Reviewing a client's or prospect's life insurance coverage needs might seem straightforward.
But too often, agents and advisors overlook critical questions that can result in a poor product recommendation — one that fails to meet income replacement, living benefit, wealth transfer or other planning needs.
To get better acquainted with policy review issues, LifeHealthPro interviewed Palmer Williams, a national sales director at Saybrus Partners, a provider of insurance and annuities solutions. The conversation explored issues germane to determining the appropriate policy size and type. Among them:
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- Client goals and objectives;
- Policy risks connected with increasing life expectancies;
- Scenarios suitable for permanent insurance and life settlements;
- The value of hybrid products boasting long-term care; and
- Chronic illness riders.
Keep reading for interview excerpts…
LHP: What are the top issues advisors should explore in policy reviews with clients and prospects?
Williams: Advisors should use these conversations to make sure that clients have the right amount and right type of life insurance. LIMRA states that less than 6 in 10 individuals own life insurance. They note also that half of all households would feel the impact of the loss of a primary wage-earner within a year of his or her passing. Many individuals may not have enough life insurance to be able to meet and accomplish their goals for their family.
There are 5 parts of a policy review discussion:
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Ascertaining clients' goals and objectives;
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Determining the right amount coverage;
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Identifying the right type or types of life insurance;
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Evaluating existing life insurance through a stress test; and
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Exploring whether a new policy would be appropriate.
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As to the first, advisors need to consider how clients' financial situation has changed since they last obtained a life insurance policy — assuming they have one. They should determine whether they're insurable and, if so, at what premium level. Also, (they should consider) life events, such as the birth of a child, that might affect the amount of life coverage required.
In respect to the amount of coverage, many insurers and distribution partners now offer producers tools to do an income replacement needs analysis, including expenses to be paid for in the event of a primary wager-earner's death. In other cases — funding a buy-sell agreement between business owners or equalizing an estate among heirs — a different analysis can used to ascertain the appropriate face amount.
For many of those in the middle market, term life insurance will be the appropriate solution. In situations where the client desires to pass on assets to the next generation, permanent life has a role to play. Often, too, a blend of term and permanent insurance will be needed to adequately cover both income replacement and wealth transfer objectives.
LHP: For what other purposes might a middle class household favor permanent insurance?
Williams: Many permanent life insurance policies now can be offered with an optional rider to cover long-term care or chronic illness expenses. The policy's cash value can also provide supplemental retirement income on a tax-advantaged basis.
But for this purpose, you'd want a high cash value policy funded with the maximum-allowed premiums — just below the point where the life insurance would, for IRS purposes, be deemed a fully taxable modified endowment or MEC. These policies make sense for more affluent clients who have maxed out on contributions to a 401(k) and individual retirement accounts and need an additional vehicle for investing supplemental savings on a tax-advantaged basis.
As to the type of permanent policy — whole life, universal, indexed UL or variable universal life — the advisor will have to gauge the client's risk tolerance level. For those not comfortable with stock market volatility, VUL likely won't be appropriate.
LHP: Tell me about the stress test for existing life insurance coverage. What's involved?
Williams: The advisor should examine a policy's existing terms and conditions and an in-force illustration: a snapshot in time showing how the policy has performed since it was purchased and projecting how it will perform in the future. Two parts of the stress don't always get much attention: (1) the beneficiary designations; and (2) contract provisions respecting the death benefit and cash value at the time the policy endows.
