Life Insurance Replacement

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May 10, 2007 9:28 am

As I am doing portfolio reviews with my current clients, I have started discussing their life insurance.  All of my clients are happy to share what they have and most of the time I find an inferior product or something that does not fit their needs (i.e. whole life for young people).  I have done a lot of replacement into variable life.  Clients may not have the guarantee they have in whole life, however if i can't average 6-8% returns in the policies over the long term, then I have done something wrong with their allocations.  I really just want to see if anyone else has worked on replacement of insurance.  Any thoughts?

May 10, 2007 9:36 am

I replace insurance all the time by either buying my client more death benefit for the same premium or saving them money on the premium for the same death benefit.

May 10, 2007 9:53 am

Any thoughts?


Yes.  You are screwing your clients and don't even know it.  Become an expert in life insurance before you start replacing policies.

May 10, 2007 11:53 am

"Yes.  You are screwing your clients and don't even know it.  Become an expert in life insurance before you start replacing policies."


So which one are you- the expert in life insurance? Or the expert in investments? The expert in both? Inquiring minds cant wait to know...

May 10, 2007 12:17 pm

Does selling over 200 policies a year qualify me as an expert?


If anyone of us was truly an expert in investments, wouldn't we earn our money from investments instead of selling investment products and investment advice? 

May 10, 2007 1:07 pm
anonymous:

If anyone of us was truly an expert in investments, wouldn't we earn our money from investments instead of selling investment products and investment advice? 



Not always.  It depends on how you want to live your life.  I earned my living for the past 15 years as a full time S&P trader.  Finally, I decided that I wanted to get away from the endless hours isolated in a dark room in front of a bank of computers and monitors.

Now, I'm more than happy to let someone else do that job.

May 10, 2007 8:54 pm

I believe an advisor should be a generalist in that area of life insurance and then from there seek out a relationship with someone or a mentor of some sorts..because some carriers (sp?) treat illness' differently .. and subsequently you could do better or worse and not even really know it.. just my experience .. incidentilly I orginated $100k in premium last year so I have some experience..

May 10, 2007 9:23 pm
anonymous:

Does selling over 200 policies a year qualify me as an expert?


If anyone of us was truly an expert in investments, wouldn't we earn our money from investments instead of selling investment products and investment advice? 



No. It qualifies you as a liar about the number of policies that you sell.

May 10, 2007 9:58 pm
peacock:

As I am doing portfolio reviews with my current clients, I have started discussing their life insurance.  All of my clients are happy to share what they have and most of the time I find an inferior product or something that does not fit their needs (i.e. whole life for young people).  I have done a lot of replacement into variable life.  Clients may not have the guarantee they have in whole life, however if i can't average 6-8% returns in the policies over the long term, then I have done something wrong with their allocations.  I really just want to see if anyone else has worked on replacement of insurance.  Any thoughts?




I am confused.  Why isn't whole life a fit for young people?  Isn't variable life a form of whole life?  Why are you replacing a policy with no volitility for one with a great deal of volitiity?  Why would variable life be a better fit for a younger person than traditional whole life?


Unless you can justify your recommendations with empirical data for EACH individual client then blindly preferring variable universal life over traditional whole life or equity indexed universal life is going to get your butt in a sling.

May 10, 2007 10:18 pm

Isn't variable life a form of whole life?


Just about anytime that someone talks about variable life, they are talking about Variable universal life.  Universal life is much closer to term than to whole life.

May 10, 2007 11:43 pm

Here's a scenario:


You meet with a couple in the 40's (prospects) who currently work with Ameriprise. Their IRA's are in Riversource Funds, and OF COURSE they each have a VUL. The VUL's have about $10,000 of cash value in each, but the surrender is about $2,500 on each one.  The VUL's each have a $250,000 death benefit. That is not enough for either spouse, and that's the only insurance they have.


I am recommending liquidating the RVS funds and transferring the IRA's to a fund company, but I'm still not sure about what to do with the VULs.  I am leaning towards selling them term (about $450K) and then cashing out the VUL policies.


They hate the VUL policies, and don't want to fully fund it (a total of about $4200/yr), so they are just paying the minimum.  Generally with VULs, my stance is to fully fund it, or cash it out, but don't just go half way.


What would you do?

May 11, 2007 6:33 am

Generally with VULs, my stance is to fully fund it, or cash it out, but don't just go half way.


I agree completely.   I've never seen an old VUL that was not in danger of blowing up. 


 In replacement situations, I don't present any options to the clients because you have no idea what is in their best interest until after the new insurance gets approved.  Apply for the new coverage for the necessary death benefit to cover their wants.  After the policy gets approved, you can then decide what is best.  It's premature to talk about options at this point.


Is there a loss on the VUL contracts?  If so, you may make sense to preserve the basis via a 1035 exchange.

