Life insurance is a promise that must be kept. The essence of life insurance is that it's not a gamble or wager. It's a guarantee, as opposed to other investments that cannot provide that certainty.
This is why an essential part of any life insurance plan is to make sure it lasts. Every insurance professional should have a plan in place to ensure that the policy does not fail or lapse. This not only requires careful pre-planning but also involves regular follow-up and monitoring after the sale.
Follow-up after the sale is good business. It shows you still care and value the client even after you've made the sale. That says a lot about you, as opposed to someone who makes the sale and you never hear from them again.
I have had many clients over the years who cannot remember the name of their insurance agent because they haven't seen or heard from him or her since they bought the policy. If anything, you want them to know who you are when that policy, the plan you created, pays off.
Pre-planning
What can you do in pre-planning mode to make sure that the life insurance policy will not fail?
Term Policies
Term life insurance, by definition, is meant to expire after the term. However, term insurance can made renewable and convertible to provide protection against the risk of uninsurability. That is one way a policy can fail, if it cannot be renewed.
Even if term insurance can be renewed, the premium can increase due to age. If those premiums get too high, the client may not be able to make payments and the policy will expire. That is not good for anyone.
This is a conversation you should have before sale. The client needs to understand this.
Explain the options and document that conversation to avoid surprises later on. You might suggest level premiums over the term and the ability to convert the policy to permanent insurance without a new medical exam.
Always follow-up after the sale to stay in communication with the client regarding the status of a policy. You'll also find that in some cases, this leads to new life insurance sales for clients who want to upgrade their policies or switch to permanent insurance.
Permanent policies
Poorly structured policies or increasing premiums that are no longer affordable can cause even a permanent policy to lapse, resulting in the loss of the life insurance protection. For the client, a lapsed policy can be a devastating shock and be viewed as a broken promise. That is why the policy has to planned and explained during the pre-planning process — before the sale is made.
Work with your client to create a plan that will hold up for life, or close to it. For example, clients need to know up front that permanent insurance is a long-term commitment and must be maintained or the death benefit will be lost.
If the client cannot commit to funding the policy for life, then look into premiums paid over a term, for example, a 10-year pay policy. The premiums last for 10 years and the insurance is there for life without any additional premium payments.
This is perfect for a client who will have good current earnings for the next 10 years. Then in retirement, the insurance stays in effect and the cash value grows without making additional premium payments.
Yes, this costs more, but after that 10–year term, you will have a very happy client who will know that the promise will be kept, not to mention cash value in the policy that can be a source of retirement income.
Another idea is to structure level payments so that premiums cannot increase, as opposed to flexible payments. No one likes premium increases, especially as they age and tend to worry more about running out of money.
If clients cannot afford the payments, work out a plan they can reasonably stick to. They might have to go with less life insurance, but less insurance is better than no insurance.
Funding for the policy should also be planned ahead of time. One way to do this is to use existing client funds, if available. Use other less productive investments, including non-performing stocks and funds that might generate losses when sold, and even IRAs.
Yes, there would be a tax from an IRA distribution, but that tax will have to be paid anyway and possibly at higher rates, especially if the IRA balance grows.
