Does your client have the right type of life insurance?

Preferences, prejudices and priorities

The selection of a particular type of life insurance policy or policy mix is to a great extent a very personal decision. Just as some individuals prefer, by psychological nature, to lease an automobile or rent an apartment, others prefer to make their purchases with a minimum down payment and stretch out the length of payments as long as possible, while others prefer to make a relatively large down payment and to pay off the loan or mortgage as quickly as possible. Too many clients there is emotional comfort in "owning," while others feel that owning ties them down and restricts their freedom of choice and flexibility.

Although this "preference/priority"-based decision making is not necessarily the most logical, it is a strong and important process that requires the planner to take into consideration the client's psychological makeup. The rules of thumb here are as follows:

1. Buy term if the client has a high risk-taking propensity.
2. Buy term if the client has a "lease rather than own" preference.
3. Buy some type of whole life insurance if the client has an "own rather than loan" type personality.
4. Buy some type of whole life insurance if the client wants something to show for his money at any given point. The more important it is for the client to have cash values and dividends at any given point, the more whole life type coverage is indicated.
5. Buy a mix of term and whole life if the client is—like most clients—not solidly on one end of the spectrum or the other.

What's the amount of insurance needed?

When the amount of insurance needed is so great (as it often is for families with young children or for couples with high living standards relative to their incomes) that only term insurance or a term/whole life combination is feasible, the need for death protection should be given first priority. This results in simple rules of thumb:

1. Buy term insurance when there is no way to satisfy the death need without it. The term insurance can be converted to another form of protection at a later date, if and when appropriate.
2. Buy a combination of term and permanent insurance when the client can cover the entire death need and is able and willing to allocate additional dollars to appropriate permanent coverage.

Keep in mind, however, that buying term insurance means paying ever-increasing premiums for a constant amount of coverage. People with little prospect of increasing their income sufficiently to pay ever-increasing term premiums face a difficult trade-off. They can buy term insurance for the amount of coverage they think they currently need, and face the prospect of being unable to afford that coverage in the future. Or they can purchase as much permanent insurance (e.g., level-premium whole life) as they can afford and be relatively assured that they can maintain the coverage for the long term, but have less coverage than they think they need.

4 reasons why your clients need IUL

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What are a policyholder's cash flow considerations?

There are a large number of premium payment configurations that provide considerable flexibility for policyowners. Some clients will prefer to fully prepay for their coverage and take advantage of the tax-deferred internal buildup of investment return. This limits the total amount of premium that they will pay, even if the insureds live well beyond life expectancy. Other clients will be more comfortable with the payment of premiums at regular intervals for a fixed period or for the life of the insured (or for the working life of the insured). This "installment" purchase of life insurance is most beneficial to the policyowners who die shortly after they purchase the policies, because they would pay a much lower total premium before their deaths.

Conceptually, the insurance company itself is indifferent to the premium payment method selected; all of these patterns of payment, if applied to the same level of death benefit and continued for the same duration of time, will have the same actuarial value. So clients' abilities to pay and their preferences are the major factors in the decision. The rules of thumb are as follows:

1. Prepay coverage (buy vanishing premium or limited payment whole life permanent insurance) if the client expects to live longer than average.
2. Pay on the installment basis (purchase term or low outlay whole life coverage) if the client thinks he or she faces a greater than average mortality risk.
3. Purchase yearly renewable term (YRT) or shorter term insurance (e.g., five-year term) if the client wants or needs to pay absolutely minimal initial premiums, but is willing to pay increasingly larger premiums each consecutive year (or at each renewal date) to keep the same level of coverage in force.

What is the duration of need?

In many cases, the planner's decision must be dictated at least in part by how long the need is expected to last. Some rules of thumb here are:

1. Buy term insurance if the need will probably last for ten years or less.
2. Buy term and/or whole life if the need will probably last for ten to fifteen years.
3. Buy some type of whole life coverage if the need will probably last for fifteen years or longer.
4. Buy some type of whole life coverage if the policy will probably be continued up to or beyond age fifty-five.
5. uy some type of whole life coverage if the policy is purchased to solve a buy-sell need.
6. Buy some type of whole life coverage if the policy is designed to pay death taxes, or to transfer capital efficiently from one generation to another, or to replace capital given to charity or otherwise diverted from the client's intended beneficiaries.