What may be the next wave of universal life contract designs?
UL contracts have been readily available in the insurance marketplace for well over 25 years, and they are accepted and popular insurance instruments.
But the supply of certain variants of these contracts, arguably those that are the most popular, is shrinking. Specifically, several major carriers have announced that they are pulling out of the secondary guarantee UL market. Such plans have accounted for a major portion of UL sales in recent years.
Meanwhile, it has become clear that, for many situations, a product much better suited to client need could be designed. This would be the “income UL.”
Consider these sales situations:
1. An individual wants to provide an income flow to his spouse.
2. An individual wants to provide income to his children for several years.
3. A couple has wealth tied up in an illiquid but profitable property. One child works with the father in the food business, but the other two do not. The couple wishes to share the wealth among all three children when both have passed away.
4. An individual or couple must provide for the welfare of a severely handicapped child if he or they pass away.
In each situation, the financial need at time of death is for income, not a lump sum. (Yes, the situation in the third example could be addressed by a lump sum benefit as well. However, the child who is the business partner realizes the value of the wealth through annual income, so it is plausible that the other children should get income flows themselves.)
A typical UL meets a need that arises upon death by providing a lump sum death benefit in virtually all circumstances. Yet to meet the need in the above situations, the lump sum payment is unnecessary. Not only is it unnecessary, it is costly.
What makes the lump sum costly? There are two factors, at least. The first concerns timeframe over which the benefit needs to be paid. The longer the deferral, the more expensive relative to real need is the cost of the coverage.