UL&WL: Death Benefit - Cash Value = Unfair to Beneficiaries!

[AllenChicago]

Every time I see a client with Universal or Whole Life policy statement that contains a large Cash Value, I get this feeling of regret.. A part of me regrets that I sold it.

Before 2008, I believed that the Cash Accumulation was in addition to the Death Benefit on Universal Life plans. After all, when the monthly cost of insurance (and admin) is subtracted from the premium, the remainder should be savings that are in addition to the death benefit. Financial common sense..right?

For example, a statement came in today on one of my Transamerica Life clients. (Was "Life Investors / Aegon Insurance Co." in 2006.) She has a $30,000 level death benefit policy, with $21,000 in Cash Value.

If she dies today, the $21,000 in the savings portion of her policy reverts back to the company. To me, that is.. well, CRIMINAL. How would you explain to the beneficiaries that the $21,000 on her most recent statement is being kept by Transamerica?

This client is routinely confronted by the guy who does their business insurance. He tells her that it's unwise to own a Universal Life policy, for the reason described above. Her husband asks me every now and then if I feel that she should stay with the plan. Since she was rated for obesity in 2006, and is bigger now, I tell him that staying-put is best.

1.) If this 47 year old client was in good health, would it be better for her to get a Term Life and put the $21,000 in an annuity?

2.) Are there any good-quality whole life plans out there that accrue cash that is in addition to the death benefit? Or, even better, a "Level Term to Age 100" policy?

Thanks in advance for all constructive responses!
-Allen

 

[DHK]

You aren't thinking correctly about this.

Here's a new term to commit to memory: "Net amount at risk".

Face Amount = "Net amount at risk" + Cash Values - any outstanding loans.

There's also Option B on UL policies that add the cash values on top of the death benefit... which is an "increasing" death benefit with higher costs over time.

 

[WinoBlues]

Every time I see a client with Universal or Whole Life policy statement that contains a large Cash Value, I get this feeling of regret.. A part of me regrets that I sold it.

Before 2008, I believed that the Cash Accumulation was in addition to the Death Benefit on Universal Life plans. After all, when the monthly cost of insurance (and admin) is subtracted from the premium, the remainder should be savings that are in addition to the death benefit. Financial common sense..right?

For example, a statement came in today on one of my Transamerica Life clients. (Was "Life Investors / Aegon Insurance Co." in 2006.) She has a $30,000 level death benefit policy, with $21,000 in Cash Value.

If she dies today, the $21,000 in the savings portion of her policy reverts back to the company. To me, that is.. well, CRIMINAL. How would you explain to the beneficiaries that the $21,000 on her most recent statement is being kept by Transamerica?

This client is routinely confronted by the guy who does their business insurance. He tells her that it's unwise to own a Universal Life policy, for the reason described above. Her husband asks me every now and then if I feel that she should stay with the plan. Since she was rated for obesity in 2006, and is bigger now, I tell him that staying-put is best.

1.) If this 47 year old client was in good health, would it be better for her to get a Term Life and put the $21,000 in an annuity?

2.) Are there any good-quality whole life plans out there that accrue cash that is in addition to the death benefit? Or, even better, a "Level Term to Age 100" policy?

Thanks in advance for all constructive responses!
-Allen

Had you sold her a 20 level term in 06 she would be half through her policy. She would need to die in the next ten years or so to win
Had she bought term she would not have the $21,000.00 to work with today.

Run a couple inforce illustrations. One as is, one doing a search for 0 or lower premium at retirement.
Then run the numbers on the term and annuity. Next on a WL. Now you can compare with what their wants and needs are today.

 

[rousemark]

Every time I see a client with Universal or Whole Life policy statement that contains a large Cash Value, I get this feeling of regret.. A part of me regrets that I sold it.

Before 2008, I believed that the Cash Accumulation was in addition to the Death Benefit on Universal Life plans. After all, when the monthly cost of insurance (and admin) is subtracted from the premium, the remainder should be savings that are in addition to the death benefit. Financial common sense..right?

For example, a statement came in today on one of my Transamerica Life clients. (Was "Life Investors / Aegon Insurance Co." in 2006.) She has a $30,000 level death benefit policy, with $21,000 in Cash Value.

If she dies today, the $21,000 in the savings portion of her policy reverts back to the company. To me, that is.. well, CRIMINAL. How would you explain to the beneficiaries that the $21,000 on her most recent statement is being kept by Transamerica?

This client is routinely confronted by the guy who does their business insurance. He tells her that it's unwise to own a Universal Life policy, for the reason described above. Her husband asks me every now and then if I feel that she should stay with the plan. Since she was rated for obesity in 2006, and is bigger now, I tell him that staying-put is best.

1.) If this 47 year old client was in good health, would it be better for her to get a Term Life and put the $21,000 in an annuity?

