Which is best for Your Client, Option A or B?
So many clients come to you wanting term life insurance (Option A) because it is the least costly protection they can get, but is it always the best way to give them the life insurance protection they need? Why not give them an alternative that offers features they will not have with term coverage (Option B)?
Option A
Bob is a 45-year-old that is looking for life insurance benefits to provide for his family. Bob has enjoyed the better part of life and is not quite within the weight range for a preferred classification. You discuss Bob’s need for life insurance and determine that $1,000,000 of coverage is appropriate. Initially you offer Bob a 30-year level premium term at a cost of $3,779.20 annually. Bob is comfortable with that cost and is ready to apply for the coverage.
The problem
Let’s consider a couple of things with the term insurance. The cost initially may sound good and the coverage takes him to age 75, but what happens at age 75? What if Bob still needs coverage and is no longer healthy enough to get it? Will there be a conversion available at age 75? Most policies don’t allow for conversion at that age. Will the annually increasing cost to continue the term insurance be too prohibitive?
Option B
Why not take the same premium we were going to put into the 30-year level premium term and put it into an IUL? What would that look like for Bob?
As an alternative to term, we are putting the premium of $3779.20 into an index universal life policy, using a S&P annual point to point with a cap. The current interest rate assumption is a conservative 5.60%.
What you can now offer to Bob is a life insurance benefit plan that will provide coverage for 34 years under the current assumptions, 32 years using an assumed midpoint of 3.5% and a 12-year guarantee.
The first thing you might think is that he only has a 12-year guarantee! Well, lets keep in mind that interest rates must fall to 1% and mortality costs and expenses must reach their maximum rates to have the policy go to the guarantees as shown on the illustration. More than likely, over the course of 30 years, the interest rate will sustain that policy. Even at 3.5% the policy goes to Bob’s age 77!
The advantages for Bob
- Potential for additional cash value growth. Interest rates could go up!
- Access to cash value for loans or withdrawals. (loans and withdrawals can affect the guarantees)
- No negative crediting, Bob will never lose his credited cash value. $56,254 in the 25th year under the assumed interest rate of 5.60%
- Tax deferred accumulation of cash
- Can receive some cash if he decides to cancel the policy early
- Benefits could be reduced in later years to continue coverage a longer time period at the same rate class
Does this work for all clients?
This concept works best for your client with a standard rate classification from about 45 to 60, so no, it does not work for everyone but can be a great advantage to some.
And, by the way, the compensation is greatly different on an IUL verses a term. In the above case, you would get paid, perhaps 95% on the 30-year term, which is not bad. The IUL would pay you 90% on the rolling target premium which is $11,330!
IUL as an alternative to term is certainly something to look at. Again, it may not work in every case, but may work on your next case. Give us a call to discuss your next term case to see if it is a good fit.