The Life Insurance Conversation™
Discussing life insurance is unlike any other insurance conversation because death is not an if. There are three fundamental fears that permeate society – dying early, living too long or getting sick along the way. Today’s permanent life insurance can help with all three when properly funded and designed with a long-term care rider.
Focus & Flavors
Many insurance companies push products that place most of the risk on the client. They have you focus on the “engine”, not the “chassis”. When designing permanent life insurance for a client, start with one essential question: “Do you want projections or guarantees?”.
If your client chooses a projected design, use conservative projections and certainly monitor the policy regularly. If they prefer guarantees, select a chassis that provides contractual guarantees.
Illustrations v. Reality
Illustrations for projected policies can be misleading. They often assume consistent compounding returns—but real-world performance varies. Indexed Universal Life (IUL) will have some zero-crediting years and Variable Universal Life (VUL) will have negative returns when markets decline. IUL cash value can decrease when the market is flat or negative as charges continue to be taken from the cash value. Few carriers provide software allowing you to adjust rates of return over time. Agents relying on cash value for supplemental retirement income may be subjecting their clients to a false sense of security.
A Different View
We modeled both IUL and VUL policies using a heavy-funding, retirement-income design. Our assumptions included a (1) zero return every fifth year for the IUL and (2) a 10% loss every 5th year for the VUL (both through policy year 20). The bottom line is the plans showed risk of derailing. If coverage lapses before death, those “tax-free” policy loans can become a retroactive tax nightmare.
On the VUL example, the projected income may need to stop by age 77 and unless you have an over-loan protection rider it will cause taxation on the gains if the policy lapses.