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 When she realized, at age 80, that the insurance was no longer in force, she couldn’t understand it.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).
That’s a point to raise with clients: Given such a low chance of using term, does it make sense to have it long-term?
One thing is certain, term is not going to take a person through all 3 phases of financial life; it works for just one phase, accumulation. When sitting with prospects, ask them why they would want to do all this planning only to do it again in the next 20 years and then yet again after that. Note that the only things to come from such waiting are: the guarantee to pay higher premiums and no guarantee on health.
By comparison, whole life has many long-term benefits.
For one, it could be considered a “permission slip” to spend down taxable assets (reducing the person’s taxable estate) because the death benefit will be there to replace those assets. Remember, fear of outliving one’s money is why many people live off only the interest generated from their portfolios. But those who have whole life can take both interest and principal, giving them more income and less money spent on taxes. (Principal is never taxed).
Even if the money runs out, there may still be cash value accumulated in the whole life policy to generate a tax-free income. (Be sure to look at the effect on the death benefit of taking money from the cash value; if there is an outstanding loan when the person dies, the death benefit is reduced by the outstanding loan amount plus any interest that had accumulated.)
If the whole life policy is put into an irrevocable life insurance trust, the proceeds pass to heirs free of estate and income taxes. So this “permission slip” is not only giving the opportunity to have more money during the preservation phase of life, but it’s also providing the strategies for some sophisticated estate planning techniques during the distribution phase.
Once clients understand these benefits, the hurdle becomes cost. Point out that it “costs” something when there’s a lost opportunity (like buying term). Whole life has no lost opportunity. Position the insurance as an asset. After all, the minute it is purchased, it’s considered part of the estate (unless it’s put in an ILIT).
Once clients see whole life as part of an asset allocation and how it can provide all the other features mentioned above, it’s only a matter of how much money should they allocate toward that asset. It’s at this time that you can take a look at reallocating the existing portfolio or adding new money to the portfolio. Either way, you’ve turned the way whole life insurance can be viewed.
Abbe F. Large, CLTC, is senior vice president of Lenox Advisors, New York City. Her email address is email@example.com.