Guarantees are taking on new life in the insurance products of the 2000s. Here are some common questions they are raising, plus some answers.
Q: What is meant by a secondary guarantee on a universal life insurance policy?
A: The secondary guarantee usually means that if the customer pays a certain amount of money into the policy, over a certain period of time, the insurer guarantees the policy won’t lapse. Even if the cash value has fallen to zero, if the provisions for the secondary guarantee have been satisfied, the policy will not lapse. So, while the customer may not have any cash value that could be borrowed, the policy death benefit remains in force.
Secondary guarantees take many shapes and forms. Some of the most creative thinking in the industry has gone into their development. These policy provisions have provided the opportunity for planning where none may have existed before. By informing the customer of what is available, an agent can offer an important value-added service to the sales process.
Q: Have secondary guarantees caused any controversy in the life insurance industry?
A: Yes. Most of the controversy has been about how to reserve properly for these benefits. There are ongoing attempts within the industry to reach agreement on what is appropriate for these policies.
Q: Are policies with guarantees always better for the customer than policies without guarantees?
A: Sometimes yes and sometimes no. The answer really depends upon what the customer wants and needs. For long term planning, where the customer needs to be sure that the death benefit will be available at death, the secondary guarantee may be desirable. But, the customer must be able to afford the increased cost usually associated with this benefit, as well as believe that the guarantee is worth the extra money. Depending on the situation, a policy may be designed to provide what the customer needs without a secondary guarantee.
Q: How would a new policy with a secondary guarantee compare to an old one without a secondary guarantee?
A: This is like comparing apples and oranges, because the two types of policies provide different benefits. It is not an easy comparison to make. Again, the customer’s particular needs and circumstances must be considered. There is no one answer to fit all situations.
Q: If a new policy with guarantees appears to fit the customer’s needs better than the old one, is a replacement justified?
A: The decision to replace the old policy should not be made lightly, and should be considered carefully. You should be sure that the customer considers not only what may be required by law, and by the new insurer, but also, what makes sense to you as a life insurance professional.