 2001 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.