insurance primer

Life Settlement | Insurance Consulting | Policy Audit

	Whole Life	Whole Life contracts are traditional permanent policies that have a cash value. Historically, these policies have been the most conservative type and provided the most guarantees.
	Universal Life	Developed as a result of skyrocketing interest rates in the 1980's. Universal Life contracts have lower premiums than traditional contracts, but with fewer guarantees. They rely heavily on current rate assumptions.
	Variable Universal Life	Consumer chooses the underlying investments that power the policy. Variable contracts have the lowest level of guarantees, but they also have the most potential of higher earnings.
	Term	Term strips the "investment" aspect out of the insurance and simply buys death benefit protection. It is the lowest cost option and contains no cash value. Term is used predominately when a need exists for a known period of time. At the end of the term period, the insurance coverage ends.

Pricing and Performance
Life insurance pricing and performance is based on a combination of factors, including

company expenses
mortality charges
interest rates

Interest, which can be earned to support the policy, is the most important of these factors. Interest rates have been on a downward trend for two decades. Consequently, the performance of cash value life insurance policies has not met expectations. Few people understand just how poorly many policies in the market today are performing and what it would take to make them sound.

Policies issued three or more years ago may not be serving the client as well as today's products are able to. Life insurance policies need to be managed because of the dynamic nature of the market.

Life insurance is a financial instrument and like many other financial instruments, it very much needs to be reviewed and managed. An investor does not necessarily purchase a mutual fund or a stock and expect to own it forever. Companies change, philosophies change, needs change, advisors change, etc. Agents have a responsibility to their clients to provide periodic reviews of their policies, especially when they have reason to believe that better products have become available.

An Analogy
If a 25 year old planned on a 10 percent average rate of return over forty years to fund a retirement account to $1,000,000 at age 65, he could determine that he needed to make a $2,054 annual deposit into the account. Now, if in reality he realized 8% on average over the forty years, his account would only grow to $574,674, not $1,000,000. In other words, the goal could not be attained because the retirement income flow would not last as long as planned. The same thing happens with the life insurance policy. If the assumed interest rate or dividend rate is not attained, the policy will not will not be able to self-fund the premiums as expected, or the premiums may escalate dramatically.

A Special Case
In addition to purchasing any of the four types of insurance described above, insurance policies can, in certain situations, also be sold. This happens in the secondary market for life insurance where policy owners who are nearing their life expectancy can receive a cash payout “Life Settlement” over and above the cash value of their policy.