Life insurance producers gravitate toward guaranteed universal life (GUL) contracts because of their simplicity.
To put it bluntly, these products are a known commodity that doesn’t cause problems and are easy to explain to consumers.
At the end of the day, if the client pays the premiums exactly as illustrated, that’s all it takes. There won’t be any surprises, and crediting rates don’t impact the death benefit.
End of story? Not quite.
What happens during policy audits and review conversations? During these meetings, it’s not unusual for clients to report that their situation has changed and they subsequently need more flexibility to:
- Reduce the death benefit
- Skip premiums
- Pay less than illustrated, or
- Change the duration of payments
When clients express such concerns, an advisor may say: “I understand how you feel, but that’s not possible with your present policy.”
But that’s still not the end of the story. With so many offerings from insurance carriers, it’s not necessary for clients to forfeit guarantees to gain the flexibility they’re looking for.
Although it’s always good to know that advisors are taking time to ensure that their clients’ policies are performing in light of their needs, it can be helpful to know why some plans are better than others. In other words, why the details are important.
We’ve all heard the reasons or excuses for a policyholder not making payments, but what happens to the policy? The ability to skip a premium (without making it up) depends on a number of factors. At the top of the list is the timing of the missed premium. When a premium is missed, the reduction in coverage duration can vary drastically.
Consider this: In a sample study for a male, age 55, skipping a premium in year six, some policies maintained coverage past age 100, while others lapsed as early as year seven.
Today, there’s simply no single product that will perform best in every situation. To avoid problems at some later date, it’s important for advisors to have a detailed discussion with clients regarding their objectives, possible future needs, and what could change going forward.
Keep reading to find out three essential considerations when evaluating GUL plans…
1. Return of Premiums feature
Does the plan provide for an exit strategy, or a way for the client to recoup premiums paid should their situation change? Many products offer a full return of premiums paid at year 15, 20 or 25.
See also: Adjustable life insurance: Pros and cons
2. Ability to reduce the death benefit
How early can a client contractually reduce the death benefit? Some policies allow the death benefit to be reduced as early as year two. However, the savings are not always proportionate to the reduction. With one major life company, for example, a male, age 59, Standard Non Smoker, would have a cost of about $15,000 for $1 million of coverage. The policy could be decreased in year three to $500,000, but the premium is reduced to only around $13,000. At the same time, there are other carriers that would reduce premium by close to 50 percent.
3. Skip premiums or stress test
Most advisors know that clients miss making premium payments. Some simply forget or the pay it late, but outside the “grace period.” Others may not have the ability to pay or a trustee’s office moved and didn’t get the bill.
By properly structuring their clients’ life insurance portfolios, advisors can help them take care of both their current needs as well as those that will present themselves sometime in the future.
See also: Premium financing is dead. Or is it?
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