An expert look at UL in all its forms and fashions: when a universal life product makes sense, how to explain UL to clients, and recent product innovations are among the topics covered by our esteemed panel, which this month includes the current and immediate past presidents of MDRT.
It seems funny to me to now to be discussing "traditional" universal life, but in light of the passage of time and the introduction of many new varieties of universal life, that is an entirely accurate way to describe those products that still closely reflect the original UL model. But there are many variations now from which producers can choose to fill their client's needs, and it's the large and growing spectrum of today's UL that we asked our producer panel to comment on this month.
To learn more about how producers are operating in the UL market, we turned to the following top producers for feedback: Guy E. Baker, MSFS, CLU; Keith Eck, CLU, ChFC; and Julian H. Good Jr., CLU, ChFC.
Charles K. Hirsch, CLU: As you look at the current "state of the art" of the universal life market, is there any one thing that strikes you as particularly innovative or noteworthy about today's products? And continuing along those lines, which of the array of UL products--indexed universal life, variable universal life, "traditional" universal life, etc.--seems to best fit your own clients and why?
Guy E. Baker, MSFS, CLU: There are two innovations that I find particularly valuable--one is the no-lapse guarantee and the other is the indexed crediting method. One of my biggest concerns about UL has been how easy it is to fall behind the funding targets. The benefit of UL is the flexibility. But that is also the negative. It is easy to avoid paying the premium when things get tight. That poses the problem of having to make up the shortfalls, which ultimately puts the policy in jeopardy if the client fails to do so.
The indexed approach is a great hybrid between variable and traditional. It gives the policyholder the benefit of equity returns without the risk. With interest rates so low, the traditional products are not able to provide significant wealth accumulation benefits. The indexed product, even with the horrible economy we have faced for the past 10 years, has still earned upwards of 8%. This return makes insurance a very viable financial tool for a myriad of uses.
Keith Eck, CLU, ChFC: As I look at the current "state of the art" universal life policies, the one contract that strikes me as particularly innovative and noteworthy currently is a variable universal life policy with an indexed equity option and investment option. This contract enables the insured to allocate money into mutual funds, equity index, or to mix and match the allocation. I believe the ability to allocate monies to the equity indexed option become more valuable when the policy is used for supplementary retirement benefits and the insured takes distributions from the policies during his or her retirement years. If we compare the past 20 years, an insured taking distributions from a policy with an equity indexed option that has a limited downside--no more than 0%--with a policy that uses mutual funds as an option, there is a significant difference. The client with the mutual fund option would have experienced substantial losses in multiple years, while the client using the equity indexed option is the clear winner as far as preserving principal and allowing for more distributions from the universal life contract.
Another product that I think is innovative is an equity indexed product, either individual or survivorship, that has a no-lapse guarantee and the flexibility so that if the insured's goals and objectives change, he or she has the ability to switch the life insurance policy from estate liquidity needs to an accumulation vehicle. It allows for insureds to adjust their life insurance contract based on their changing estate planning goals and objectives.
Julian H. Good Jr., CLU, ChFC: I personally don't sell variable universal life and never have, as I don't like the risk factors involved. Traditional universal life and universal life with secondary death benefit guarantees have been my preferred universal life products. I also do not sell indexed life or variable annuity products.
Hirsch: From a practical standpoint, how do you determine which kind of UL product makes the most sense for which kind of client? Does it have to do with the client's level of affluence, risk tolerance, need to maximize coverage, or some other factors?
Eck: The determination of which kind of universal life product is dependent on the facts and circumstances of every client case that I work on. We take into consideration the client's goals and objectives for purchasing the insurance, the age of the insured, the risk tolerance of the insured, and ultimately the client's input on the product options.
Good: I use universal life when the client is looking for maximum coverage, normally illustrating a variety of life expectancy options. I use universal life when cash value growth is not a factor. If a client wants cash value growth, in the right situations I will use whole life with "adds," riders, etc.
Baker: Frankly, I am not a fan of variable universal life. Early on, we did a study of the difference between an average return and IRR--that is, internal rate of return. The illustrations were done using a 12% IRR. This was the equivalent of a 15% average return, whereas a 12% average return was closer to a 9% IRR. Comparing these two illustrations showed a significant difference in outcomes.
I determined, in my own mind, that insurance did not have to be that good. An IRR of 9% was adequate to meet the needs of my clients. After doing some back testing, it was apparent they had a far better chance of attaining 9% as an IRR with the indexed product than with the variable. Plus, I did not have to be concerned about the black swan scenarios. The indexed product met my criteria of upside opportunities along with no downside risk. It was a great hybrid.
Unless there is a specific reason to use a traditional universal life, I strongly favor the indexed universal life and the ability to have a higher return over the long run than a general account product will produce.
Hirsch: Could you talk a little about when UL makes more sense for a client than either whole life or term?
Good: When a client wants "guaranteed level term insurance for life," universal life with secondary death benefit using no-lapse premium for life can be effective. In this case, cash value growth and accumulation is of no interest to the client. For business insurance cases, this is a very effective tool.
Baker: All life insurance is term insurance. So I don't really try to convince clients that one kind of product is better than another. I simply say, "Tell me when you are going to die and I will tell you what to do." If they need insurance their whole life, term is not a good solution.
When it comes to universal life versus whole life, I sat down with the chief actuary of our insurance company and asked him to explain to me the pros and cons from his perspective. He convinced me that whole life and universal life are identical with the same funding. And since life insurance is an actuarial science, that made total sense to me. The difference was and is guarantees and flexibility. There are tradeoffs between the two. So for a very affluent client, universal life may make the most sense. But for someone who is concerned about limiting their risk and who wants to have the benefit of the absolute guarantees, whole life is better. I am unbiased in this discussion. It is simply a matter of preference. How much do they want to guarantee there will be no surprises? both are great products and have their uses.
