Why Should I buy Life and Disability?
There are multiple reasons for life insurance protection. Whether you are young, old, single or married there is a reason for life insurance. How much insurance is a different story and we will address that in a second. Some of the reasons for life insurance are:
- Savings Goals
- Creating a Legacy
- Tax Deference (cash value)
- Taxes ( used in trust)
- Long Term Care Riders
- Capital Needs – 10 x income
- Human Life Value – 30 x income
Before we discuss life insurance diversification, one thing that is not usually addressed is disability. Your most important asset is your ability to provide an income. Yet this is the area that is mostly ignored and we’ll talk about in a little bit. Disability income protects your income in case of a disability. Let’s define a disability. Most people do not think they will ever end up in a wheelchair, and that is what people think of when they think of a disability, however stats show that 1 out of 3 adults between 18-50 will be disabled for at least 90 days in their working lifetime. Disability can be mental, it can be physical or it can be stress related. Insurance just allows you to relax a little. We’ll get back to this in a little while. But if you are going to diversify and buy life insurance and protect your needs, it will mean nothing if you don’t add a disability policy.
Types of Life Insurance
In an earlier post we discussed the types of life insurance. Here is a refresher.
Life insurance is a great product and there are many different options one can use. One might be confused with all the offerings, they include:
- Term Insurance
- Decreasing Term
- Whole life
- Indexed Universal Life
- Guaranteed Universal Life
- Variable Universal Life
- Universal Life
- Whole Life – This is the traditional type of policy. It is a fixed insurance, but only the true permanent policy, I’ll explain in a second. It is the most expensive of all type of policies and not as sexy, however, a great play for fixed position in life insurance. This is a great product to use when utilizing the Life insurance as an asset class theory. I’ll discuss this theory in a later post. Whole life Insurance is a great product to have guaranteed cash values and death benefit.
- Term – All of the other products above fit into the term category except for While Life. You have your traditional term that has a level term of 10, 15, 20, 30 years and there are also one year terms and decreasing term policies. These are your cheapest life insurance and are great to get. When buying them make sure they are convertible to a permanent policy so that when the term is almost up you can convert and maintain your health eligibility. Now the other products are permanent policies and most build cash value. However, as they are built, they are designed to have term (annually renewable) inside them thus driving up the internal cost each and every year which should be offset by cash value growth.
- Indexed Universal Life – This is the popular insurance right now and a great product if used correctly. Indexed policies are based on a stock index and should be used right. There are a lot of different theories on how to run the illustrations and at what rate. I think they should be run at 6%. The lower you run an illustration the more money that needs to go into it. If the market does better than a lower number you have only helped yourself. Second, most policies are only shown at target. Target is not a bad thing, but it does not make the policy run the most efficient. Why do most advisors only show target? Well because of competition and education. It is hard to educate clients why a large premium makes sense and the advantages of the policy. In addition there is a compensation element, but when one advisor runs an illustration at target all the other advisors need to do the same otherwise they might lose the case. As clients, we need to ask for max funded policies, as advisors we need to run them at a max funding rate all the time and have the discussion.
- Variable Universal Life – Same concept as Indexed with two differences. One they are more based on the stock market, and in a variable you could lose money on the cash value and you have higher potential fees in a Variable contract.
- Current Assumption Universal – Again same concept, only this is a fixed plan. You will not see high returns but a better fit for a conservative client.
- Guaranteed – This is a death benefit policy only.
- Whole Life – Provides guaranteed death benefit with a fixed cash value at a better growth rate potentially better than universal life. Whole Life policies are fixed policies and are a good fit for a diversified life portfolio. Whole Life Policies are the only true non term based policies, and thus are more expensive. However, if designed right can be a good fit. Whole Life policies, I from a participating company, pay dividends that help grow the policy. There are three parts to the dividend, the Dividend Interest Rate (a percentage that is shown on the illustration), mortality costs, and company expenses. Just because the illustration is showing a high DIR, does not mean their dividend is strong and vice versa.
With any of these policies, one thing that clients and customers need to be aware of is the Illustration beauty contest. This is not intentional by most advisors, but mainly because advisors don’t understand the complexity of the illustration and clients don’t understand the complexities of the products. Hopefully this will help clear thing sup. For Indexed life and VUL policies the rate on the illustration shown should not be higher than 6.5%. The lower the percentage the more money you need to put into the policy, the higher the rate the less and greater the chance the policy may not succeed. The same can happen with Whole Life Policies, although the rate is more fixed, watch out for blending of term, or misapplication of dividends. These are not bad things but they might have different connotations. Have a frank conversation with your client and/or your advisor depending on which side of the table you are on and discuss what these products will mean to your overall goals. Remember Illustrations are simply that, illustrations. The difference between life illustrations showing a rate, and a mutual fund illustration showing a rate, is that Mutual funds by law can only show past history whereas life illustrations show future potential based on the set rate. This isn’t a bad thing just make sure you understand that the illustration has two columns, guaranteed and non-guaranteed. The guaranteed column usually shows highest expenses in the policy and also the lowest fixed rate they will pay. Don’t focus on this column, as this is a worst case scenario, but just be careful that the rate is not fixed and can change. Annual reviews are important with these policies.
Why Disability is not sold?
Disability insurance is not sold for really two reasons, infallibility of the client and cost. Most clients don’t want to think they will ever be disabled but it is possible. Advisors don’t sell Disability for two reasons, they are afraid of the cost to present it to the advisor and they don’t really understand the product. Life insurance everyone understands because everyone dies and it eases stress. Disability, again we think of people in wheelchairs, so we don’t think anyone we know is ever disabled. But what about the wife that can’t work because of headaches, or the man who is sensitive to light and can only take certain jobs only though he is educated to do a lot more. SO from a client perspective you need to ask for it and advisors need to present it.
Finally, advisors, we need to present our insurance opportunities in a diversified case scenario. One way to present insurance is in a five step process:
- Identify the capital and human life value need
- When will they need the life insurance
- What would happen if they got disabled – get waiver of premium and sell a di policy
- Cover the largest need amount with term (shortest time horizon maybe ten or twenty years or thirty years depending on situation)
- Cover the rest with a combination cash value policies including Whole Life, Indexed and Variable.
Rodney Mogen, is the president of solveurpuzzles, a business focused company. Helping financial advisors and insurance agents solve their case troubles and issues. Rodney is also a small business advisor focused on developing financial strategies for small business owners and helping them develop their own strategy and ideas to grow, sell, develop the way they want. He is focused on creating proper financial strategies for Advisors and business owners to assist them in their day to day duties by solving their financial puzzles.