Is Your Client’s Life Insurance COI’s Changing? Guaranteed versus Non Guaranteed – Do your clients know the difference?

By Tammie Smith, President of BDLife212

There was a time when life insurance was simple….

As long as you paid the premiums on time you were assured your beneficiary would receive the death benefit. As markets change and clients interests change, life insurance products also change.  Life insurance companies, in order to compete with client interests, designed more advanced products which allowed the insured to benefit from the competition of market ups and downs. These newly designed products allowed for a greater ability to provide more benefits but these benefits also came with a risk.  These newly advanced products, if funded correctly and reviewed annually were designed to allow the insured to take on more risk for a greater reward of additional features and performance.

Keeping up with market changes and client interests….

Post 1980: Era of Universal Life 

Evolution of Universal Life

•1979 - 1990  Fixed Interest Universal Life 

•1989 - 2008  Variable Universal Life 

•2005 - 2013 Guaranteed Universal Life 

•2005 - 2016 Index Universal Life  

These new designs included a need to focus on multiple moving parts within a product. Guaranteed and non-guaranteed features, flexible rates and flexible costs became a great part of these new designs. As carriers launched this new product type and design, the discussions and company material focused on the ability of obtaining greater interest rates at current costs (all non-guaranteed) of which looked very appealing to clients. The challenge with these additional features is that the illustration used to explain the product and the ability of future performance illustrated this greater interest rate and current cost as a constant throughout the life of the policy. So as interest rates rise and fall and current costs rise and fall the illustration was no longer valid as a way to determine how the policy is to perform in the future. Hence the reason why an annual policy audit is critical to assuring the policy will continue to be there when most needed.

Declining interest rates……

During the time when these new products were introduced the interest rates were being illustrated at rates (non-guaranteed) that were competitive to the current times along side the guaranteed rates which illustrated the minimum rates that could be credited. Should the carrier choose to reduce the interest within the life of the policy due to interest rate market conditions will change the performance of the existing policy. The spread between the current credited interest and the guarantee interest before 2000 seemed incredibly wide and almost seemed impossible to consider.

Increasing Mortality Costs…

As time moves forward in a life policy the mortality costs within a policy are designed to increase resulting in greater charges later in the policy design. This design is intentional because as premiums are paid and anticipated interest rates are realized the policy begins to accumulate excess cash (aka cash value) to meet the additional charges later in the policy’s lifespan. But when increasing mortality costs are met with declining interest rates the cross over in performance occurs much sooner than anticipated and results in the need for more premiums to be paid to fill in the gap.

Cost of Insurance Charges……

And then there are the cost of insurance charges within a policy that make up the operating costs of selling insurance, investing premiums and paying claims. These costs also have a guaranteed and a non guaranteed charge and can be adjusted should the carrier find the need to increase or decrease those charges but they are not allowed to increase these charges beyond the maximum charges aka the guaranteed charges and when changed will affect the performance of the policy.

Annual Policy Audits….

If managed timely and effectively these policies can most times be adjusted to sustain all these different charges and interest rate fluctuations. But if you find that a policy has not been reviewed regularly and adjustments have not been made to keep up with the changing market conditions than there still may be hope….

Options available may include:

* Reducing the face amount which will lower the cost of insurance.

* If medically fit, exchange the policy for a new lower cost, greater 
  death benefit and/or greater guarantees and possibly add living benefits
  if needed. Note: Living benefits can only be added at the time an policy 
  is issued.

* If not medically fit, consider selling the policy, aka life settlement, 
  but this option should be a last resort option and should be dealt with 
  caution as tax consequences may be involved and the money received for a 
  life settlement may create a situation where medicaid may not be available.

Taking time to help your client understand that Life Insurance, Long Term Care and Disability policies are living documents and should be reviewed regularly will enhance the respect and importance of financial planning, build stronger and sustainable relationships and build quality referrals.

Time Management and Due Diligence…..

If you find you are pressed for time and unable to perform timely policy audits and need the support of an insurance specialist – we at BDLife212, LLC are qualified to help. Our expertise includes over 30 years of life insurance experience offering Independent Advisers with education and support in life insurance, long term care and disability designs that meet the needs of their clients each and every year. Our “Policy Performance Analysis Summaries” consist of client education in reference to what the insured currently owns, how the policy is currently performing and how the policy is anticipated to perform in the future. In this analysis we also provide any current due diligence information necessary on the carrier if applicable. We also educate on what is currently in the open market to assure the policy currently held is offering the best benefits to meet current and future needs of your client while minimizing premiums paid.

If we can be of assistance, we can be reached at where we would be happy to follow up with a phone consultation to determine if this type of service is beneficial to your client relationships and business growth.

Our focus and mission at BD Life 212 is to design case strategies that provide solutions that have the clients asking themselves “why wouldn’t I do this?” versus “why should I do this?”!  

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