Sometimes I think my job is basically giving people bad news. As a consultant, yes, I see more than my fair share of sick policies just as the number of patients that come through a doctor’s office in the course of a day who are sick is likely greater than the population at large. Sick people congregate at the doctor’s office and sick policies congregate on my desk.
The main issue with educating the advisor market on sending sick policies to me is that they don’t always send policies to me that aren’t obviously sick. Often times, sick policies don’t look sick and when one waits long enough to see the sick, they’re terminal. Hey, just like with people.
Pay Attention to Healthy Policies as Well
What’s even more difficult is to get referrals for policies that look specifically healthy. Why is that a problem? Just as with routine physicals, a “well visit” can identify opportunity.
A few years ago, a trustee called me to ask about the effects of a late premium on a policy in a trust he managed. I was thrilled he did so as this doesn’t usually happen. The policy was a guaranteed universal life (GUL) contract and everyone should know by now that timing of premiums is crucially important, so important that even paying too early can sometimes be a problem.
The trust had money but there were some timing issues with cash flow and the trustee did the responsible thing by calling. I told him I’d look into it and run some ledgers to determine how sensitive the policy was. In the end, the delay in premium wasn’t going be a problem. There was a surprise, however. I included in my request to the carrier a ledger assuming the premium wasn’t paid at all for the year. To my surprise, the contract guarantees still ran to maturity, or age 125.
I related this to the trustee and he thanked me but paid the premium anyway. Why not? It could help later in a similar circumstance. Years later, there’s a new trustee on the trust and I recently thought about this again. Since I help manage this policy, I order in-force ledgers every year to make absolutely sure everything is on target. I ran it again assuming a skipped year of premiums and it turned out the same way, guaranteed indefinitely. Then I ordered another ledger assuming skipped premiums for two years. I found it was still guaranteed through age 110. I’ve now ordered another ledger just to see what happens if we skip three premiums.
When I related this to the trustee, he was thrilled and thankful for the information. Why did this happen even though the policy was originally put in force at the minimum guaranteed premium? Because the contract hasn’t been performing at guarantees from the moment it was instituted. The longer it performs at better than guarantees, the more wiggle room there is in the policy. To be sure, not all GUL contracts work this way, but if this one does, might not others? I have another client who originally chose to fund his policy to age 100 rather than for life. Now, every few years, the in-force ledger shows the policy guaranteed for an additional year, now to age 104.
Don’t Waste Premium Dollars
Some might be tempted to keep adding money “just in case,” but this may be a complete waste of resources. It’s not like putting an extra quarter in the parking meter in case you run long. It’s like plugging the meter next to you in addition to your own. Silly.
This same issue is at hand in another situation. Many of these GUL contracts, let alone current assumption contracts, don’t lapse simply because a premium isn’t paid. The performance and guarantees are affected, but they don’t immediately vaporize. If you are a trustee on a policy for an old person who isn’t doing too well, or anyone for that matter, might it not make sense to see how long the policy would last without paying premiums? I’ve seen situations where a trustee dutifully made premiums when the insured was on their death bed. This would be critical for a term policy or even a whole life policy, depending on the dividend option, but may not be necessary for a universal life or GUL. When a client of mine, who had recently paid the premium on his mother’s policy, told me his mother wasn’t doing well and likely wouldn’t make it to the end of the year, all I could think of was the wasted premium. As an exercise I ordered a ledger assuming no more premiums, and it would last for another decade surviving on internal value, even though the cash surrender value was $0.
In another case I was asked to analyze a $3 million policy with a $53,000 annual premium. It was a second-to-die policy, and the husband had recently passed away. The wife didn’t want to pay the premiums and the attorney got her to bring it to me.
The client was 85 years old and the attorney informed me she is quite unhealthy and not expected to live many more years. In-force ledgers from the carrier show me that $53,000 is indeed required to guarantee the policy for life. $51,000 will guarantee it through age 110, but that’s not much of a savings. $44,000 would guarantee it through age 105, and $24,000 would do so through age 100. Finally, no more premiums at all guarantees it for a dozen more years, through age 97.
Information Is Critical to Making Good Decisions
It’s not my decision to say whether or not she should pay or not pay premiums. It’s my job to bring to the table information such as this for the client, family and advisors to consider relative to managing the life insurance policy. Maybe they will not be willing to take the risk that mom will be gone by 97. They understand the situation much better than I do. We’ve since ordered ledgers showing no premiums for the next five years (saving over $250,000 for now) and then calculating for required premiums starting in year six to hold the policy to age 100 and 105 and 110. This gives us the chance to evaluate the bogey six years down the road to see what the backstop costs would be if it turns out mom is still alive and kicking and appears to be doing better than she is now and they want those guarantees back. In this situation, there’s no reasonable occurrence where it would make sense to pay the premiums for now.
The lesson here? Pay attention to everything, even healthy policies. Just as with your own health, hopefully you don’t indefinitely avoid the doctor’s office just because you are feeling fine at the moment. That reminds me, the gastroenterologist’s office just called, and it’s been five years …