May 11, 2007 10:03 am

I look at replacing after assessing the clients situation.  If they have a 15 year old policy and need additional coverage,  or a reduction in coverage I consider replacement.  As far as variable life goes, if an illustration is ran at 6%, I'm confident the client will earn that over the course of their life.  That doesn't mean all clients should use a vul, but it makes sense for many.  If I were a client, I would rather have control over how the cash is invested as opposed to the insurance company.  Just some thoughts. 

May 11, 2007 10:26 am

If variable VUL makes sense for many people, why don't I ever see an existing policy that isn't in danger of blowing up?


I'm also confident that the client can earn 6%.  The problem is that even if the client earns an average of 6%, the policy can still completely fall apart on them.   The main problem with the policies is that the cost of insurance is based upon attained age.  The backbone of a VUL policy is annually renewable term insurance.  Annually renewable term insurance is meant for temporary insurance needs, not permanent needs.


If I were a client, I would not want my money invested in an insurance policy.  Whole life insurance is a place for long term savings, not long term investments.

May 11, 2007 11:04 am

You rarely see properly funded VUL's because they are being sold to
people who have no business owning them but the insurance person
convinced them how great it was.  Don't confuse WHOLE LIFE with a
VUL-totally different animals.  I know there a very reputable
insurance guys/gals out there, but too often someone licensed with a
6/63 sells a VUL with a high death benefit (read high(er) commission)
and only minimally funds it at a level to generate an approval by home
office. 



In your situation I would not hesitate to replace the policy and get
appropriate coverage in place via term.  But make sure the clients
know full well they will not suffer any surrender charges if they wait
x number of years.  You might also look to see what minimum
funding level it takes to keep the policy in force that "x" number of
years until CV=SV.

May 11, 2007 11:28 am

I agree, Ironhorse. 


I'm a franchisee of Ameriprise.  I don't sell much VUL.  When I do, I make sure that I've gone through and explained the product, and why it fulfills a need, usually estate planning for older, wealthier clients who want to leave the tax free DB, and are going to fund it. 


I've never really liked the idea of using Cash Value as part of retirement savings/income (from any sort of Life Ins.), even if you can "loan" it to yourself tax-free, and interest free.  any thoughts on this?


I see it as one of the highest service financial products, and yet it gets sold so many times with a poor asset allocation, it may not set up for the COI to be pulled from the fixed account, and it sometimes isn't serviced according to the initial illustration: e.g.:  if it's sold with an illustrated reduction in Death Benefit over the years to reduce COI, then that HAS to be done.  otherwise it will blow up.


VUL can be a great product for the right situation, but if it's just sold to a client for a commission, never to be addressed again, that's when they eat themselves.

May 11, 2007 11:34 am
Big Taco:

I've never really liked the idea of using Cash Value as part of retirement savings/income (from any sort of Life Ins.), even if you can "loan" it to yourself tax-free, and interest free.  any thoughts on this?


I don't like it either.  I recommend life insurance  soley for the death benefit.  If they want an investment, I'll recommend an investment.

May 11, 2007 11:46 am

I want to clarify that I don't place that much life insurance, period.  (I'd like to do more...) but when I do, it's either term or VUL.


If you want PERMANENT Life Ins., that's when I suggest VUL.  I just make sure that we compare "term & invest the difference", and VUL so the costs of holding permanent ins. are comprehended. 


there's a lot of uninsurable people out there that wish they could've gotten something placed when they were healthier.  at least w/ VUL it can be flexible, and when done properly, you can stuff more money into it later, or reduce the DB.  But it's There.  for those who sell a lot of perm insurance, I'm sure you've used the line: "97% of term policies never pay out".


I don't like fixed annuities, and I don't like fixed interest rates in UL and Whole Life.  If there's money that's being saved longterm, i feel it should be invested according to appropriate asset allocation.

May 11, 2007 12:11 pm

Those are some good thoughts and viewpoints, I appreciate it.

May 11, 2007 12:15 pm

I've never really liked the idea of using Cash Value as part of retirement savings/income (from any sort of Life Ins.), even if you can "loan" it to yourself tax-free, and interest free.  any thoughts on this?


You can't take a loan interest free.  You pay interest on the loan, but at the same time, the policy continues to earn the dividend. 


First and foremost, life insurance is for the death benefit.  However, that doesn't change the fact that it is a great source of cash.   I look at the cash value of a life insurance policy as long term savings.   It is my belief that having this accessable cash can really help someone's retirement savings. 


Ex. Client has $1,000,000 invested and needs $50,000 year, increasing with inflation.  Will this money last?  The answer is "maybe".  However, I believe that if the person has whole life insurance with substantial cash value, or any other source of long term savings, they have a much greater likelihood of not running out of money.  Why?  When the market goes down, they can leave their investments alone.


I don't know of a better long term savings vehicle than whole life insurance.  This is especially true once you factor in the after tax rate of return and the income tax free status of the death benefit + the money not spent on term insurance.