Premium Advice – The Return of the Large Case

At long last, it seems that clients are ready to make decisions again. The last 18 months have not been the first time in history that economic conditions have made clients nervous or apprehensive about making financial decisions. Many of my recent articles have been related to strategies with timely pertinence to the global economic downturn; ideas that minimize the impact or that dealt with specific impacts that some clients had experienced.

One of the key results over the last year was that planning strategies seemed to be put on hold until clients regained their confidence in the economy. In some cases, the cash flow wasn’t there or pressing personal, business issues caused clients and advisors to put strategies on hold, and very correctly so. However, there were many situations where both the client and advisor agreed that the course of action was right, the cash flow was there and the solution was both timely in the short term as well as addressing long term needs. Regardless of those reasons, many clients simply declined.

At two recent industry networking functions, the consensus among advisors and wholesalers I spoke with was that their consistent efforts over the last 12 months are now paying off. Many advisors and companies are seeing a strong increase in written and settled business. The needs and concepts don’t seem to be anything new. Whether the need is for funding the buy-out in shareholder agreements, paying estate related taxes at death, or providing liquidity and equalization for the next generation, many of the recently successful cases are for the basic capital needs at death.

So how are people structuring the cases to help clients implement these important decisions? Many of my colleagues have seen a great increase in guaranteed permanent products. Non-guaranteed whole life type products are also being used as well, but the biggest increase in interest from advisors and clients has been fully guaranteed permanent products. (For further reasons on why whole life can make sense in volatile markets, see my article ‘Premium Advice – Forgotten Insurance Practices Shine in Volatile Markets’.

There tend to be two types of guaranteed products being used – Limited Pay Term to 100 with Cash Values, and Limited Pay Guaranteed Universal Life. Both products are very similar. With Limited Pay Term to 100, clients usually pay premiums for 10 or 20 years, and have cash values accumulating as early as the 10th year, but often starting in year 20. Usually the death benefit stays at a flat static amount, not increasing with any cash value build up.

When comparing products, the trade off is usually that for early cash value products (year 10), the ultimate cash values will be lower than products that don’t offer any cash value until year 20. However, if the true need is for estate protection, the cash value is theoretically of limited importance. It’s purely there as a worst case scenario asset to be accessed only if necessary. Consider 2 products offering $250,000 death benefit. If two products have a similar premium, but one offers cash value (CV) starting in year 10 yet the other only starts values in year 20, consider the value of each plan:

Year	Plan A (CV yr 10+)	Plan B (CV yr 20+)
Year 10	$8000	Zero
Year 20	$40,000	$59,000
Year 30	$89,000	$105,000

Neither plan increases in death benefit value, so the choice is made based on value of short term accessibility, which costs the client something in the values given up in later years. Unless there is a specified need known in advance, it’s simply a choice to be made of the flexibility inherent in each.

Built in a similar structure to the Term to 100 with values, we are seeing increased use of Guaranteed Limited Pay Universal Life products. While some pessimists state that advisors like these products because they require less management by the advisor than traditional equity based ULs, the reality is that they provide great value to the clients and ensure the estate capital is in place for a specified need. In addition, they provide more flexibility than a purely Term to 100 with values product. By taking similar cost and cash value structures of a limited pay Term to 100 product, and embedding them into a Universal life chassis, we get access to the best of both worlds – guaranteed costs, guaranteed cash values, access to other tax-sheltered guaranteed interest accounts, and the ability to increase our death benefit via the tax sheltered growth in guaranteed account.

Careful examination must be given to the different contract language in the various products in the marketplace, but many offer guarantees in their contracts (whether including an investment bonus or not) of between 3-4% or slightly greater. If a 4% tax-sheltered rate could be guaranteed, it would be equivalent to a pre-tax yield in excess of 7% (or approaching 8%) if the client is at the highest marginal tax rates in each province.

Let’s review in summary, the reasons that clients are taking action on large cases after delaying recommendations:

• They have permanent needs for capital at death which insurance is best suited for (buy sell, taxes owing in the estate, estate equalization amongst beneficiaries)
• These needs are not going away (permanent in nature, not temporary term needs)
• Eventually they have to make a decision (delaying the decision will only cost more at a later age)

Why are they choosing guaranteed cash value products, especially guaranteed universal life solutions?

• Guaranteed premium
• Guaranteed death benefits aligned with capital needs
• Guaranteed cash values
• Ability to grow the death benefit as they capital needs grow (or simply to keep pace with the time value of money)
• Guaranteed after-tax internal growth rates competitive or superior to what else is available to them
• Ability to not worry about market volatility due to contractual guarantees
• Accessibility to cash value in case life changes
• Flexibility of product to custom design to their own needs

For these reasons, clients are again getting back to dealing with their financial realities in their personal and business lives.

Chris Paterson has 14 years’ experience in the insurance industry, and has recently joined Wise AdvisoryGroup in Oakville, Ontario. He can be reached at chris@wiseadvisory.com