Life Insurance Illustrations
I have before me two life insurance illustrations. One is Universal Life (UL) and the other is participating (PAR). My task is to compare them. I suppose that is like what a client might be expected to do.
In fact, they are not really comparable, so I will need to find some important differences. Some good and some not. If I do not do it the client will never understand it. Here’s why.
- The UL presentation is 23 pages long. There are 17 “Important Points” about the illustration. None are written in conversational English.
- The illustration assumes interest earned at 3% plus bonus interest met under some conditions.
- The illustration also show the effect of a more conservative return. In this case 0%.
- Pages 5 to 21 are numbers except for the headers and footers.
- Page 22 includes some notices about what is guaranteed and what is not.
- There are some, nearly random, tax factors appearing and they affect the coverage.
I think I am fairly skilled at dealing with numbers. If someone gave me this and asked for a decision, I would be lost without hours of study.
The PAR illustration is smaller at 22 pages.
- It offers dividend option – paid up additions, additional deposit option and premium offset.
- It offers 3 scenarios. Current dividend scale, current minus 1% and current minus 2%
- Pages 4 to 15 are dense numbers in a small typeface.
- Pages 16 to 20 are definitions of terms that do not appear elsewhere in the policy although if you are good at numbers you can see how they affect the illustrations.
- Dividends are an important value in the projection, but try to find where they come from and how they might change.
I think if I were a client I could understand the UL easier than this one.
What should clients think about, because they are not going to get the details straight very easily.
- What is the purpose of owning any plan?
- How does that need change over the future?
- How does the contract change compared to my estimation of need?
- What is my financial commitment to get the projected result?
- How different is that commitment if the future behaves better or worse than the projection shows.
- What conditions could change the projected outcomes?
- What guarantees exist and could I live with their outcome if necessary.
For most clients, the best choice depends on predicting the future and that is a losing proposition. If the purpose is to put liquid capital in your estate then either are likely to do that better than non-insurance options.
- If bond rates rise PAR will do well.
- If equities do well, maybe UL is better.
- If life expectancy improves, UL is unaffected but PAR does better.
- If a lot of other people quit their PAR contracts, those who remain will do better. No effect on UL.
- Insurer’s expenses are about the same, but if they get better PAR will do better.
- Taxes flow through in either case.
- If everything goes south, UL will do better because its insurance rates are guaranteed and there is a minimum guaranteed rate of return on the cash.
Clients can easily get caught up in the complexity. Tax deferrals, low MER, flexibility. If you do not begin with, “What is this tool supposed to do?” it will be challenging to get a good answer.
“Good answer” is the goal. You can get that without a lot of fuss. Perfect answers don’t exist except at the moment. You will do better looking for the 90% right answer and getting on with the important parts of your life.
Always notice that the illustration is not a fact. It is like an estimate at the body shop. Could be close. Might not. Depends a lot on how the vendor decides to present it. Ask questions.
Don Shaughnessy arranges life insurance for people who understand the value of a life insured estate. He can be reached at The Protectors Group, a large insurance, employee benefits, and investment agency in Peterborough, Ontario. In previous careers, he has been a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business.
Please be in touch if I can help you. firstname.lastname@example.org 866-285-7772