While some insurance carriers are implementing virus-driven underwriting changes, I’ll focus on other issues to think about during the COVID-19 pandemic regarding life insurance. Most, if not all, of these issues are applicable during normal times, but it might be easier to get attention now.
Cash Flow
I recently read a statistic about the percentage of people feeling a cash flow crunch as a result of layoffs and the disruption of business. It’s to be expected, even for the most responsible of us. Even those not in a real crunch now are choosing to delay mortgage payments and discretionary purchases simply because there’s too much uncertainty moving forward.
What should policyowners keep in mind now? If they’re in a cash crunch and life insurance premiums prove an undue burden, there may be options, but they need to be understood and enacted appropriately. Many life insurance policies can handle not having premiums paid for some period, but policyowners better be sure, and often they don’t know if that’s the case. Also, and this might sound strange, depending on the kind of life insurance, they better not pay the premium the right way.
Whole life (WL) and term premiums work very differently than universal life (UL) based products. One might be able to simply not pay the premium on a UL policy and be fine for some period of time. On the other hand, not paying on a WL policy might result in it flipping to a reduced paid-up contract or extended term, which is likely a permanent result. Automatic premium loans and using policy dividends or paid-up additions might be in the cards, but all of these options, and the ramifications, should be analyzed and modeled.
It’s times like these that many look to their cash value life insurance as a source of funds. This may be a good choice, or it may not be. Some policies have very favorable loan features, while others don’t. Some have low interest rates, while others are very high. Taking out a loan meaningfully affects the policy performance on some contracts, while it’s negligible on others. Is borrowing money out of a contract the best thing to do, or might it be better to use the policy as collateral and borrow from an external source? What options have been presented? How have they been analyzed? Have the various options been objectively compared? Please don’t let your clients take action without doing so if you have any influence.
Policy Loans
Speaking of life insurance and loans, many life insurance policies already have loans, and too many policyowners don’t understand the terms and the effects of the loans. In many of these situations, the loans are crushing the policies, and in some, the policyowner is coming out of pocket for the loan interest to keep the policy alive.
The concept of refinancing a high-interest policy loan should be evaluated. I’ve helped many policyowners save tens or hundreds of thousands of dollars of interest annually by favorable refinancing policy loans. An additional benefit is strengthening of the policy and preventing nightmarish income tax consequences.
Life Settlements
I wouldn’t run to a life insurance settlement on the secondary market just to satisfy a liquidity crunch, as the policy may be very important over the long term. However, there are many policies out there that have been riding on a thin edge for a long time, and the current circumstances we find ourselves in might be putting some policyowners over the edge.
Maybe they were wondering if they could afford to increase the premiums, and now that decision has been made for them. Maybe selling a policy with $100,000 of cash value for $500,000 didn’t look attractive enough before, but it does now. Whatever the reason, the life settlement market is more aggressive now than it’s been for a long time so it may be worth some attention.
Term Insurance
Given the typical term insurance premium, there might not be a lot to gain from evaluating term coverage, but I’ll suggest there’s more to it than many understand.
Many term insurance policies on the books remain competitive, but many aren’t. I often see drastically overpriced policies in which the insured individuals have been squandering money for years. Use this as an opportunity to review your client’s portfolio to make sure his money is working the best it can be.
Many people also have their term insurance through professional associations and group term through their employers. While this is better than nothing and valuable for those who can’t otherwise qualify for life insurance, it’s also some of the most expensive and poorest quality insurance out there. The potential money saved with individually underwritten life insurance with dramatically better contractual features and rights would surprise most policyowners.
A Diversified Estate Portfolio
A recent teleconference with some advisors and their clients brought back to the forefront a piece I wrote a handful of years ago. It’s about the attributes a well-designed life insurance portfolio can bring to an estate. We all will eventually die with “pots of stuff,” including personal assets, business assets, traditional investments, qualified plans and real estate.
But let’s focus on the unique attributes of life insurance. Life insurance has unique income tax attributes that can make it attractive. Unlike almost everything else in a portfolio, it has an inverse relationship to time. It has very low, if any, variability. Life insurance is a noncorrelated asset, which is one reason life settlements as investments are attractive to some portfolios. What if your client dies during uncertain times like we have now, when most of the other assets are severely depressed? Life insurance comes in at full value regardless of housing starts or jobless claims, the exchange rate of the yen or the euro, who’s in office, what war or geopolitical issue is going on or … pandemic.
Need for Premiums
Though much of my work involves rescuing underfunded life insurance policies that need more of a cash infusion, sometimes it’s the other way around. It’s not uncommon to meet with policyowners who want to reduce or terminate premiums and express disappointment at not being able to. They’re surprised when I tell them they don’t need to keep paying. Many WL policies are funded well enough for dividends to cover premiums with an analysis showing out-of-pocket premiums can safely be stopped. Even though guaranteed UL is often notoriously susceptible to rigid premium requirements, I’ve seen situations in which premiums can be terminated for a number of years with no adverse effect. In the latter, unnecessary premiums are simply a waste of money.
As mentioned earlier, every one of these points is as pertinent at any other time as it is today, but maybe the issues some are currently facing will garner renewed attention. Not only will education and expert guidance help many of your clients when they need it, but also without it, too many will make poor decisions that won’t best help them now in addition to having deleterious consequences over time.
Bill Boersma is a CLU, AEP and LIC. More information can be found at www.LifeLoanRefi.com, www.oc-lic.com, www.BillBoersmaOnLifeInsurance.info and www.XpertLifeInsAdvice.com or email at [email protected].