With volatile financial markets, what products are clients using to fund their estate plans? In the life insurance market, the answer may be–and increasingly, is–equity index universal life insurance.
To see why, well take the temperature of todays estate planning clients–those who are either embarking on estate planning for the first time or coming into the office for a plan review.
When clients ask me, their attorney, whether they should take a risk in funding their estate plans, my response is simple: If you lose on the risk, can you stand the consequences? Because if you cant stand the consequences, then dont take the risk.
To reinforce this advice, I tell a story about something that happened to me a few years back. One of my fingers had become so infected, it had swollen to twice its normal size. The doctor said he would have to operate to clean out the infection; otherwise, I could lose the finger. “What are the chances of losing the finger if you take a less aggressive approach, and just use antibiotics?” I asked. He replied: “If it is your finger, the risk is 100%.”
The doctor could have been kidding me–as doctors sometimes do with lawyers–but I could tell by his facial expression that he was absolutely serious. What he was saying was, I could not afford to take that risk, unless I was willing to lose the finger if I was wrong.
The same goes for estate planning decisions made by clients–i.e., if you cant stand the heat, then get out of the kitchen.
If a client takes a risk and loses, we can usually make adjustments–as long as the client is alive. But, once the client dies, it may be impossible to make an adjustment. Many aspects of an estate plan become carved in stone at death.
The sufficiency of life insurance funding is, of course, one of those aspects.
When applied to estate planning, these ideas should lead clients to be conservative with their life insurance. The reason is simple: They cant afford to suffer the consequences, if the funding is insufficient for their estate planning needs. Otherwise, the fruits of their lifetime of labors could be lost to forced sales and estate and income taxes.
So, when it comes to choosing products, what choices are appropriate for estate planning needs?
During the go-go 1990s, some agents stuck to recommending traditional life products for estate planning purposes, and eschewed variable life products. They felt the variable products involved too much market risk. As the stock market continued its seemingly relentless expansion, customers started demanding equity-based products, so these agents sometimes were forced to reevaluate their own advice.
In the last few years, however, the marketplace has changed, as you well know, and so have client preferences. Now, clients want more certainty in their life insurance planning. And, they are willing to give up some market gains, in return for this certainty.
Enter, equity index insurance products. As sales reports for the last several quarters indicate, EIP revenues are up, for both equity index annuities and EIUL policies.
EIULs allocate part of their premium flow to traditional whole life investments, such as bonds. The insurer invests the balance in an index, such as the Standard and Poors 500.
If the market index goes up, a portion of the index gain is allocated to the life insurance policy, through the policys excess interest crediting. If the market goes down, the traditional investments provide support for the policys minimum interest guarantee, thereby assuring the policy values will continue to grow, the down market notwithstanding.
On the risk-reward spectrum, therefore, the EIUL life insurance contract falls between traditional whole life and variable life.
Today, EIUL is getting more interest from estate planning clients. In my meetings with clients, it quickly becomes clear that the stock market uncertainties of the past two years have much to do with this.
Simply put, customers are more risk averse due to the market volatility. They have seen and heard what has happened to some owners of variable life insurance–the rising account values in the 1990s followed by the steep declines over the past two years.
With the market moving sideways, as it has been doing for a while now, VUL seems, to market-worried clients, a less attractive purchase. On the other hand, such clients increasingly indicate that the EIUL may be a better fit for their psychological and estate planning needs.
Clients often ask me what kind of product I think is appropriate for them. I remind them that I am their attorney, not their investment advisor or insurance agent, and that the question is better asked of those professionals.
But some clients still want me to help assess the possible avenues they can take, in view of the risk preferences and other planning details we have already discussed. In such cases, I respond in general terms. This process has led me to the conclusion that, ultimately, the decision will rest upon the answers the clients themselves give to questions posed to them regarding these issues.
Therefore, it behooves financial advisors, brokers, and planners to be sure to ask those questions, and let the client put his or her concerns on the table. If you do this, I think you will find more clients today will want to explore EIUL options.
Douglas I. Friedman, a partner in the Friedman, Pennington & Downey, P.C. law firm of Birmingham, Ala., is national counsel on estate and business planning for insurers. His e-mail is firstname.lastname@example.org.
Reproduced from National Underwriter Life & Health/Financial Services Edition, September 16, 2002. Copyright 2002 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.