2.) Are there any good-quality whole life plans out there that accrue cash that is in addition to the death benefit? Or, even better, a "Level Term to Age 100" policy?

Thanks in advance for all constructive responses!
-Allen

You can always use option B on UL policies and then they will pay the face amount plus the accumulated CV.. However, option B will not accumulate as much cash value as option because the insurance cost will always be calculated on the increased net amount at risk. In this case, with option A which apparently you wrote, the net amount at risk is only 9k.. Had you used option B and funded it with the additional premium required to have 21K the total DB would be 51K... with a current net amount at risk of 30K.

 

[WinoBlues]

Oh also, yes it is called GUL. Can be made to run to any age.

 

[VolAgent]

Don't blame your lack of understanding upon the policy. By all accounts it did exactly what it was supposed to do.

Although, I really have to question what you did to have sold a policy in 2006 for $30,000 in benefit to a woman who is now 47 and have $21,000 in cash value.

It sounds like you really put a lot more premium in than was necessary to simply fund the policy. You probably should have gone with option B. I would definitely get an inforce illustration. There is a good possibility she may never need to make another payment on this policy again.

 

[AllenChicago]

My biggest mistake with all clients before 2008 was believing that Cash Accumulation was in addition to the Death Benefit with UL policies. That's why I choose the "Level", vs the "Increasing" DB. As Rousemark pointed out, the largest cash accumulation was the goal.

Started choosing "Increasing DB" option after 2008.

Will have to check out the GUL to see what that's about. I'm primarily health insurance, term, Fin Expense, CI, Injury now. Will have to "bone up" on the UL scene.

Thanks all!
ac

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It sounds like you really put a lot more premium in than was necessary to simply fund the policy. You probably should have gone with option B. I would definitely get an inforce illustration. There is a good possibility she may never need to make another payment on this policy again.

They are putting additional premium in the policy, on a quarterly basis. Self Employed family. Not much retirement. Are savings allowed to exceed the Death Benefit? What will the beneficiary get if the DB is $30,000 and the Cash Accumulation is $60,000?

 

[WinoBlues]

My biggest mistake with all clients before 2008 was believing that Cash Accumulation was in addition to the Death Benefit with UL policies. That's why I choose the "Level", vs the "Increasing" DB. As Rousemark pointed out, the largest cash accumulation was the goal.

Started choosing "Increasing DB" option after 2008.

Will have to check out the GUL to see what that's about. I'm primarily health insurance, term, Fin Expense, CI, Injury now. Will have to "bone up" on the UL scene.

Thanks all!
ac

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They are putting additional premium in the policy, on a quarterly basis. Self Employed family. Not much retirement. Are savings allowed to exceed the Death Benefit? What will the beneficiary get if the DB is $30,000 and the Cash Accumulation is $60,000?

No, the cash value will push the FA higher. An inforce illustration will show when.

 

[unic.consulting]

My biggest mistake with all clients before 2008 was believing that Cash Accumulation was in addition to the Death Benefit with UL policies. That's why I choose the "Level", vs the "Increasing" DB. As Rousemark pointed out, the largest cash accumulation was the goal.

Started choosing "Increasing DB" option after 2008.

Will have to check out the GUL to see what that's about. I'm primarily health insurance, term, Fin Expense, CI, Injury now. Will have to "bone up" on the UL scene.

Thanks all!
ac

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They are putting additional premium in the policy, on a quarterly basis. Self Employed family. Not much retirement. Are savings allowed to exceed the Death Benefit? What will the beneficiary get if the DB is $30,000 and the Cash Accumulation is $60,000?

There has to be a "corridor" between the cash accumulation and the DB for it to be considered life insurance. Make sure the insurance company will increase the DB to make sure the account doesn't become an endowment.

 

[VolAgent]

They are putting additional premium in the policy, on a quarterly basis. Self Employed family. Not much retirement. Are savings allowed to exceed the Death Benefit? What will the beneficiary get if the DB is $30,000 and the Cash Accumulation is $60,000?

The corridor effect will kick in (please forgive me if I'm thinking the wrong term). The insurance company will increase the face amount to keep from violating TAMRA and DEFRA. That or they will simply refuse any premiums that would cause it to violate that. I'm not sure how TA handles those policies.

So if you are using level for cash accumulation, it does suck if they die early in the policy as those extra premiums really did nothing for you. But it definitely pays off later due to the lower cost of insurance.

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There has to be a "corridor" between the cash accumulation and the DB for it to be considered life insurance. Make sure the insurance company will increase the DB to make sure the account doesn't become an endowment.

I'm not aware of any company that will knowingly allow a policy to violate TAMRA. They will certainly act to prevent it. Either by increasing the face amount and/or refunding premiums.