Life insurance is a long-term investment with many potential risks and rewards. But in this protracted low-interest-rate environment, many carriers have chosen to increase mortality costs on huge blocks of older policies. So it may be time to reconsider how and what you will sell to your clients in the future.
Agents need to ask themselves, “Am I capable of learning from the industry’s behavior in a way that will enhance my value to clients? What advice should I be giving to clients who are understandably nervous about the ‘trust me’ components of many of the products I sell? What can I learn from the recent spate of cost of insurance (COI) increase announcements?”
Let’s start with the assumption that you want to provide the most suitable and sustainable product advice. Let’s also assume that by doing so, you will attract new clients, rebuff the competition, and grow your client and renewal base. How can you attract and retain new clients and have them recommend you to others? Start by organizing your sales practices.
Following are 10 suggestions that will help you organize your practice for maximum results:
1. Learn to read and understand insurance contracts. Everything that takes place post-issue will rely on the wording of the contract, to which no changes can be made. Focus on the sections that describe how premium payments are received and credited, and how timing affects the contract.
Then make sure you understand the mortality or “COI” provisions and how they may be changed by the carrier. If there is a persistency bonus or other nonguaranteed component, make sure you understand the triggers. Finally, read every amendment and rider. For every policy you deliver, create a digital file with a copy of everything your client receives.
2. Show illustrations based on more than one interest rate scenario, and keep them in your file. In today’s environment, the guaranteed interest rate should be your baseline for current assumption universal life (3 percent is reasonable). For indexed UL, use no more than 5 percent as your target rate, to which you should add a lower and a slightly higher rate illustration. For variable life, 6 percent is an acceptable gross return, and for whole life, the current dividend scale should be used along with an illustration using a lower dividend return of at least 100 basis points. Guaranteed UL should be illustrated with premiums that guarantee the coverage for life!
3. Understand the risk/reward value propositions and communicate them to your clients. If you don’t understand how the pattern of returns works to enhance or detract from your client’s policy values, your client surely doesn’t understand it either. Don’t sell that product!
4. If you sell IUL, use a Monte Carlo simulator to deconstruct the policy and predict the probability of success. If a thousand simulations of market returns show a 20 percent probability of the policy lapsing before the client’s life expectancy, your clients need to know this before they make a decision. Typically, it takes only an additional 5 percent to 10 percent increase in the annual premium to raise the odds to a more reasonable 85 percent to 90 percent probability.
5. Advise your clients to pay the premium with the highest probability of success. Regardless of the contract, create a file titled “Open in Case of Buyer’s Remorse,” which should contain the illustration the client signed, along with an illustration showing the premium they originally considered and the report showing the low probability of success. That way, in the future, when someone suggests to your client that they could have paid less, they will open the file and remember that they paid a little more for peace of mind. Attach this file to the policy when you deliver it.
6. Learn to show your clients a chart that illustrates the spectrum of risk. On the left is the policy with the least risks (term, GUL, nonparticipating whole life, etc.). Next should be participating whole life, then UL, IUL and finally variable life. Be prepared to discuss how a properly funded contract, regardless of type, mitigates much of the future risk of underperformance.
7. Don’t make your sale about price. Virtually all of the problems we are seeing today with COI increases are in some way related to minimized premium funding patterns. Insurers have a difficult time making money if clients pay the rock-bottom minimum. This is particularly true for current assumption UL. Moreover, paying the very least possible premium severely magnifies the problems that clients might experience in the later years of the contracts. Those problems may be unfixable and cause the policy to lapse before it matures.
8. Don’t assume that today’s problems are isolated to UL products. Whole life dividends contain a mortality component that is adjusted every year. Bad mortality results, or reduced profitability on a block of business, are reflected in the dividend. Between interest rates and mortality experience, many blocks of whole life will see less than projected dividends for at least the next seven to 10 years, even if interest rates start to trend upward.
9. Encourage your clients to maximize their returns, where possible, by adjusting premium payments to achieve the desired results. For example, with a variable policy, encourage them to add to the payments when markets are down, and restrict payments when markets are overenthusiastic. This requires more attention to policy performance and market trends, but results in much better returns and happier clients.
10. Monitor policy results at least biennially (every two years) and advise adjustments as needed. A policy with moving parts — UL, IUL, whole life, variable — must be treated as an investment with market volatility. The pattern of returns has a material impact on the outcome, as do the premium size and pattern of payments. Policy owners do not understand the annual reports they receive from the carriers and cannot reasonably be expected to change their payment behavior without your assistance.
We recently worked with an 85-year-old man who purchased a UL policy in 1983. The client retained all of the original sales materials that showed a level premium based on a “conservative” rate of return of 8 percent! What he actually paid was significantly different. He essentially waited for the lapse notice each year and paid the minimum required premium as stated in the notice. To date, his family has paid $341,000 into a policy with a face amount of $240,000. And they continue to pay in order to limit their loss.
In this client’s file of documents was every single communication with the carrier. Noticeably absent were in-force ledgers, which were never obtained. This is a tragedy that could have easily been avoided by constant monitoring and possibly a commissionable replacement policy with guarantees.
Most importantly, you can increase your sales volume significantly and receive more referrals simply by disclosing the risks, recommending the right premium level to achieve the highest probability of success and paying attention to details.
Ron Sussman is founder and chief executive officer of PolicyAudits.com and CPI Companies. He counsels high-net-worth individuals through risk management analysis and life insurance planning strategies. Ron may be contacted at firstname.lastname@example.org.