Satisfying The Unique Insurance Needs Of The Ultra-Affluent Market

This is most commonly seen in conjunction with alternative investment products such as hedge funds, which are known for their tax inefficiency. The combination of the hedge fund returns with the tax efficiency of life insurance can lead to a very attractive, nontraditional investment product. But because these involve the use of unregistered securities, investors must meet several net worth and investor sophistication tests, putting this out of reach to all but the ultra-affluent. The $500,000 to $1,000,000 minimum premium also factors into this exclusivity.

Surprisingly, these unique pricing distinctions do not always translate into “the best” illustrations. Unfortunately, many consumers and advisors mistakenly believe the illustration “is” the product. This is not the case.

It is important to understand that insurance illustrations are long-term projections of insurance company assumptions about future mortality experience, lapse ratios, expenses and investment performance. As a result, many carriers have been comfortable with aggressive assumptions that have led to unrealistic illustrations. The list of disappointed policyholders and resulting lawsuits is long.

Unfortunately, attempting to spreadsheet or mathematically compare illustrations will frequently result in frustration and incorrect conclusions without insight into, and thorough understanding of, the underlying assumptions: a barrier that is difficult to penetrate.

While this under-performance can result in disappointment for the average insurance buyer, it can be far more damaging for the ultra-affluent whose premiums are frequently designed to fit within annual and GST gifting exclusions, as well as unified credit limits. Thus, a policy due to be self supporting in “x” years but extended further may result not only in additional premiums but in unexpected gift tax as well.

Thus, credibility of the carrier and illustration is critical. While it may be difficult to pin down, credibility can be measured by such factors as price relative to peers, length of time in and commitment to the super affluent marketplace, overall performance and the carriers history of equitable treatment of in-force policyholders.

Compounding the problem of underperformance is the lack of ongoing review of most policies following their purchase. Because life insurance is typically viewed as a buy and hold asset, most policies are purchased, put in the safe deposit box and ignored. Again, why is insurance treated so differently than other financial tools? Who would give money to an investment advisor each year without expecting regular performance reviews and recommendations for periodic re-allocations or other adjustments?

Yet, a recent study by an insurance consulting company revealed nearly 90% of policies have never been reviewed and that as many as 80% were underperforming and warranted restructuring or replacement. The recent decreases in crediting rates alone have negatively impacted the majority of permanent policies.

Thus, the need for true insurance portfolio management is critical. A clearly defined system for monitoring a policys actual performance compared to its initial illustration, re-evaluating future performance expectations, reviewing the carriers continued commitment to the ultra-affluent market as well as the stability of its management team and financial strength, and a review of potential alternatives should be the minimal expectation in dealing with the ultra-affluent and their advisors.

To provide this level of portfolio management requires not only independence from a specific carrier but a commitment of substantial resources–a staff trained and dedicated to this task. It requires actuaries, financial analysts and systems, none of which come cheaply but all of which are required to provide the level of service increasingly expected by this market.

Obviously, this depth of ongoing due care can only be performed for a limited number of clients and would be virtually impossible and financially unfeasible to provide this with the large number of clients and transactions required by the more traditional retail industry segment.

Millions of dollars are spent each year helping companies segment markets to develop the right products, distribute through the right channels and establish the right level of customer service. So why is life insurance viewed so differently? The answer, of course, is that people dont know what they dont know–few realize specialized alternatives exist for the ultra-affluent.

Fortunately, for those with the net worth to qualify, there is a significant difference. Life insurance is but another financial tool, another type of property, but one with many hidden complexities and traps for the untrained or inexperienced. And, as with any financial tool, one size does not fit all.

Michael J. Brink, CLU, is with the insurance advisory firm of Nease, Lagana, Eden & Culley Inc., Atlanta, Ga., a member of the M Financial Group. You can contact Michael at [email protected].

Reproduced from National Underwriter Edition, May 5, 2003. Copyright 2003 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.