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How to understand (and manage) the hidden challenges of GUL

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Most people know guaranteed universal life (GUL) for its flexibility and guarantees. These features are built right into the policy and are the reason many of your clients are drawn to it. They may not know that there is a third and equally important design aspect to these products, though — risk.  

While a “risky GUL” may seem like a contradiction in terms, it’s really an industry standard. For some carriers, 30 percent or more of GUL policyholders’ premium schedules may be going off track, according to The Life Product Review. These policies run the risk of lapsing or experiencing a reduction in coverage, which could result in the policy’s beneficiaries receiving little to none of the funds originally intended for them.

When you consider that GUL accounted for more total premium in 2013 than any other type of universal life product, according to LIMRA’s “Individual Life Insurance Sales Report” for Q4, then you understand just how much of an issue this can be for you and your clients.

How risk is introduced

Think of life insurance products on a sliding scale — risk on one side, guarantees on the other — where the level of flexibility offered determines a product’s location on the scale. In this scenario, variable universal life, which offers a great deal of flexibility, would be located on the risky end, while whole life, offering very little flexibility, would be on the other.

Though guaranteed, GUL also offers flexibility in the level of death benefit and the amount and timing of premium payments. So, when you run a sales proposal for a client using a GUL product, it looks risk free. And it is – as long as the premium amount illustrated is consistently paid on time and in full. Any deviations from the original proposal will ultimately jeopardize the death benefit guarantee.

Product design is at the root of the issue

GULs earn interest on cash value, but they aren’t meant to be used as a vehicle for accumulation. The reserves backing the policy are there primarily to support the desired guarantee, so it can provide a death benefit for the intended beneficiary. When payments are late or missed there may not be enough funds left to cover the policy’s charges, potentially resulting in a need for a decreased death benefit or lapse in coverage.

Early payments can be just as problematic for your clients. This is due to the way carriers treat level-pay and single-pay policies. The interest rates assumed in pricing on level-pays can be adjusted over time, making them more competitive for clients. If a payment is received early on a level-pay, the interest rate assumed can revert to the single-pay rate, causing a potential deficit in cash value, which may also jeopardize the death benefit guarantee.

Managing the risk

The burden falls to you and your clients to ensure that GUL premiums are paid on time and in sufficient amount. To do that, you’ll need to monitor the payment history and compare it to the illustrated product. This will help you determine any potential impact on the guarantee.

Communication is key when selling and managing GUL contracts. When the contract is going off track, you’ll need to notify your client and explain the best way to get the policy’s guarantee corrected.

An easier way to manage the payments and to help mitigate the risk of a GUL policy going off track is to have the client establish an electronic funds transfer, or EFT. This will automate the premium payments and timing, reducing the burden on you and your client. As long as the account connected to the EFT remains open and funded, the policy’s premiums will be paid as illustrated.

Work with a carrier that can help you manage the risk

Another option would be to partner with a carrier that offers you and your clients tools that help to manage the risks. These tools could be as simple as periodic reviews to see if the policy is on track or advanced billing notices to serve as a reminder to your clients. Or they can be more sophisticated services, such as special handling for early payments, late payment provisions or catch-up provisions for policies that are off track.

These programs aren’t always available. So the next time you have a client considering a GUL, it’s important to check with your carrier about the programs they have to offer before the sale is complete.