Quick! Which company has the lowest guaranteed annual premium on a universal life with no-lapse guarantee (ULNLG) for a male, age 50, $1 million death benefit? No doubt you know the company or know at least which carriers are in the top 5.
But does the guaranteed lowest annual premium give the customer the best value? It may or may not. Certainly, if the customer could care less about cash values (either guaranteed or illustrated) and just wants a term-to-death policy, the absolute lowest guaranteed premium may be the perfect fit.
Fast forward 15 years. Assume a new insurance product has been developed. A producer looking over this customer’s insurance needs mentions this new product to the customer. The customer wants the new product because of the differentiating features. The producer believes that it would be wise to 1035 exchange the current policy into the new one but, looking at the current in-force policy, there’s no significant cash value to exchange. The customer questions the lack of cash values. Yes, the customer remembers buying a term-to-death policy but did not realize this would happen.
Question: If the customer had paid a little more, wouldn’t the customer now have the flexibility to exchange the current contract into a new one? Wouldn’t the customer have valued this extra flexibility?
But that didn’t happen. In the early 1990s, when ULNLG policies became popular, comparing annual premiums and selecting the lowest premium became standard.
After all, the thinking was that customers were buying the contract to lock in death benefit protection for the long-term with little need for cash value accumulation. And companies were fighting to compete with lower and lower annual premiums. In the process, cash value was sacrificed, with many illustrations showing no cash value of any kind in most years.
(Some would argue that this complete lack of cash surrender values helped fuel the life settlement business, but that’s another story.)
But things have changed over the past couple of years. A few companies are now touting ULNLG contracts that do build up cash values. Some provide basic cash value growth; some provide a “return-of-premium” type provision with up to 100% of premium paid available on full surrender; and others provide solid cash value growth, either in early or later durations.
The chart illustrates the range of choice. It shows 4 companies with 4 different products–from the basic low premium ULNLG premium with almost no cash value accumulation (company A providing bare bones death benefit protection at a low cost) to a contract providing strong long term accumulation values (company D with exceptional long term values).
Today, customers can take advantage of some of the greatest strengths of life insurance–tax deferred cash value buildup and tax advantaged distributions. These ULNLG “cash enhanced” contracts provide the customer with future flexibility.
Companies have responded to varied customer needs with a multitude of contracts. Unfortunately, because of the different features and benefits, it is difficult to do a simple spreadsheet comparison in most cases. More analysis is needed to fully understand how each company positions its contracts. Producers who really try to understand the nuances of the different companies and contracts will stay far ahead of their competitors.
One thing is always certain: Unexpected things do happen. For customers who understand this, a contract that provides cash value growth will provide a higher value proposition even though the premium is higher. And for customers who want the “next best product” in a few years? At least there will be cash values to make a 1035 exchange.
Michael S. Pinkans, CFA, CFP, CLU, ChFC, is the products and markets director for Brokerage Resources of America, Barre, Vt. and a registered representative and investment adviser representative of ING Financial Partners, Inc. His e-mail address is email@example.com.