“What clients are looking for today is flexibility,” says Meridee Maynard. “This is the million dollar word now. While we all know about life insurance and the death benefit it provides, the thing to start focusing on again is the living benefits.”
Maynard, a senior vice president-life product for The Northwestern Mutual Life Insurance Co., Milwaukee, Wis., says this is the message that life insurance agents have to deliver to clients–especially those in the middle market–if they’re to make a compelling case for buying permanent life insurance. The cash value component, in particular, can serve as an emergency fund during key life events: the birth of a child, a second marriage, a son or daughter going off to college, or one’s transition to retirement.
Augmenting the product’s flexibility, Maynard adds, is the Pension Protection of 2006 that President Bush signed into law on August 17th. Among its other provisions, the legislation allows life insurance and annuity contracts to include long-term care insurance policies. Because such “combo” products incorporate a savings component, the law’s proponents say, they should prove persuasive to clients who might otherwise be disinclined to buy a stand-alone LTC policy for fear they will never use it.
The pension act aside, cash value life insurance lends itself to a myriad of financial needs–or whims. And it frequently delivers greater bang for the buck, and at lower cost, than do alternative assets that clients may tap to achieve the same objectives. The problem, observers say, is that many agents don’t understand these uses or fail to broach them in meetings with prospects.
Example: leveraging the cash value of a policy to cover certain expenses (such as a vacation) that might otherwise be funded by taking out a home equity loan. Timothy Radden, a chief life underwriter and chartered financial consultant at Northwestern Mutual Financial Network, Milwaukee, Wis., says that individuals would be better off using the loan to fund a permanent life insurance contract, then drawing against the policy to cover the other expenses.
Radden, who spoke on the topic at National Underwriter’s Sales Mastery Forum, held in Atlanta September 27-29, illustrates his point using a life insurance policy that carries a face amount of $500,000 and $13,000 per year in annual premiums. Over the life of the loan, the policy’s tax-deferred cash value will grow at a 5.35% annual rate, yielding $484,000 at the end of the 28-year loan term. This compares with an effective interest rate on the loan of 4.59%.
“People buy everything else on debt,” says Radden. “Why don’t they buy their life insurance this way, too? There is nothing wrong with that. At least this way, they have an asset, instead of just a memory [of a vacation].”
Radden adds that life insurance can also be more compelling than alternative vehicles for achieving retirement and estate planning objectives. He observes that, for a given amount invested, an immediate annuity supplemented by a life insurance policy can yield a greater income for an annuitant’s survivor than an immediate annuity carrying a survivor benefit rider.
By purchasing a paid-up life insurance policy, individuals with $1 million to invest can also secure a rising annual income during a 30-year retirement; and for the benefit of heirs, gross up their estate to the $2 million limit that is exempt from federal estate tax. The same $1 million, when invested in 30-year treasury bonds, will yield only a flat annual income for retirees over the same period, Radden says.
Cash value life insurance can be a cost-effective tool for securing still other objectives. Among those cited by Radden: providing a source of funding for spousal support; an employee retention vehicle within a restrictive bonus plan; and serving as collateral for a bank loan, thereby allowing for a reduction in loan interest costs.
As a retirement planning tool, permanent life insurance also defeats its counterpart, term insurance, sources say. In theory, the popular refrain, “buy term and invest the difference,” is a lower cost retirement planning strategy. But advisors note that most people don’t have the discipline to follow this strategy through to its completion.
“Buying term insurance and investing the difference is a fine concept, but every study will tell you that no one is doing it,” says Maynard.
In a 2003 Harris Interactive survey commissioned by Northwestern Mutual, 77% of more than 1,000 financial decision makers ages 21 to 55 with household incomes of $50,000 or more indicated they buy term insurance to save money for long-term financial goals, but admit they lack the discipline to support the goals.
Result: Most of these individuals (86%) are not investing the difference in cost between term and permanent insurance. And 17% said they spend all the money they save every year. Also, 48% of term owners (versus 32% of permanent policy owners) said they were unprepared for a major a financial setback.
The study found, too, that cost was the most important factor in their decision to buy term insurance. Low annual premiums and “getting a lot of coverage for an affordable price” were cited by 85% and 89% of respondents, respectively, in their decision to buy term.
Yet, sources point out, term insurance can be substantially more expensive over the long haul. Radden illustrates this using the example of a 35-year-old male who can be expected to live to age 79. On a policy with a face amount of $1 million, over the remaining 44 years, he will have paid–assuming an ability to fund the rising mortality costs–$299,000 in term insurance premiums. This compares with $154,000 in premium outlays for a participating whole life policy, part of which is covered by policy dividends.
The dividend payout, contends Bob Castiglione, president, CEO and founder of Leap Systems, Bridgewater, N.J., is key to understanding not only why whole life insurance is superior to term insurance cost-wise, but also trumps other cash value policies–notably universal life and variable universal life contracts–in the product’s ability to meet financial planning objectives.
While dividends can be used to purchase additional insurance (“paid-up additions”) or be received as income, a popular option among retirees is to apply the dividends to the annual premium. Beyond a certain point (say, age 65) the dividends can exceed the premiums, so the retiree would not have to make a premium outlay. The dividends simultaneously grow the cash value, thereby creating a bigger dividend, which may be received as income.
“Life insurance is the only product in the world wherein both the principal and income grow at retirement,” says Castiglione. “That makes it the best retirement planning tool. And when you die, there is a tax-free death benefit. Nothing can beat that.”
Some in the insurance industry, he adds, overemphasize the supposed benefits of UL and VUL alternatives: flexible premium payments, high rates of return (in the case of VUL) and the cash value component.
A key problem with the illustrations used to market these other products, he says, is that they assume average rates of return rather than actual, fluctuating rates. He adds that borrowing against a policy’s cash value can put the contract at risk if the policy holder is unable to pay an increased premium, the loan interest or the loan balance.
Castiglione, discounts, too, whole life’s higher premiums relative to the lower premiums engendered by UL and VUL contracts. He observes that whole life policyholders receive better benefits, including disability protection, tax-sheltering, creditor protection, privacy of assets and increasing death benefits. He notes, however, that UL and VUL are appropriate as a supplement to whole life insurance to round out the client’s insurance portfolio.
Maynard disagrees. “The reality is that one size does not fit all,” she says. “In considering a policy, one has to weigh not only financial objectives, time horizon and risk tolerance, but also cost. Everyone has a different personal situation. Many people simply can’t afford whole life.”