In last month’s column we considered “What’s it gonna cost?” when it comes to buying life insurance. In MetLife’s cute commercial series featuring the “Peanuts” characters, Lucy seems to think, “It should cost five cents.” And why not? The various forms of universal life (UL) – the most popular form of “permanent” life insurance being purchased today – allow the buyer to pay as little as they want as infrequently as they want. Hey, Lucy – what about 5 cents?
Obviously, life insurance has to cost something. In my May column, I addressed the technical issues about why an illustration-calculated planned premium’s sufficiency may be more complicated than it appears when 1) the intention is to keep the planned premium as low as possible, and 2) the UL policy is of the indexed or variable variety.
We’re now aware of the underlying issues of complexity with the typical UL illustration using a snapshot rather than a high-definition video to portray a moving target. But there’s a second underlying issue that often gets lost in the conversation: How did we decide to sell that indexed universal life policy in the first place? That’s right – the illustration looked good and it is the product many companies are encouraging their agents and brokers to sell. And the price certainly seems right without having to take the kind of volatility risk associated with variable universal life.
But in considering the broader arena of financial planning, a planner or investment manager will begin the conversation with a new prospective client by inquiring about the client’s risk tolerance. The advisor typically will ask the client questions and review a list similar to the following. In doing so, the advisor also will instruct the client to choose the statement that most closely reflects the subjective “from the gut” answer to the following question: “What about money and the risk of losing principal wakes you up in the middle of the night?”
Preservation of principal is paramount. In other words, I want to minimize my risk, if faced with the choice of whether getting a return of my money is more important than getting a return on my money.
Current income and stability of principal is important to me, and my investments should be relatively safe.
Current income and stability of principal is an objective; however, I would also like to see the value of my investments reasonably increase over time. I am willing to incur a moderate level of risk to achieve this objective.
Growth of the value of my investments is important. However, I would also like to have some current income. I am willing to expose my investments to a fair level of risk to achieve this objective.
Substantial growth over time is important to me. I do not need to generate current income. I am willing to incur a considerable level of risk to achieve this objective.
Those questions will guide the investment manager in assembling an investment policy statement (IPS) that will in turn generally include several custom portfolio options that best respond to achieving the clients’ style needs within their consideration of risk tolerance.
In my own practice, clients who express a conservative approach to investing should know about both of the two guaranteed life insurance products in which premiums, death benefits and cash values are fully guaranteed. A secondary consideration to a conservative investment style is a desire not to have to manage their investments. When selecting a carrier of high financial strength, clients have an extremely high probability of achieving their objectives both as to the guarantees and the low or nonexistent management requirements.
On the other hand, clients who have experience investing “in the market” – and have the resources, time horizon and willingness to actively manage their life insurance – might be drawn to a variable or indexed universal life policy. The sophisticated client – and the insurance professional – will collaborate to come up with one or more policy styles that will meet those needs and expectations. And as we saw last month, although the illustration is capable of drawing attention to the appearance of a low “price” – that is not an appropriate basis on which to select a policy. If a policy is recommended on the basis of price alone, the client will miss the objectivity, planning focus and customization to risk tolerance that is clearly needed with today’s sophisticated and complicated life insurance products.