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Life-Insurance Makeover

Now may be the time to get your clients more life insurance: In 2008, life-insurance premiums will be 11 percent lower than they were two years ago and half of what they were a decade ago, according to the Insurance Information Institute. Meanwhile, new product features that give individuals more flexibility and guarantees have been developed and are gaining popularity. So why are life-insurance rates

Now may be the time to get your clients more life insurance: In 2008, life-insurance premiums will be 11 percent lower than they were two years ago — and half of what they were a decade ago, according to the Insurance Information Institute. Meanwhile, new product features that give individuals more flexibility and guarantees have been developed and are gaining popularity.

So why are life-insurance rates dropping? It has everything to do with age demographics: Death rates for individuals aged 25 to 44 — the primary purchasers of life insurance — have decreased significantly over the past 10 years, explains Steven Weisbart, Ph.D., chief economist at the Insurance Information Institute.

In 1996, the death rate per 100,000 for individuals aged 25 to 44 was 177.8. By 2004, it had dropped to 161.8, based on National Vital Statistics Reports preliminary data. That represents nearly a 10-percent drop in the death rate in less than a decade for the individuals who are of prime insurance-buying age.

The drop in insurance rates can yield a substantial savings. The annual premium for a 40-year-old male nonsmoker buying a $500,000, 20-year, level term-life insurance policy runs around $615 if he qualifies as a “standard” risk, and $340 if he meets the more stringent requirements of a “preferred” risk. Rates for women and younger people, and for larger amounts of insurance are even lower, as are premium rates for traditional whole life, universal life and variable universal life insurance. Today, someone age 35 would pay about $8 per $1,000 of coverage for permanent protection. Ten years ago, it was more like $12 per $1,000 of coverage.

With rates lower than they ever have been, clients with families might reassess the amount of life insurance they carry and consider purchasing more. For example, today it takes a $500,000 death benefit to pay a widow $2,500 a month for 17 years, which is just a little more than double what someone working 40 hours a week at minimum wage will earn in 2008. Yet in 2004, according to LIMRA International, the average adult aged 25 to 34 with life insurance had only $145,000 of coverage; the average adult aged 35 to 44 had only $323,000 of life insurance.

Feature This

In addition to the falling cost of life insurance, insurance companies have developed new product features that offer greater flexibility and protection. For example, many universal life-insurance policies now offer “no lapse” guarantees. Policyholders earn current rates of interest on their cash value. In the past, if interest rates declined, the insured individuals would have had to kick in extra premiums to keep the policy in force. The no-lapse guarantee protects the insured against this problem. It doesn't cost extra, says Byron Udell, CEO of Accuquote — but it does require a specified premium to be paid for a specified period.

Term insurance policies are also being issued with “return of premium” riders. After the term of the policy expires, policyholders can elect to get premiums back or renew coverage for another time period. Of course, for a 30-year policy, the cost of return of premium is typically about 50 percent higher than a policy with no return-of-premium coverage. Some say the cost is not worth it ultimately, because inflation can erode the purchasing power of the money you get back. Meanwhile, some universal life-insurance policies have developed Equity Index Universal Life Insurance, which invests the cash value of a policy in stock indexes. The policies pay a minimum guaranteed rate of, say, 2 percent. But if the stock market performs well, such policies could potentially earn 60 percent of the return on the S&P 500.

Some insurers have also added riders to variable universal life-insurance policies that offer guaranteed minimum-withdrawal benefits and guaranteed minimum-accumulation benefits, similar to those on deferred variable annuities. Depending on the insurance company, the cost of these riders runs about 60 basis points annually, according to Udell of Accuquote.

Combos And Financing

Today's life-insurance policies may also offer a combination of benefits. Individuals can purchase life-insurance coverage that will pay for long-term care if the policyholder goes into an assisted-living facility, nursing home or needs home health care. (For more on long-term care insurance innovations, see our story “Thinking Long Term” in the November 2007 issue.) Any remaining death benefit is passed onto beneficiaries.

“The distinctions between product lines and product types are narrowing,” says Keith Dall, consulting actuary for Milliman Inc., and co-author of a Society of Actuaries report on product innovations. “Long-term-care riders and waivers of specified premium benefits attached to life insurance can be looked upon as either a life-insurance benefit, or a health-insurance benefit or both.”

You typically get more coverage with a standalone long-term-care policy. But people who don't think they will go into a nursing home, or think they will be in a home for a short period, may want a life-insurance policy that covers long-term care. It might also make the most sense for people who have some money to cover long-term care, but wish to supplement it with life insurance. This type of policy bridges the gap, and is less costly than buying both life insurance and a long-term- care policy. A lower-cost option may be to get term insurance coverage at a younger age to cover the family, and then get a long-term care policy later on.

Premium financing, though not new, is also becoming a much more popular option for life-insurance policyholders. With premium financing, high-net-worth individuals borrow money from a bank to purchase life insurance they need without immediately liquidating other investments or otherwise changing their normal cash flow.

When properly structured, this type of insurance may help in the transfer of assets to children and grandchildren. If purchased inside an irrevocable trust, it potentially reduces gift and estate taxes. When the policyholder dies, the bank loan is paid off tax-free out of the trust, and the remainder of the proceeds goes to the beneficiary tax free (again).

“Premium financing works well with individuals who need insurance coverage for wealth replacement or for estate taxes, but have cash tied up in their business or illiquid assets like real estate,” said Lance Wallach, a Plainview, N.Y. “Financing enables them to get the insurance coverage they need.”

As with any type of insurance, the guarantees on life insurance are only as good as the company issuing it. Most of the largest and best-known names in the insurance business — AIG Life, John Hancock, Sun Life and Berkshire Hathaway, among others — are rated A++ by A.M. Best and AAA by Standard & Poor's.

Alan Lavine is the author of The Short and Simple Guide to Life Insurance, Authors Choice.

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