Eck: First, let me address the term insurance aspect of this question. term insurance is an ideal solution when there is a short term need for life insurance--under 10 years--and/or the amount of a client's life insurance need and budgetary constraints mandates that either a portion or all their coverage is term insurance. As far as whole life insurance versus universal life, we prefer UL because we believe it has greater flexibility, and we can design a universal life insurance contract to look very much like a whole life contract. We also can minimum-fund a universal life policy to make it comparable to purchasing term insurance. By minimum-funding a universal life contract, we can illustrate to an insured that if they can pay slightly more over a 20-year guaranteed period for their life insurance, the universal life insurance policy will end up being a much more cost-effective insurance solution than term insurance, especially when you consider the re-entry costs for the insured at the beginning of the 21st year.
Hirsch: What has been a good, effective presentation that you've used recently in showing a client both why UL can be an effective solution to their problem and how UL works?
Baker: I developed "The BOX" 20 years ago. It was a simple five-minute presentation that demonstrated the mathematics of life insurance in an understandable and intelligent manner. I still use it today. I have never found anything better. In essence, as I said, all insurance is term insurance. It is based on the predictable probability of death. But no one can afford to pay the curve during their whole lifetime. So if they want insurance for their entire life, they have to fill the BOX. If the BOX has enough money in it, the BOX will pay the curve. The only risk is that the earnings in the BOX go up and down based on the economic times. If the rates go up, you can put less in the BOX. If the rates decline, then you have to put more in the BOX. My job is to help you know how much money you need to have in your BOX.
Life insurance is really that simple. For a more detailed explanation, go to www.aboutthebox.com.
Eck: As far as effective presentations that I have recently used, as a broker we have access to multiple companies and every insurance carrier we work with has proprietary presentations for particular insurance strategies that we will use. If we are comparing insurance products for our clients and we are not using a proprietary presentation, our presentations focus on addressing the key components of their insurance portfolio that are most relevant to their individual goals and objectives. If clients are purchasing insurance for death benefit purposes, we will focus on the death benefits in various years relative to the premium payments, while if a client is purchasing a contract to overfund for supplementary retirement benefits, we will focus on the cash accumulation and what they would have to earn in an alternative investment to match the internal rate of return of the life insurance policy.
Good: I have always explained universal life simply using a pen and paper. Premium is deposited into a water bucket; administrative expenses and taxes come out of one spigot each month; cost of insurance comes out of another spigot each month; and interest earned is added to the water bucket at the end of each month after the two spigots shut off. then the same thing occurs each and every month. If the client pays enough premiums, the bucket will stay full up to a certain level depending upon desire. If the client does not pay in enough premiums, the bucket will ultimately become empty. What would you like your bucket to look like?
Hirsch: Any further thoughts?
Baker: Life insurance remains the most remarkable financial product ever developed. For just a few cents, the policyholder can create large sums of money payable tax-free to the beneficiary. The money walks in when the policyholder walks out and provides cash needed to keep the family in their home.
There are obviously other reasons insurance is valuable. After selling insurance for more than 45 years, I have learned this most remarkable thing: People do what they want to do, when they want to do it. So if they understand their risks and they understand their options, they will almost always choose to buy life insurance. our job is to make sure the insurance is there when they die. Unfortunately, not all policies were created equal, and there are many cases where either the policyholder did not understand, or the agent didn't understand, or both. And as a result, the policy under-performed the illustration and is about to lapse. this is a tragedy and one every agent should conscientiously seek to avoid.
The only ones who can harm the insurance industry are the agents who are unethical and do not take seriously their fiduciary role with the client, or the carriers who are so eager for profits that they fail to provide sound products that will actually pay a claim. Fortunately, our industry has very few of either classification. We are blessed with an industry that takes seriously our responsibility to our policyholders. May it always be so.
Guy E. Baker, MSFS, CLU, from Irvine, calif., is currently MDRT's Immediate Past President. He is a 40-year MDRT member with 32 Top of the Table qualifications. As managing director of the BTA Advisory Group, Mr. Baker manages a group of five financial services companies focused on the needs of business owners.
Keith Eck, CLU, ChFC, graduated from and played football at UCLA and played for the Washington Redskins and New York Giants in the NFL. His football career abruptly ended in 1980 when he suffered a heart attack on an airplane en route to preseason training camp for the Giants. Shortly thereafter, Mr. Eck entered the financial services industry, where he developed a passion for assisting business owners with achieving their succession goals. In 1990, he founded Keith Eck Financial & Insurance Services, assisting business owners with wealth accumulation, retention, and wealth disposition planning. He is a Life and Qualifying member of MDRT and a member of the Court of the Table.
Julian H. Good Jr., CLU, ChFC, from New Orleans, is currently MDRT President. He is a 27-year MDRT member with three Court of the Table and three Top of the Table qualifications. Mr. Good's practice focuses on estate and retirement planning, business insurance, and nonqualified and qualified retirement plans.
By Charles K. Hirsch, CLU
Charles K. Hirsch, CLU, is a contributing editor to Life Insurance Selling. He is the president of Hirsch Communications Consulting, LLC, in Florissant, Mo.
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|Title Annotation:||Universal Life: PRODUCER ROUNDTABLE|
|Author:||Hirsch, Charles K.|
|Publication:||Life Insurance Selling|
|Date:||Dec 1, 2010|
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