Few products are as misunderstood, misperceived, misrepresented and stigmatized in the minds of senior clients as life insurance. Be it a permanent or term policy, a single-premium or survivorship life product, they all come with misconceptions.
"Most of the time," says Brian Fisher, CFP, of B.E. Fisher Associates in Canonsburg, Pa., "seniors don't realize [two things]: they can use it and they can actually get it."
When purchasing some form of life insurance for a senior client is not only warranted but practical and financially manageable, often one of the biggest challenges for advisors is bridging the gap between (mis)perception and reality – coaxing a client to overcome his inaccurate preconceived notions of a product. Below are some of the most common myths and misconceptions senior clients harbor about life insurance in general and specific life insurance products in particular, with suggestions on how to set the record straight so you can focus on taking care of the business at hand: building an insurance portfolio that will work in the client's best interests
The myth: There's no way to guarantee the insurance company will maintain premiums or pay the death benefit.
Debunking the myth: More than anything, many seniors want certainty. That's exactly what they get with some of the optional secondary no-lapse premium guarantees now offered with many permanent insurance products. Typically used with universal life policies, the NLPG guarantees premiums will remain at or below a certain level for the life of a policy and that the death benefit will be paid until the policyholder reaches a specified age (usually 100) as long as the specified premium is paid for a required period of time. An NLPG rider isn't free, but when peace of mind is a high priority, it's worth the investment, says Ben Baldwin of Baldwin Financial Systems in Arlington Heights, Ill., in light of prevailing premium uncertainty and questions about some carriers' wherewithal to meet their obligations under older UL policies initiated in the 1980s, when double-digit returns were the norm.
The myth: My heirs will be better served later if I don't spend money now on a life insurance policy.
Debunking the myth: Simple illustrations, according to Fisher, are usually all it takes to get the client to see the advantages life insurance offers when the goal is preserving a financial legacy. Here's where the advisor can highlight how permanent insurance can protect assets from taxation when they pass from one generation to the next and how it uses discounted dollars (often within the framework of a life insurance trust) to ensure heirs have enough liquidity to cover estate taxes without depleting the estate.
"Show them a comparison of what their estate might look like in Scenario A, if they spend it down without a life insurance component, and Scenario B, where they have a life insurance policy as part of an estate plan. Once you show them the two scenarios, they can see what they pass through to heirs will be much larger and the tax consequences will be much less."
The myth: An insurance policy is basically self-sustaining. There's no reason to periodically revisit it or consider tweaking my insurance portfolio.
Debunking the myth: Seniors who assume their UL policies are rock solid and self-sustaining as long as they stick to paying the original premium are in for a surprise, Baldwin says. Just ask the folks who purchased an early-generation UL policy that delivered double-digit returns, then some years later discovered their policies had become virtually worthless because they failed to keep up with the increasing premiums the carrier found it necessary to collect to keep their books of UL business from exploding in their faces. Since returns and premiums both can fluctuate, it's wise for the advisor to underscore to the client the importance of periodically reopening one's insurance portfolio for review. "It's important the advisor helps them understand how fragile these contracts can be," Baldwin asserts.
The myth: No need to pay high premiums for permanent life insurance when I can get a term life policy much cheaper.
Debunking the myth: When it comes to life insurance, it's crucial for clients to understand they get what they pay for. "You find people who never buy the cheapest boat or the cheapest house, but for some reason they can't justify buying anything but the cheapest kind of life insurance," Baldwin says. Here's where a simple lesson in the distinctions between permanent and term insurance is timely and usually quite effective, he says. The proposition is simple: If you have a permanent need for a death benefit, you have a need for permanent insurance. Once they understand that and once they hear about such features as on-demand access to cash value accumulations, adjustability of death benefit and premium, the ability to pass on proceeds tax-free to beneficiaries and build cash value on a tax-deferred basis, the idea of purchasing term life usually comes off the table.
