If theres one word that aptly describes the driver of todays insurance market, that word is “guarantees.”
Today, clients and their financial advisors are both looking for the sure thing when it comes to providing life insurance protection for families and businesses.
The insurance industry makes these lifetime guarantees available through two different products: the old standby, traditional whole life insurance; and the relative market newcomer, universal life insurance with a secondary guarantee component. While each can provide a guaranteed death benefit to at least age 100, not all guarantees are created equal.
WL and UL have specific rules to maintaining death benefit guarantees, each targeted to meet specific financial needs. Therefore, understanding the difference between the guarantees will help advisors make the right recommendation to clients who are seeking the right product for their situation.
What about the WL guarantee, then? Maintaining the death benefit guarantee in the WL product is virtually mistake-proof. If the policy is in-force, the guarantees are in-force. These guarantees include a level premium, a minimum cash value and a death benefit that will equal at least the face amount outlined in the policy contract.
To keep the WL and its guarantees in-force, the policyowner must pay the base policy premium every year to the age specified in the contract (usually age 95 to 100). If the annual premium is not paid, the policy will lapse.
But, to keep the policy going, policyowners do not have to pay the premiums out of their own pockets every year. This is because WL contracts typically feature an opportunity to earn an annual dividend. Over time, these dividends (or the paid-up additions with cash value they can purchase) may be sufficient to cover the cost of the WLs scheduled premium in any given year.
The bottom line? From the day the WL is issued until the day it is surrendered, lapsed or pays a claim, the guaranteed death benefit is in place.
How does the UL guarantee stack up? Here, the opportunity to lock in a guaranteed death benefit is different. Typically, modern ULs offer a “secondary guarantee” provision that secures the ULs death benefit beyond what is guaranteed based on maximum costs and the minimum interest-crediting rate.
The typical provision states that, as long as a minimum no-lapse premium is paid every year and all other requirements are met, the UL will not lapse, even if its account value drops to zero.
The guaranteed no-lapse period offered by a UL can range from as little as five years up to age 100. And some ULs extend those benefits beyond age 100a boon to consumers concerned with outliving life insurance benefits.
The important thing to know about UL secondary guarantee provisions is this: There are conditions–beyond paying the minimum annual premiums–that limit policy flexibility. Failing to meet any of these conditions can negate the death benefit guarantee. While policy features differ from company to company, some conditions that may cancel or reduce the UL death benefit guarantee period are:
–Skipped or late premium payments;
–Failure to pay sufficient cumulative premiums;
–Withdrawal of policy values;
–A policy loan;
–Addition of a rider or other policy benefits after issue;
–A change in the ULs face amount; or,
–A death benefit option switch.
If a UL policyowner skips or makes a late premium payment, either intentionally or inadvertently, the UL must then rely solely on its non-guaranteed account values to cover monthly charges and expenses. If these values are not sufficient, lapse will occur.
Fortunately, if the UL no longer has a guaranteed death benefit because sufficient cumulative premiums have not been paid, many companies offer a “catch-up provision.” This provision allows the policyowner to pay all past-due premiums, often plus interest, to restore the secondary death benefit guarantee.
The time period permitted to catch up on skipped premium can range from as little as 30 days to as long as the insureds lifetime. These provisions are a great safety net for policyowners, but can also result in a significant one-time premium outlay to restore the guarantees to age 100. Remember, however, missed premium payments are not the only way to void the secondary guarantee death benefit.
Either WL or UL can be the right product for a client, depending upon need and ability to pay premiums. The UL offers a guaranteed death benefit at a lower premium than WL, based on the typical minimum secondary guarantee premium.
So, if your client is looking solely for guaranteed death benefit protection at a lesser premium and is willing to comply with the strict rules associated with secondary guarantees, then the UL may be the appropriate insurance coverage. However, if your client wants more from a life policy than guaranteed death benefits, consider recommending WL.
WL is a much more effective accumulation vehicle, giving owners the opportunity to use their policies for “living benefits” (like retirement income, education funding and accelerated benefits), as well as death benefit protection. Also, because dividends may be used to pay premiums, your clients are not likely to have to pay out-of-pocket premiums for a lifetime, which they will appreciate as they reach their retirement years.
Finally, and perhaps most importantly, WL offers mistake-proof guarantees, giving clients peace of mind and you fewer servicing problems.
Katherine H.Readinger is director of product support-individual markets at Guardian Life Insurance Company of America, New York, NY. Her e-mail is [email protected]
Reproduced from National Underwriter Life & Health/Financial Services Edition, July 21, 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.