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January 20, 2008 at 02:00 PM
What can whole life insurance do for a person while still living? Quite a bit.
Let’s start by recalling that there are 3 phases of financial life–the accumulation phase, preservation phase and distribution phase. (See chart.)
Whole life can play a role in all 3 phases. Here is how to make that point.
During the fact finding session with a new prospect, I ask about the person’s insurance “portfolio.” Typically, it consists of the infamous “$1 million of term.” I then ask: “Why did you choose that amount?” and “How long do you need the insurance?” The answers are most always the same: “It sounded like a good amount” and “Oh, I don’t know, 20 years I guess.”
That’s a perfect segue into the whole life conversation. Find out how the prospect feels about the existing term insurance and whether he or she likes what the insurance does. Most people only look at the death benefit and want the cheapest form of it. So, it’s up to the advisor to educate on whole life as an asset–yes, “asset”–and what it can do throughout one’s lifetime.
The “how long do you need this” is a key question. If the answer is “for a short period of time, say 5 years,” term insurance most likely does make sense. However, most people need the insurance longer than that.
Quite frankly, most don’t even look past 5 years; they are just so concerned about now. This is where the advisor needs to get the prospect to visualize life in the 3 stages mentioned earlier. In my experience, term can make sense for certain situations but most either cancel the policy after the 20-year level premium time has ended or they outlive the insurance.
My own grandmother’s experience should make the point. She had paid her term premiums diligently for 20 years. When she realized, at age 80, that the insurance was no longer in force, she couldn’t understand it. She called, wrote letters, you name it, but couldn’t get the insurer to reinstate the policy because it had matured and well, the good news was she didn’t die! But, the bad news was, she didn’t die. I explained the policy expired at age 80 and tried to make her feel better by reminding her she was still alive but she just couldn’t wrap her mind around paying premiums for all those years and end up with nothing! That’s a classic example of lost opportunity. She lived to age 92.
If you call any insurer and ask, “What is the percentage of claims you pay out on your term insurance product line?” most, if not all, will say “Less than 1%” (as per LIMRA’s MarketFacts Quarterly, 2006).
