Do your clients have somebody they love that will suffer financially if they are no longer around?
Jamie Hopkins was that somebody at age 8. In a recent webinar we hosted together, he told me the story. His father, the primary income earner in the family, went to work one rainy day in Baltimore, Maryland, and didn’t come home. He slipped on the icy steps of an aluminum ladder, fell and passed away.
“Here’s my family – my mom doesn’t have a college degree, my dad didn’t either; they’re running a family construction business where he is the worker generating the income, and that’s gone,” Jamie said. “My parents didn’t have life insurance. They didn’t think about this as a need-to-have at that point.”
Jamie recalls worrying about what the family was going to do – how they were going to pay bills and buy food. To his mother’s credit, she kept running the company and eventually made it work.
“That’s a perfect example with my life – you have that earner and that high risk – where life insurance would have been core to protecting the family,” Jamie said. “To me, it’s personal. All of this is. It should be.”
There are many ways life insurance can fit into your clients’ financial plans. Putting policies in place can help comfort clients, knowing that they’re taking steps to protect their heirs. In this article, we’ll give an overview of why clients need life insurance and get into the pros and cons of term and permanent life insurance.
Ultimately, life insurance is for somebody your clients love and care about. It’s the ultimate gift that your clients can give.
Read more: How to Demonstrate Your Value to Clients
Why Do Clients Need Life Insurance?
At the basic level, life insurance is a financial tool designed to replace the income of the deceased earner. To an extent, pure life insurance is a very efficient mechanism for doing this, because people are less likely to die in their early years when their income is the highest. But then there are cases where they do die in those high-earning years, and life insurance is crucial to taking care of their heirs.
The story Jamie told is an example of the first reasons clients might need life insurance.
Reasons to have a life insurance policy:
- Survivor income: Do your clients want to provide income for their survivors over their survivors’ lifetime or a lump-sum benefit?
- Replacement income: Do clients want to replace their own income for their spouse in the event they pass away?
- Liquidity for the estate: Will clients’ estates need to pay off some debts after they die?
- Mortgage expenses: Does your client want to provide a means for their partner or spouse to pay the mortgage?
- Business expenses: Do clients have buy-sell agreements? If they’re business owners, will their workers get paid? Do they want to leave resources to hire a replacement?
- Charitable endeavors: Do clients want to transfer wealth to a charity upon their death?
Clients determine who benefits from their life insurance policies. It could be their dependents, a charity, creditors, business owners and, in some cases, the insured themselves. Remember to do beneficiary reviews periodically with your clients as those beneficiaries may change.
Term and Permanent Life Insurance
Let’s jump into the age-old question of should clients get term or permanent insurance? It all depends on their need and what they’re trying to protect.
Term policies allow your clients to put a greater amount of protection in place for a lower cost. Most term policies are that of a level term – you put protection in place for the period of time for which you need protection. There have also been increasing term policies, which were initially designed to protect against inflation and are not prevalent today. Decreasing term policies were mostly designed as mortgage protection, so protection decreased as the mortgage was paid down.
Permanent policies are designed for when the need extends beyond a short period of time. Different options in this category include whole life, universal life, variable life and variable universal life.
Term life insurance might be appropriate if, for example, a client wants to make sure that their home is paid for if they don’t come home from work one night. Oftentimes, term life insurance covers a period of 10, 15, 20 or 30 years.
After establishing a need for life insurance, often the type and amount of insurance is determined by a client’s budget. If your client has a young family, and their budget is strained, the cost of life insurance can be an issue. Term insurance allows us to put a greater amount of coverage in place for a more economic cost.
One strategy for term life insurance is the classic “buy term and invest the rest.” The key is for your clients to be disciplined in “investing the rest,” because while it’s great to save the dollars, if you don’t take care of the other half, the strategy breaks down.
A Closer Look at Term: The Benefits
When you’re looking at a term policy, it’s important to keep the functionality of a policy in mind. Ask these questions:
- Is it renewable? Term policies are guaranteed through the policy term – whether it’s 20 or 30 years. Most can be renewed without evidence of insurability. If policy owners need to extend coverage for a few years and go into an annual renewable term situation, they’ll pay higher mortality and expense charges. That affordable term coverage over the last 30 years can become exponentially more expensive. That leads me to my next point.
- Is it convertible? Generally, there’s a period while you own term coverage when you can convert part or all of it to a permanent policy with no evidence of insurability.
- Waiver of premium? If a client becomes totally disabled and still needs life insurance, but there’s no income coming in to pay the premiums, a waiver will keep the policy active. It’s a great benefit to help ensure the self-completing nature of the policy stays intact.
The Drawbacks of Term Life Insurance
Like with anything, there are pros and cons to term life insurance. When you take out a term policy at a more advanced age, the mortality and expense charges – and the premiums – are higher.
Most term policies are lapsed without collection by the insured. This is the argument for a lot of insurance – people have policies in place and paid premiums on for a number of years, and they never use them. Term policies run this risk because there is a finite amount of time where you own and are covered by that policy.
Term policies also have no savings component and may not meet permanent insurance needs.
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A Closer Look at Permanent Life Insurance: The Benefits of Whole Life
Whole life has been around for hundreds of years, providing level, permanent protection. Essentially, you choose a face amount, and a guaranteed premium will be paid for the life of the policy.
Unlike term insurance, we use a present value to build the higher mortality and expense charges into the premiums. That’s why premiums are higher on a whole life insurance policy. The benefit of that is you start building cash value.
Other characteristics of whole life policies are that the death benefit is level throughout the term of the policy and typically the premium is also. Many whole life policies offer permanent protection until age 100, with some of the modern policies going up to age 120.
A portion of whole life premiums pay for the raw cost of owning the insurance – like the mortality cost and overhead. The rest goes to the cash value, which will grow at an interest rate and be useful for the “living benefits” of life insurance down the road.
One of the benefits of whole life insurance is being able to use the cash value for emergencies and other strategies, i.e., retirement funding and college education. Every permanent policy has a schedule that speaks to when and how much you can take out.
Cash values of these policies also have a minimum guaranteed rate of interest, and the cash value that grows within the life insurance policy grows tax-deferred. Oftentimes if it’s properly designed, it can come out in a tax-advantaged or tax-free way, in some instances.
However, if you no longer have a need for life insurance, you can surrender the policy and take the cash value out. Generally, there is a surrender period, which is upward of 10 years, and a percentage of money is held back to cover costs of early termination of the policy. You’re allowed to take that cash value out.
Participating or Non-participating Life Insurance Companies
Clients should explore whether the life insurance company is participating (receives dividends from the insurer) or non-participating (does not receive dividends from the insurer).
In a participating company, dividends could come in the form of cash or premium reduction, or you could buy additional life insurance. It’s important clients understand what they’re putting in place from a whole life standpoint and which policy or company is right for them.
The Drawbacks of Permanent Insurance
Whole life policies are expensive, but again, you get what you pay for. It is permanent, so it offers steady protection for the lifetime of the contract as long as you pay the premiums.
Premiums for whole life policies are also inflexible – clients must pay premiums, and there isn’t flexibility to stop paying the policy. However, there are contracts that offer the functionality on the front end of paying once or in different installments.
Cash value is gradual and based on interest rates, so in a low interest rate environment, it can be difficult to show high returns.
Can clients buy their ideal amount of protection, knowing that the premiums are going to be two or three times higher than term? This could limit coverage or create a need to blend term and permanent.
The optimal insurance solution depends on your clients’ unique situations and goals. Finding the right insurance solutions to meet your clients’ goals is key.
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