Because we have managed life insurance for over a decade our clients will sometimes inquire about the best permanent life insurance policy to buy. Our answer – always – is there is no single best policy. The market usually has a “latest and greatest” policy and today it is equity index universal life (EIUL) which captured 64 percent of all universal life premium in a recent report issued by LIMRA, an industry research firm focused on life insurance. (1) However, determining the best policy will depend on your client’s financial situation, cash funding position and investment risk.
While a basic understanding of life insurance is important in helping your clients determine the best policy specifically for them, you need not be a life insurance expert to provide guidance.
Specific policy characteristics determine suitability for a client and understanding your client’s situation is important when determining the best policy. What is your client’s risk tolerance? Do they want a policy with significant guarantees or if a cheaper alternative could be found, would they be comfortable absorbing some risk? What is their cash flow situation? Do they need a policy that allows for flexible premium payment, one that allows them to fund more heavily in good years, less when cash is tight, or could they fund a certain specific amount each year? Will they have a significant cash flow drop when they retire or will the source of funding for the trust and the policy stay in place even after entering their golden years? Is there a need for cash in the policy to fund obligations of the trust or can the policy be lean on cash value? As seen, a discussion with your client is important before the selection process begins. The information below, while not all-inclusive, will provide you with the guidance to allow you to participate in a thoughtful discussion with your clients about policy purchase decisions.
As policy guarantees increase, premium payment flexibility typically decreases. The premium for a guaranteed universal life policy must be paid in full and on time or the death benefit guarantee is compromised. Whole life policies have required premiums that can be offset by dividends or paid by policy loans, but premiums should be thought of as required at least until the policy develops significant cash value. Other universal life policies (current assumption, variable, and equity index) without death benefit guarantees are flexible premium policies and can accommodate the client with varying cash flow capacity. Another factor to consider – retirement. Some clients will have a significant income drop in their retirement years and this should be considered. Short pay options that front-load the premium payments in the early years of the policy may be a viable option.
All things equal, for a universal life chassis policy without a death benefit guarantee, the higher the rate of return that can be generated in the cash value account, the lower the premium needed to carry the policy. Since equity investments typically provide a higher return than fixed products, a variable universal life policy (VUL) can be shown to generate a lower premium need than a current assumption universal life (CAUL) policy. But does your client (and his trust) have the investment risk tolerance for an equity investment? Do you as trustee wish to lower premium costs (gifting) by attempting to generate a higher return on the policy? A guaranteed universal life policy (GUL) has no market risk but has other issues we have mentioned and will mention soon. Is GUL a more appropriate policy? Decisions about investment risk are an important part of the policy selection process.
Cash Value Growth
In a trust-owned policy, cash value growth is typically not as important as the rate of return on the death benefit provided. A low premium is typically the driver, not cash generated. However, cash value can provide flexibility for the trust enabling the trust to pay out cash to beneficiaries prior to death and if the trust needs change, can be distributed if the policy is surrendered; or if a more efficient policy is found, used to jump start the new policy. Whole life, current assumption, variable and equity index universal life policies can all generate significant cash value, but a guaranteed universal life policy will not. In later years, the cash value of a GUL policy will often drop to zero with the policy running only on guarantees.
Death Benefit Guarantees
While a whole life policy can provide death benefit guarantees if fully funded, it is the GUL policy used most often to provide low cost guaranteed death benefit coverage in the trust owned life insurance (TOLI) world. Over the last two decades, these policies gained favor even with premium inflexibility and low cash values. Other universal life policies can provide very limited death benefit guarantees, or longer guarantees if a higher premium is paid.
There is a best policy for each client and situation. Determining the policy type is a process that must be undergone before a policy is purchased. If not, the policy will probably eventually be replaced, often at great cost. As trustee, you should strive to avoid this by working with your clients to determine the specific policy best for them.
For more information about choosing the best policy, check out chapter 12 of The TOLI Handbook, available in a free PDF download by clicking here.
- Indexed Universal Life Continues Its Hot Streak, Cyril Tuohy, insuramcenewsnet.com, March 1, 2018
While GUL provides a low premium for a level benefit, a policy with cash value accumulation often pushes up a higher benefit around life expectancy. How do you view the risk of getting off track on a GUL versus the risk of non-guaranteed accumulation products? The risk of the accumulation products would be greatly diminished if companies guided underfunded policies with gradual decreases keeping a permanent portion. See this link for my article on what is permanent life insurance: