Reviewing a client’s or prospect’s life insurance coverage needs might seem straightforward. But too often, agents and advisors overlook critical questions that can result in a poor product recommendation — one that fails to meet income replacement, living benefit, wealth transfer or other planning needs.
By: Warren S. Hersch
LifeHealthPro, 16 July 2016

Reviewing a client’s or prospect’s life insurance coverage needs might seem straightforward.

But too often, agents and advisors overlook critical questions that can result in a poor product recommendation — one that fails to meet income replacement, living benefit, wealth transfer or other planning needs.

To get better acquainted with policy review issues, LifeHealthPro interviewed Palmer Williams, a national sales director at Saybrus Partners, a provider of insurance and annuities solutions. The conversation explored issues germane to determining the appropriate policy size and type. Among them:

- Client goals and objectives;
- Policy risks connected with increasing life expectancies;
- Scenarios suitable for permanent insurance and life settlements;
- The value of hybrid products boasting long-term care; and
- Chronic illness riders.

Keep reading for interview excerpts...

LHP: What are the top issues advisors should explore in policy reviews with clients and prospects?

Williams: Advisors should use these conversations to make sure that clients have the right amount and right type of life insurance. LIMRA states that less than 6 in 10 individuals own life insurance. They note also that half of all households would feel the impact of the loss of a primary wage-earner within a year of his or her passing. Many individuals may not have enough life insurance to be able to meet and accomplish their goals for their family.

There are 5 parts of a policy review discussion:

1.Ascertaining clients’ goals and objectives;

2.Determining the right amount coverage;

3.Identifying the right type or types of life insurance;

4.Evaluating existing life insurance through a stress test; and

5.Exploring whether a new policy would be appropriate.

As to the first, advisors need to consider how clients’ financial situation has changed since they last obtained a life insurance policy — assuming they have one. They should determine whether they’re insurable and, if so, at what premium level. Also, (they should consider) life events, such as the birth of a child, that might affect the amount of life coverage required.

In respect to the amount of coverage, many insurers and distribution partners now offer producers tools to do an income replacement needs analysis, including expenses to be paid for in the event of a primary wager-earner’s death. In other cases — funding a buy-sell agreement between business owners or equalizing an estate among heirs — a different analysis can used to ascertain the appropriate face amount.

For many of those in the middle market, term life insurance will be the appropriate solution. In situations where the client desires to pass on assets to the next generation, permanent life has a role to play. Often, too, a blend of term and permanent insurance will be needed to adequately cover both income replacement and wealth transfer objectives.

LHP: For what other purposes might a middle class household favor permanent insurance?

Williams: Many permanent life insurance policies now can be offered with an optional rider to cover long-term care or chronic illness expenses. The policy’s cash value can also provide supplemental retirement income on a tax-advantaged basis.

But for this purpose, you’d want a high cash value policy funded with the maximum-allowed premiums — just below the point where the life insurance would, for IRS purposes, be deemed a fully taxable modified endowment or MEC. These policies make sense for more affluent clients who have maxed out on contributions to a 401(k) and individual retirement accounts and need an additional vehicle for investing supplemental savings on a tax-advantaged basis.

As to the type of permanent policy — whole life, universal, indexed UL or variable universal life — the advisor will have to gauge the client’s risk tolerance level. For those not comfortable with stock market volatility, VUL likely won’t be appropriate.

LHP: Tell me about the stress test for existing life insurance coverage. What’s involved?

Williams: The advisor should examine a policy’s existing terms and conditions and an in-force illustration: a snapshot in time showing how the policy has performed since it was purchased and projecting how it will perform in the future. Two parts of the stress don't always get much attention: (1) the beneficiary designations; and (2) contract provisions respecting the death benefit and cash value at the time the policy endows.

As to the first, as a family’s situation changes, beneficiaries may need to change. In one case I was involved with, an ex-wife sought to collect on a life insurance policy of a former husband who had not changed the contract’s beneficiary designations. So she received the death benefit.

Secondly, for UL and VUL contracts issued prior to 2004 and that endow at age 100, it's important to understand what happens to the policy when it reaches maturity. Consider a UL policy with a $500,000 death benefit but only $30,000 in cash value on the policyholder’s 100th birthday. At that time, the policy endows and the policyholder will — absent a maturity rider providing for payout of the death benefit — receive the lower cash value and the policy will cease.

Many clients underestimate their chances of living to age 100. They shouldn’t: The World Health Organization (WHO) says the number of centenarians between 2010 and 2015 increased 10-fold. So the chance of an age-100 problem happening for clients with existing coverage is significant enough that it warrants an analysis — at a time when they’re young enough to be able to make policy adjustments.

LHP: What about a life settlement — selling the policy on the secondary market for an amount that’s less than the death benefit, but more than the cash surrender value. When might this be a viable option for policyholders?

Williams: We at Saybrus Partners don’t participate in the life settlement market, but we do encourage clients who no longer need or can no longer afford life insurance to explore all options.

A life settlement may be appropriate for, say, owners of no-lapse guaranteed UL policies that have a substantial face amount, but little or no cash value. If these policies are allowed to lapse, the policyholders will have lost all the premiums paid. But when discussing a life settlement option, a client needs to have a conversation with both the life insurer and a CPA or tax attorney to ascertain the tax and other ramifications.

LHP: Let’s turn to long-term care and chronic illness riders available on permanent life policies. What should advisors talk about in connection with these options?

Williams: A key part of the insurance planning discussion is to help the client understand unexpected medical costs in retirement. Seven in 10 clients over age 65 will need some type of long-term care. That doesn't mean they will be on a long-term care claim, but 7 in 10 will have a long-term care event, one that will likely significantly impact the client’s financial picture.

Given this high probability, advisors should broach with them 4 options:

1.Self-insuring from existing assets;

2.Buying a traditional long-term-only policy;

3.Purchasing a combo life/LTC policy; and

4.Buying a permanent life policy without an LTC or chronic care rider, assuming the client is not eligible to qualify for LTC benefits.

Among these four options, the third is often the most favored, compared with a standalone LTC-only policy. That’s because the combo product will always pay out: Either the insured will receive a long-term care benefit or surviving family members will get the death benefit at the insured’s passing.

LHP: What guidelines do you recommend advisors follow when evaluating life/LTC combo products?

Williams: Very good question. There are three things to consider, starting with what happens when the insured submits a claim.

Many riders on hybrid products stipulate that if the insured experiences cognitive impairment or can't perform 2 of 6 activities of daily living (ADLs), then they’re eligible to receive an LTC benefit. The key question here is, how long is the insured going to be incapacitated. The better life/LTC combo products stipulate a 90-day waiting period; others require that both a physician and the insurer certify the insured’s condition will last for his or her remaining life. That’s a big difference.

Second, the advisor needs to determine how an LTC claim will be paid: whether in the form of an indemnity or as reimbursement for actual LTC expenses incurred. The first is more flexible because the LTC benefit can be used to pay anyone, even those who are not long-term care professionals.

Thirdly, the advisor should determine if the policy can help fund a long-term care coordinator, someone who can:

- Assess care long-term care needs;

- Create a suggested care plan;

- Identify local care providers, such as home care agencies, assisted living facilities and adult day care;

- Negotiate for discounts on care; and

- Locate public resources that might supplement paid caregiving coordination.

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