It’s a tough economy and life insurance professionals are asking lots of questions about selling in this climate. Here are my answers.
Question: Many life companies have had ratings downgrades. How can I handle presenting life products from a company that has been affected by this?
Answer: First, agents have always sold policies issued by insurance companies that did not have the best ratings. So, in that sense, nothing has changed.
Sometimes a change in ratings, especially a pattern of change, can signal a possible problem. Other times a change may just indicate a change in how the ratings agencies do their work.
The old saw in the insurance industry is that there has never been a death claim that went unpaid because of the financial condition of an insurer.
Yes, stock prices of insurers have been battered by the markets; two insurers have taken Troubled Asset Relief Program money; and sales are reportedly off by 20% to 30% at companies. But as far as we know, as I write this, there are no insolvent insurers; otherwise they would be taken over by the regulators. So far, insurers still appear to have the cash flow to pay their obligations.
Agents should continue to evaluate companies as they did before, with a healthy dose of common sense. Look for products that fit the customer’s needs. Some products are usually better than others for a particular customer depending on age, cash value needs, and overall objectives. Look for a company that knows how to underwrite the market for which the policy is offered. Accurate underwriting is a good predictor of financial success.
Don’t assume that the cheapest price is the best deal. An insurer has to make money to be financially stable.
The bottom line: Review the available information and proceed knowledgeably and sensibly.
It’s impossible to be conversant on the pros and cons of all the companies. But, an agent should be familiar with the pros and cons of at least several companies that offer a suitable product for a customer. That way the customer can be assured that a reasonable effort has been made to recommend a product that is appropriate for the customer’s needs, while also considering the financial health of the insurer.
Question: What considerations may arise from selling level term policies with conversion options? Many peers are doing this now because 1) term is less expensive than permanent, and 2) customers who want and need permanent insurance can convert later on when finances are better. It’s also a way to sell something rather than nothing in these very difficult days.
Answer: The general rule is that a customer always is better off with coverage than without coverage. This has not changed.
The question of suitability is important. But, to determine suitability, an agent may have to disclose alternatives that are marginal, in addition to those that are realistic for the customer. So, when permanent insurance may be a possible alternative, the agent should discuss permanent insurance as an alternative–even if the agent knows that permanent insurance may not be a realistic alternative based upon the customer’s finances.
Nevertheless, the permanent alternative should be discussed. That way the customer better understands the choices.
Sometimes agents ask my firm questions about what would be the best solution for a particular customer. The agents want to tell the customer what should be done.
I often say that the best alternative depends upon what choices the customer wants to make. The agent should present the alternatives, and explain them. Until that is done, the customer is not in a position to make a knowing choice. The agent should never preclude consideration of a possible alternative for reasons that involve only the agent–such as what the agent wants to sell, or a desire to simplify the presentation unnecessarily.
Question: What should the agent advise the client do when the insurance company sends the client a notice that the client’s universal life policy is now underfunded? Recommend reducing the face amount? Dumping in more money? Surrendering the contract? Doing a life settlement if coverage is no longer wanted or needed? Or what?
Answer: This question is more complicated than it looks at first. One reason is the Modified Endowment Contract (MEC) 7 Pay Rules. These rules restrict how much money can be paid into a policy during the first 7 years; otherwise loans and other policy distributions may be subject to income tax.
The limitation on how much money can be paid into the policy is tied to the face amount. If the face amount is lowered, the result could be that too much money would have been paid into the policy with respect to the lowered face amount. In that case the policy becomes a MEC.
I frankly am concerned that customers, who often act without an agent’s input, may lower the face amount without understanding or fully considering this result. And remember, once a policy is a MEC, it will forever be a MEC. There is no way to remove MEC status.
Similar rules govern the definition of a life insurance contract for tax purposes. Under the alternative that is most often utilized so that a policy is treated as life insurance, these rules, too, require a relationship between the face amount and the cash value. Lowering the face amount could force out cash from a policy and the cash could be subject to income tax. Insurers will automatically pay cash out of a policy to keep the policy within these rules. Insurers do not want to have policies that do not qualify as life insurance.
Depending on the contract, making additional premium payments could possibly have a similar effect as lowering the face amount. The additional premium changes the relationship of the money paid into the contract with the face amount.
In addition to these technical tax rules, all the usual considerations apply to this question. For example, should the customer reduce the face amount in view of the customer’s financial obligations? In addition to personal insurance needs, there may be insurance amounts required for business contracts or court decrees (as in a divorce).
So, here again, the agent should assist customers in making an informed decision. In essence, the agent should be sure that the appropriate questions are raised so that the customer may fully consider what to do.
Question: Is this the time to be talking with customers about entering variable universal life contracts? Or, is it irresponsible to be making such a recommendation, considering that many experts say the economy and the stock market still have jolts ahead? I ask because some companies have brought out new VULs this year, even though VUL has not been selling well, and that is making me wonder.
Answer: Another tough question. But this one does not involve the technical tax aspects of the last one. Here, suitability again is the best guide.
Some customers want to time the market. These customers may decide to embark on the VUL route any time that they think the market has hit bottom. VUL is a valid sale provided that the customer knows the alternatives, and the sale fits the customer’s goals and situation.
To be sure, for each share of stock that is being sold in the market, someone is buying it. So, there are definitely buyers out there. A VUL product may be the best choice for some clients.
The old saying, that the more things change the more they stay the same, comes to mind. A review of the questions and answers above shows that while the questions may involve different issues than in past years, the answers basically revolve around knowing what the alternatives are, and helping a customer to evaluate those alternatives. This is something that agents have always done, and the current economic situation has not changed that at all.
Douglas I. Friedman, a partner in the Friedman & Downey, P.C. law firm of Birmingham, Ala., is national counsel on estate and business planning for insurers. His e-mail is [email protected]