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Cash Value Policies

Planners can add great value to their clients by helping them identify the characteristics of a policy or policies that they feel would be appropriate for them over the long term.

We’ll describe several types of cash value policies, including whole life (WL), WL/term blend, current assumption universal life (CAUL), guaranteed (no-lapse) universal life (GUL), equity indexed universal life (EIUL) and variable universal life (VUL).

Planners can add great value to their clients by helping them identify the characteristics of a policy or policies that they feel would be appropriate for them over the long term. In practice, meaning in real cases in which an agent is presenting products to a client, we suggest that the agent use a template that describes each product in terms of these characteristics, along with an accompanying illustration. Let’s consider each characteristic.

Premium flexibility. This characteristic presents the fundamental question of whether the premium is determined by the carrier (and therefore the agent) or the client. It’s difficult to assign too much importance to this question, because the presence or absence of control over the initial and ongoing premium could well be the deciding factor for or against the choice of a type of policy. For example, a younger individual who would like to buy a cash value policy to supplement some term insurance might want to be able to “feather in” the premium as his compensation increases, without evidence of insurability. Or, an individual who’s funding a policy in an irrevocable life insurance trust (ILIT) might want to pick up the pace of that funding or, conversely, cut it back for a while to conserve cash or gift tax exemption, without losing any death benefit. Or, consider the 60ish-year-old policyholder with a health issue who wants to increase the funding of his policy for retirement purposes. A flexible premium policy such as CAUL would accommodate him, but other types of policies, such as WL, wouldn’t. He would be forced to go back into the marketplace, if he even could. On the other hand, many individuals would prefer not to have that kind of flexibility, perhaps because they want or need the discipline of a fixed premium to make sure the policy is funded properly. These individuals would likely be more comfortable with WL or GUL.

In practice, there are two main points to appreciate about premium flexibility. First, many agents are reluctant to give the client that kind of flexibility and control over the pricing decision. That’s because it either puts the compensation in the hands of the buyer or creates a product with performance risk, service demands or both that they aren’t comfortable selling. That’s why a thorough discussion about these characteristics, and product suitability in general, is key to a purchase that will stand the test of time. Second, the individual had better understand that the price of having that flexibility is eternal vigilance, which is why the agent’s post-sale service model is so important.

Premium guarantees. This characteristic, typically associated with WL, GUL and certain hybrid versions of CAUL and VUL, is all about the extent to which the client wants to know that the premium he plans to pay will support the death benefit until a targeted age, regardless of policy performance. Guarantees obviously have their place in many planning scenarios in which the policyholder needs to know just what his premium outlay will be on an annual basis. That assurance may be necessary for cash flow planning for a personal policy or for gift tax planning for funding a policy in an ILIT. But, the prospective purchaser of a policy with a guaranteed premium must clearly understand what the guarantees will bring to and take away from the table over the life of the policy in terms of the other characteristics, for example, the premium flexibility afforded the owner of a CAUL or VUL policy versus a WL or GUL policy.

Investment flexibility. This characteristic, primarily associated with VUL, but also with EIUL to a limited extent, refers to the ability of the policyholder to designate how the policy’s cash value is invested, all within the confines of the rules on diversification and investor control under Internal Revenue Code Section 817. At first blush, this characteristic would seem to be of particular importance to individuals who think that they can “out-invest” the carrier. But, there may be other aspects of this characteristic that appeal to the policyholder. For example, an individual might perceive that a separate account product, such as VUL, in which cash value allocated to the funds isn’t subject to the claims of the carrier’s creditors, is safer than general account products like WL, CAUL, GUL or EIUL, in which cash values are subject to those claims.

Cash value accumulation/distribution. Individuals in high tax brackets may consider using cash value policies as vehicles for retirement investing, either on a standalone basis or as a component of their larger life insurance program. Or, individuals who use split dollar or other forms of premium financing may want to be able to use the policy’s cash value to fund an exit strategy from that arrangement. Almost by definition, the investment-oriented purchaser will look for premium flexibility to accommodate what could be an irregular pattern of funding the policy, but wouldn’t want guarantees that could limit that flexibility. Investment flexibility, however, may or may not be important to this type of policyholder.

The four characteristics described are the foundation for selection of the type of policy. Once selected, however, the policy has to be designed, which will require the individual to consider such things as premium duration, that is, how many years he would like to plan on paying premiums, and death benefit structure, meaning level, increasing or return of premium. A standalone investment-purposed policy also calls for its own design specs, such as a minimum non-modified endowment contract (MEC) format or something that might accommodate increased funding in later years without underwriting.


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