Projections or guarantees?
Life insurance is not the commodity many believe it to be. There are many differences between carriers and products. If your client is shopping on price alone it might be a mistake they pay dearly for down the road.
When designing permanent insurance for a client, start with this question: Do you want “projected” insurance or “guaranteed” insurance? There used to be only two types of coverage – term and whole life. Term is for temporary coverage and will end or become prohibitively expensive the longer you hold it. Whole life is guaranteed for life. In the 80’s we were introduced to universal life (UL) which can be projected or guaranteed. UL can offer fixed rates, market returns or indexed crediting to grow cash value. Today, the most sold UL structure is indexed universal life. Universal life works under the assumption that if there is cash in the policy it will last. If not, then you need to fund more, or it will lapse.
UL diagram
Illustration Concerns
The problem with indexed and variable universal life illustrations is that they project the same rate of return each year, which is not reality. Variable life will have losses and higher than shown return years. Indexed life can’t lose principal, but there will be zero or lower than projected return years which will affect the actual performance of the policy in the long run. A few carriers allow you to illustrate varying returns or zero return years, which reflects a more realistic outcome of indexed universal life. Below we share a comparison of fixed rate projections vs a zero return every 5 years. Variable life could be worse with lower returns or large loss years.
IUL Projection Comparison
How life insurance works
Life insurance is all math based on 3 variables: interest, expenses, and mortality. With a non-guaranteed structure, the client holds all three risks: premium payment, performance, and mortality. In many situations the biggest risk is likely mortality. If a carrier increases mortality rates significantly, you may not be able to fund the policy enough to stay in force until you die. Even if you can properly fund it, it may not make economic sense to do so.
Both individual and group life carriers had up to 25% higher mortality rates in recent years. This doesn’t necessarily mean carriers will make policy cost of insurance increases as they also have rapidly rising interest rates to help offset these losses. The larger concern for UL policies will be at older ages. If a carrier didn’t price their products properly, they will adjust, and your client may struggle to keep their coverage in force. Some may regret they didn’t purchase a guaranteed policy. Launch the below link to learn more about recent mortality losses.
ALIRT Report
Posted in Uncategorized