What kind of death benefit guarantee period is right for the client? That question comes up after advisor and client have decided that universal life best suits the financial security need.
Reaching an answer requires honest dialogue about the options, risks and benefits involved.
Recall that death benefit guarantees out to age 121 have, based on actuarial tables, been accepted as the UL industry norm. But this has occurred with little real discussion as to whether or not this makes sense in a “real world” application. Rethinking this approach is needed, with focus on providing competitive pricing to death benefit guarantee ages, such as 105 or 110, that address more realistic life expectancies.
Brokers may be tempted to discuss life expectancy tables with the client, but these tables may not be relevant. Life expectancy tables provided by the Centers for Disease Control are averages. The table most often cited shows average life expectancy for people from birth. Others show average life expectancy for people who are currently a specific age. Whatever table is used, it only estimates the average lifespan for a large group of people. Because life expectancies are averages, they are not predictive of individual life expectancy.
Some advisors may pay to have an independent underwriting firm evaluate a client’s life expectancy. This practice is common in the life settlement and premium-financing arenas. While often useful, this exercise doesn’t provide a precise life expectancy. The life expectancy derived will still be an average for like people with similar health histories and backgrounds. Even with full underwriting, a person’s actual life span cannot be determined.
Brokers may assume that a lifetime death benefit guarantee period is the only option. In fact, fully 20% of independent producers responding to a June 2009 blind survey by Genworth Financial indicated they were unaware that the death benefit guarantee period could be offered for shorter periods than lifetime.
Some brokers may automatically ask for a specific death benefit guarantee period before fully understanding the client’s need, the potential value, and the potential risk associated with shorter duration guarantees.
The choice of death benefit guarantee period is an individual decision that only the applicant can make. But agents and brokers can assist in the selection in several ways, as follows:
1. Review how long the client realistically needs the coverage.
Will the need for the coverage continue indefinitely? For example, if the insured outlives the beneficiary–such as the spouse–will the coverage still be needed? If the reason the client is buying the coverage is to benefit a surviving spouse, then estimate the longevity of the spouse. If the client wants to care for another generation, coverage must last as long as the insured lives.
2. Consider the client’s budget.
The shorter the death benefit guarantee period, the more death benefit the client can buy for the same premium dollar. Conversely, for the same death benefit, it will cost the client less to buy a policy with a shorter death benefit guarantee period.
Agents and brokers will want to conduct for the client a cost benefit analysis based on premium amount, length of guarantee, and the death benefit amount. The determining factor is the length of the guarantee. Ask: Is the client willing to take some risk to buy more death benefit for the dollar with the understanding that, if he or she survives the guarantee period and still needs coverage, it could be extremely costly to extend the guarantee at that time?
3. Discuss lifespan expectations of the client and these longevity factors:
o Current health. This includes height, weight and any conditions that may impact longevity. If there is a chronic condition that will impact longevity, such as heart disease or history of cancer, is it even realistic for the person to think in terms of buying a guarantee that lasts a “lifetime” (to age 121, as noted above)?
o Lifestyle. This refers to “controllable” risk factors such as drinking and smoking and higher risk activities like scuba diving that contribute to a shorter lifespan.
o Family history of health conditions or premature death. Of course, there is a correlation between family longevity and how long the client is going to live, so how good are those genes?
Determining the length of the death benefit guarantee does require thoughtful dialogue and consideration. Agents will be able to differentiate themselves by focusing on understanding the client’s individual needs, expectations and circumstances and then effectively evaluating how different guarantee periods can deliver greater value to the client.
Chris Grady is president of Distribution & Marketing for U.S. Life Insurance at Genworth Financial, Richmond, Va. His email address is [email protected].