Financial advisors sometimes avoid conversations with clients about life insurance because they’ve encountered agents trying to sell expensive and unnecessary policies as investments. However, advisors do need to discuss insurance to ensure clients have adequate protection against risks. You should aim to filter out the hype and misconceptions to have constructive insurance conversations focused on your clients’ real risks and needs.
So how do you have these conversations? Here are a few suggestions.
Provide Education
Here’s a simple way to explain to them the two basic types of life insurance.
Term life insurance. This provides a death benefit only and does not accumulate a cash value. The most common type is guaranteed level premium term coverage where the policy provides coverage for a fixed period of time typically ranging from 10 to 30 years with a guaranteed premium for a portion or the full period. There is also annual renewable term life insurance where the premium increases each year. Another type is decreasing term life insurance which features a decreasing death benefit and a level premium.
Permanent life insurance. This type of policy is designed to be long term coverage with a maximum age ranging from 90 to 121. Permanent life policies can provide a fixed premium or a flexible premium. They may also include a cash value. There are many types of permanent life insurance. The main types are whole life, universal life, variable life, variable universal life and equity-indexed universal life.
Life insurance can also feature a long-term care insurance rider or be combined in a linked-benefit hybrid policy with long term care insurance.
How Does the Cash Value Work?
On whole life insurance policies and other cash value policies, the cash value functions as a reserve account. As the cash value increases, the net amount at risk to the insurance company decrease. This is important because the cost of insurance increases as we age.
If the net amount at risk remains level, rather than decreasing, the annual total cost of insurance will increase each year. This can cause the policy to underperform. Policies can also underperform if earnings are lower than projected.
Permanent life insurance policies include the following components which can impact policy performance: earnings (payable as interest rates, dividends, etc.), mortality costs (cost of insurance charges) and overhead (expense) charges.
How each component functions depends on the policy type. For example, insurance companies declare dividends on participating whole life insurance policies. Meanwhile, interest rates on equity-indexed universal life policies are based on the returns of the underlying indexes.
Insurance companies can change mortality costs (the cost of insurance) at the company’s discretion. In other words, companies don’t need to disclose why they are changing mortality costs. And the bigger issue is that insurance companies also typically don’t disclose when they have changed mortality costs.
A permanent life insurance policy can underperform based on one or more of the following:
Lower than expected earnings.
Higher than expected mortality costs or cost of insurance.
Higher than projected expense charges.
With term life insurance policies, you just have to monitor if the premium increases more than expected, when the premium is not fully guaranteed.
Check the Appropriateness of an Existing Policy
Explaining how you review policies and giving your clients some tips, too, will help them understand that you have their best interests in mind.
The first step is to review the need for the policy. What is your client’s goal? Does the client still a need for the policy? Is the coverage amount still accurate?
Term Life
Reviewing a term policy is simpler than reviewing a permanent (cash value) life insurance policy.
With a level-premium term policy, check to see how many years the policyholder’s premium is guaranteed to remain the same without a rate increase. For example, on a ten-year guaranteed level premium policy, the full level-premium period would be ten years. Review whether the level-premium period is long enough to match the client’s needs. Also check to see what happens at the end of the level-premium period.
Some term life insurance policies extend beyond the level-premium period but they are usually not worth it because they are often accompanied by a significant increase in the premium or a significant reduction in the death-benefit.
Some term policies also include a conversion rider which allows the policy owner to exchange the coverage for a permanent life insurance policy. A caveat: Although the insurance company may offer several different types of permanent life insurance policies, there may only be one type available for conversions — in other words, there is no choice.
Permanent Life
Permanent (cash value) life insurance policy reviews are more complex. You’ll need to determine whether the policy will continue to maturity based on current premiums and assumptions, whether it will require additional funding, or whether the premiums can be discontinued.
The Power of In-Force Illustrations
The only way to answer these questions and to check on policy performance is with an in-force life insurance illustration.
An in-force illustration projects future performance of the policy and it is the only way to do this. In-force illustrations are based on current assumptions from the time the illustration is generated rather than the predictions at the time the policy was issued. You client will usually need to request these illustrations directly from the insurance company, although sometimes an insurance agent may provide them.
In-force Illustrations help you answer these questions:
Is the policy fully funded? In other words, will it continue to maturity (max age) with current premiums based on current assumptions?
If not fully funded, what is the premium required to fund the policy to maturity based on current assumptions?
Is the policy overfunded? This means, has the client paid in more than was required?
Can the client terminate premiums and still have the policy continue to maturity based on current assumptions?
Unless there is a significant problem with policy performance that requires a higher level of monitoring, it’s a good idea to request in-force illustrations every two to three years. Here is what to include in an in-force illustration request letter:
Attn: Policy Owner Services
[Carrier Name] and [Address]
Re: [Policy Number], [Insured Name], [Owner Name, if different than insured name]
In reference to the life insurance policy (policies) captioned above for which I am the policy owner, please provide these two in-force proposals:
Illustrate to maturity with current premiums based on current interest rate and mortality assumptions.
Illustrate to maturity the minimum premium required to endow the policy at maturity based on current interest rate and mortality assumptions.
Please also indicate the current surrender value, loan value, and the cost basis in the policy to date. Please call me if you have any questions and thank you for your prompt attention to this matter.
Note: Depending on your client’s situation, they may need additional in-force proposals.
Must-ask Questions
Are Policy Riders Still Needed?
Life insurance policies often include riders. Common riders include waiver of premium, accidental death benefit and accelerated death benefit. However, often the policy owners no longer need these riders because they no longer need the coverage they provide.
For example, policyholders usually don’t accidental-death benefit coverage if they have sufficient life insurance coverage because that life insurance will include coverage for accidental deaths. In these cases, the rider can be terminated. This can reduce the policyholder’s premium outlay because the insurance company charges an additional premium for riders.
What Are the Insurer’s Financial Strength Ratings?
Life insurance policies can stay in force for decades so it’s important to review at least every two to three years, the financial-strength ratings of the insurance companies that issue them. There are four major ratings services:
It’s important to note that insurance companies may not have ratings with all services. Each service uses its own criteria to rate insurance companies.
Are Beneficiary Designations Correct?
There are many changes to our lives over the years. This can include changes to our marital status and the birth of new children and grandchildren. Therefore, reviewing beneficiaries is an important part of a life insurance policy review.
Consider whether your clients’ current beneficiary designations are in line with their wishes and planning. Be sure to check whether the beneficiaries’ names are spelled correctly. It’s also important for your clients to name a contingent beneficiary in the event that the primary beneficiary predeceases the insured. If the primary beneficiary is a trust, this may not be necessary.
Final Words
Clients who buy a life insurance policy often think they’ve bought an investment product, but that is often not the case. Life insurance policies are insurance contracts that may have an investment component. Life insurance policies can be complex and should be reviewed on a regular basis. While a policy analysis can require technical expertise, you can help your clients spot red flags that indicate a closer look is required.
For more information and some examples of changes clients can make to their policies, see this companion article.
Maxwell Schmitz, MSFS, CLTC, is president of Yetworth Insurance Solutions, an agency that specializes in providing practical family benefits strategies in collaboration with financial advisors. Schmitz is also the CEO and co-founder of Dingo Technologies, Inc. Tony Steuer, CLU, LA, CPFFE, an internationally recognized financial preparedness advocate, award winning author and podcaster, is the founder of The Get Ready Money Club. Steuer is also an advisor at Insurance Nerds, Paperwork and Dingo Technologies.
