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Bottom Line Or Top Value: The Life Insurance Purchase

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What do customers want to pay for life insurance? Probably, as little as possible.

People have become attuned to believing the less they can pay for life insurance, the better off they are. After all, “wasting” monies on extra premium only helps the insurance company (and possibly the agent), right?

It’s strange the life insurance industry is viewed as a commodity marketplace by consumers who think nothing of paying almost $5 for specialty coffee drinks. What should the advisor do about this? Let’s see.

With one company, assuming a 50-year-old male, best underwriting class, needing $1,000,000 of death benefit coverage, premiums can be as low as $790 for a 1-year nonrenewable term policy.

Why would customers even consider anything else? Probably, because that’s not the best product for 99.99% of the industry’s customers.

It should be noted that term insurance sales still make up 23% of all life premium sold, according to the most recent statistics from LIMRA International, Windsor, Conn. But the question to ask is, ‘is this the best deal for most consumers?’

To get the answer, it helps to look at other products. Let’s look at only one carrier’s product portfolio (not even including all its products or the hundreds of thousands, or perhaps millions, of variations available within the company’s illustration system). The accompanying table shows some different possibilities for the above 50-year-old man, using that carrier’s products. A quick glance makes the point: customers certainly do get what they pay for.

For instance, say the man wants a longer term contract. For $400 more per year, the death benefit can be guaranteed for 10 years–but after that, the premium skyrockets to $23,620 in year 11.

That begs the question: who would keep that contract beginning in year 11? Only someone who’s now uninsurable. That’s not a position any customer wants to be in.

Furthermore, this contract never has any cash value accumulation. Is that important to the customer? If so, he’ll need to look elsewhere.

What about offering the man a universal life policy with a no lapse “term-to-death” structure? This would cost about 10 times the cost of the nonrenewable term–i.e., $8,800 a year. Does it have flexibility? Not really. What’s more, it has very little cash value growth, and the premium must be paid every year.

Is the customer willing to take more risk? If so, perhaps try using a variable life illustration at 8%, solving for a current endowment at age 100. That premium is just under $8,900 a year, but the policy has with significant cash value growth on an illustrated basis. If the subaccounts perform better than 8%, the premium could be reduced and/or the cash value growth would be greater. But of course, if the return only averages 5%, there’s a risk that more premium would become due to keep the death benefit in force.

Does the customer definitely want guaranteed cash value growth? Consider whole life, which is available for $12,770. This has guaranteed coverage. But, it has no upside potential, since this contract doesn’t project any dividends, only guaranteed cash value growth.

Well, does the man want guarantees with dividend growth potential? Now the premium is $22,900. That’s a long way from the no frills $790 term offering.

If all of this seems like too many options to run though, just imagine how the customer feels.

Still, the example demonstrates that advisors can design the right product for any customer’s needs and risk profile. Just show the customer the benefits of paying a higher premium.

That’s where the advisor has a strong competitive advantage over quote engines. Keep that advantage in mind, and, at the right time, point it out to the client.

Consider: Even though UL sales still remain strong because of the no lapse guarantee market, many insurers are revamping their current assumption/indexed UL contracts to sell the accumulation and distribution potential over a no lapse UL contract. By demonstrating the pros and cons of the different contracts, the advisor can show how the premium considerations are secondary to the benefits–and demonstrate the advisor’s own professional expertise in the process.

Michael Pinkans, CFA, CFP, CLU, ChFC, is the product and marketing director for Brokerage Resources of America, based in Barre, Vt. His e-mail address is [email protected]