When I think of the life insurance discourse, I think of the days when there were essentially only two types of permanent life insurance products on the playing field. One was whole life (WL), often mixed with term insurance in something creatively described as a “whole life/term mix”. The other was the actual universal life (UL) assumption, which could sometimes be mixed up. These days, the playing field is more crowded, with guaranteed universal life, variable universal life, guaranteed variable universal life, indexed universal life and private placement universal variable life. This does not begin to consider all the structural variations in the themes of these products that begin to blur the lines of demarcation between them. I, for one, cannot tell the players without the program.
I then wonder how today's life insurance agents can arrive at a safe and secure recommendation for a product type. In “How agents can protect themselves while protecting others,” I suggested a structured approach to arriving at such a recommendation. The approach is based on matching the prospect profile and intended use of the policy with the functional characteristics of the product. But until now, space prevented me from looking at some of those functional features as closely as I'd like.
Functional Characteristics
In this and subsequent articles, I will talk about such functional features as premium flexibility, guarantees, efficient accumulation and distribution of cash, investment approach, and flexibility and intensity of service, which may ultimately prove to be the most important. of all these characteristics for both policemen. and agents. For good measure, I'll also talk about diversifying a client's life insurance portfolio across carriers and products. Indeed, that kind of diversification could benefit both the policyholder and the agent.
This non-exclusive list of features is based on my experience as an advisor, underwriter and dedicated follower of today's life insurance discourse. I will address each characteristic separately. But in real time, meaning the way agents have to connect them to prospects, these functional features are more like concentric circles than related, unrelated topics.
To be perfectly clear, I'm not judging the products themselves, nor am I favoring any particular form of feature packaging. To borrow a term from the Protect article, I am product agnostic.
Premium Flexibility
Premium flexibility depends on who sets the premium: the carrier or the customer. As will be the case with all functional characteristics, such disaggregated openness underestimates the complexity and nuance that often boils down to controversies between agents. But I have to keep things simple to make my point, which I will try to make by contrasting two products.
WL
With traditional participating WL, for example, the carrier sets the base premium for the stated death benefit amount and guarantees that as long as the premium is faithfully paid, the policy will support that death benefit until the policy matures at, say, age 100 or 121 years The policy will also provide a certain cash value in each policy year. And, the policy will yield, meaning the cash value will be equal to the initial death benefit, say, at age 100. The guarantees do not assume dividends, which are not themselves guaranteed. I use the term “base premium” because, in real time, the policy can be designed to include various mechanisms that allow the policyholder to supplement the base premium by putting in more money as needed for the policy's intended use.
The policyholder has no choice as to the amount of the base premium or the ultimate slippage path of the policy, although dividends should ultimately provide some useful options in this regard, as discussed in “A boomer at the crossroads of a vintage policy.” In Albanian, this is more colloquial than actuarial, the WL policy is paid to the consumer with the guarantees, but the policyholder hopes that the (non-guaranteed) dividends will effectively reduce that price to reflect the operator's actual experience.
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With UL, on the other hand, the carrier basically tells the policyholder something like, “Tell us at what age you want to support the death benefit and under what assumptions about the interest credited, insurance costs and expenses, and how how long you want to pay premiums, and we'll tell you the premium you need today to achieve that result.Remember we'll need another conversation if your guesses don't pan out or if you change the 'specs'.
The point is that UL essentially allows the policyholder to determine the premium and slippage path of the policy initially, albeit within certain guidelines beyond the scope of this article. It also allows them to reset the premium path and slider to fit changing needs, circumstances, and updated thinking about those assumptions. This flexibility allows the policyholder to effectively shorten or extend the duration of the death benefit or “overfund” the policy to accumulate cash, all without underwriting. Even if economic conditions or carrier practice ultimately require a mid-course correction, reading increase, of the scheduled premium to support the death benefit up to the target age, it is the policyholder's choice how to respond.
Again, roughly speaking, UL allows the policyholder to purchase coverage at the price of the operator's current experience and hope against hope that the operator's experience does not deteriorate enough to push that price back toward the warranties.
The value of flexibility
If you don't think the kind of flexibility offered by UL (or other really flexible premium products) is important to some customers, ask those who want to buy a permanent policy to protect their insurance, but start with a fairly high premium minimum and increase it gradually with the increase of their compensation, without proof of insurance. Or ask the 62-year-old with a health problem who wants to put more money into his current policy but can't because the premium was the premium was the premium. Or, consider the customer who, having “downsized,” asks the carrier if he can take a breath of some or all of the premium without somehow damaging the policy, only to be asked dismissively, “Which part of the “No “You don't? Do you understand?” Or the policyholder who wants to “roll up” the premium gifts in their irrevocable life insurance trust (ILIT) to buy some time and save substantial gifts or taxable credits while funding the ILIT with property that produces income that will ultimately enable the ILIT to handle the total premium with its own cash flow.The point is that in any client environment, the ability to determine the policy's course at the outset and then change it may be considerable value. But there is more to the story.
Remarks Apply
Premium flexibility is not for every policyholder. That's because a downside of premium flexibility is, well, premium flexibility. If the policyholder does not pay the WL premium, the policy loan will pay it, meaning there is an immediate real-time consequence of not paying the premium. But if the customer does not pay the scheduled UL premium, the result is less real-time than in the past, because it may take years to know whether the skipped premium has deprived the policy of the funds needed to support the death benefit for the duration of intended. To be clear, skipping a required or necessary premium for either type of policy can be the tipping point that will cause trouble down the road. But while the omission of a WL premium sets off a sharp alarm, the alarm in the UL policy is muted, at least early on. Indeed, for many UL policyholders, the alarm is no longer silent, thanks to falling interest rates and, in some cases, rising insurance costs. This is all part of how and why other functional characteristics, such as service intensity, overlap. Thomas Jefferson's life insurance agent may have expressed it in terms of the need for lifelong vigilance.
After all, premium flexibility may be exactly what one wants as a fundamental feature of their life insurance program. On the other hand, I've heard clients say, “The last thing I need to do is buy a policy that doesn't ask for a certain premium at a certain time because, well, you know…” A perspective of certain may consider a policy that offers much safer premium flexibility in the long run than one that does not or vice versa. The same may be true for other features, such as guarantees and investment flexibility, which are the subject of future articles.
More to come
Premium flexibility is just the first of many features the agent must explain, contextualize, and then incorporate into the final recommendation presented to the prospect and, quite often, their advisor. This may be Life Insurance 101 for agents, but it is advanced placement material for most clients and advisors. This is why the agent should cover the topic in a multimedia way, that is, with prose and illustrations. A small contribution to this effort is the agent presentation model in “A Conversation about Life Insurance Products for the Simply Rich.“
And this brings us to guarantees, which will be the subject of the next article.