Life Insurance Technical Manual

Transcription

1 Life Insurance Technical Manual Technical issues surrounding one of the biggest assets owned by successful clients life insurance. Presented by: Daniel Tasciotti, CLU, ChFC, CFP, AEP, MBA There are worse things in life than death. Have you ever spent an evening with an insurance salesman? Woody Allen Estate Planning Council of Greater Miami November 21, 2012 Introduction I. Life Insurance I. Life Insurance For the Non-Insurance Advisor The industry could use a good P.R. agent Technical knowledge not sales knowledge Only 12% of agents survive beyond three years Help you speak intelligently to clients Of those, few are technically proficient, most are poorly trained Life Insurance is not for everyone Many offer insurance only as a sideline Money for future delivery Very few earn the Chartered Life Underwriter (CLU) designation Complicated but not hard to understand Some have an irrational distaste for it Life Insurance is powerful if you know how to use it correctly Primer on the product spectrum, and how the products work Case studies [email protected] 1

2 I. Life Insurance Matching Product to Objective I. Life Insurance A Turning Point Understand what the client needs and wants New products, where risk was shifted to the policy owner The art of matching that with the appropriate product Not your father s life insurance Different objectives can dictate different products II. Components of Price II. Components of Price General Concepts The things determine premium: Most products have some guarantees Regulators require conservative pricing assumptions Policies can be in force years Beyond the guarantees no one knows the ultimate cost Conservative assumptions to assure the benefit can be paid Mortality Expense Investment If premiums are more than adequate, policy owner receives dividend [email protected] 2

3 II. Components of Price II. Components of Price Mortality Expense Cost of claims quantifiable Standard mortality Commissioner s Table Commissioner s Table vs. Insurer s Table Companies project expenses to set premiums Projected conservatively Creates slightly higher premium Expense must be projected out decades Expenses Include: Home Office Expense: rent, salaries, legal, accounting, advertising Field-Distribution Expense: field offices, sales management, commissions, underwriting II. Components of Price Projected Dividends Investment Income Commissioner s interest rate for reserves Conservative investments required Dividend interest rate (NOT the policy rate of return) [email protected] 3

4 III. Generic Product Forms III. Generic Product Forms A Risk Shifting Vehicle A Risk Shifting Vehicle Term Term Traditional Permanent Flexible (Universal Life) Annually Renewable Term Level Term [email protected] 4

5 Level Term to 100 III. Generic Product Forms A Risk Shifting Vehicle Term Traditional Permanent Whole Life Traditional Whole Life Guaranteed Cash Value Reserve for payment of death benefit Guaranteed cash value = death benefit age 100 Limited Pay Whole Life Term-Whole Blends [email protected] 5

6 Term-Whole Life Blend- $250k III. Generic Product Forms A Risk Shifting Vehicle Term Traditional Permanent Flexible (Universal Life) III. Generic Product Forms Universal Life Flexible (Universal Life) Introduced in 1970s Flexible premium Opportunity for growth Minimal guarantees Policy owner assumes the risk [email protected] 6

7 III. Generic Product Forms Variable Life Flexible (Universal Life) Secondary guarantees For a higher UL premium guaranteed death benefit Premium lower than whole life Little or no cash value Narrow actuarial calculations Strict payment monitoring III. Generic Product Forms Indexed Life Insurance III. Generic Product Forms A Risk Shifting Vehicle Most recent flexible product offering Crediting tied to an index of equities Definition of the index varies widely Guarantees but difficult to quantify Promoted as lower ultimate cost Term Traditional Permanent Flexible (Universal Life) Second-To-Die [email protected] 7

8 III. Generic Product Forms Second-To-Die Same generic product forms Insures two lives Benefit paid at second death Unlimited marital deduction 1981 Interest, mortality, expense Joint mortality table III. Generic Product Forms Term Traditional Permanent Flexible (Universal Life) Which Product Is Best??? IV. Product Performance IV. Product Performance Traditional products: Traditional products: Dividends Dividends Uses of dividends Vanishing premium concept Premiums based on conservative assumptions Dividend paid when premiums are more than adequate Not guaranteed Values are over and above the guarantee Dividends received cannot diminish 8

9 Use of Dividends Dividends in Cash Common Dividend Options: Cash Applied to reduce premium Purchase additional death benefit Compare: Same Contract with Different Options: Dividends Reduce Premium Dividends Purchase More Death Benefit 9

10 Premium Offset Concept Current Dividend = 14 payments Vanish Concept sold frequently Vanish depends on dividends Lower dividends mean more payments Lower Dividend = 16 Payments IV. Product Performance Flexible Products: No dividends. Investment account instead Earnings on investment account can effect the ability to maintain the death benefit Even when investment performance is favorable, mortality costs can change Vanish point can change dramatically, requiring substantial additional premium Policy can unravel quickly Must be monitored. Re-run illustrations regularly [email protected] 10

11 VUL 8% vs. 4% VUL Guaranteed Mortality 4% Lapse Age 85 4% Lapse Age 68 8% In force Age 110 8% Lapse Age 71 Causes of Underfunding Lack of understanding by the client Lack of understanding by the agent Client over optimism Agent over optimism Agent misleading Client looking for the easy way Contract Historical Performance How did they really do with mortality, interest, expense? Apples to Apples is difficult Same policy can be different over time Same company, different policies different results Different companies products vary 11

12 VI. Summary Life Insurance is priced logically no magic Not a free lunch Trade off: premium vs. risk shifting Skillfully match product to circumstances Good design is more than getting 3 quotes VII. Case Studies Four real-life cases. Three that have come through our office this year VII. Case 1 VII. Case 1 Fact Set: 2 million 2 nd -to-die life insurance was purchased in an ILIT for tax strategy in 1995 when exemption equivalent was 600k. Premium is $50k. At acquisition, ages were 65M/61F. What are some options? a. Drop it - they face no estate tax Ages today 83M/79F. Current estate is 5 million. No estate tax issue. Life insurance isn t needed anymore. What s your advice? [email protected] 12

13 VII. Case 1 What are some options? VII. Case 1 What are some options? a. Drop it - they face no estate tax b. Keep it and pay the premium a. Drop it - they face no estate tax b. Keep it and pay the premium c. Keep it and stop the premium VII. Case 1 Current age 81/79 - Sur value = $1 million 1. Keep Policy Pay Premium Age M/F Death Benefit Rate of Return 85/81 2,750, % 90/86 3,000, % 95/91 3,700, % 100/96 4,500, % VII. Case 1 Current age 81/79 - Sur value = $1 million 2. Keep Policy Stop Premium Age M/F Death Benefit Rate of Return 85/81 2,750, % 90/86 2,750, % 95/91 2,750, % 100/96 2,750, % [email protected] 13

14 VII. Case 1 Current age 81/79 - Sur value = $1 million 3. Surrender, invest the 1 million, add the 50k/yr Age M/F Account Value 85/81 1,548,000 7% 90/86 2,480,000 7% 95/91 3,780,000 7% 100/96 5,616,000 7% Rate of Return Fact Set: VII. Case 2 M71/F71 10 million estate, mostly business real estate that son needs for the ongoing enterprise. Spouse is worried about income if she survives. CPA suggests looking at life insurance. Client always thought life insurance was a bad deal, has never studied it, and is dismissive of the idea. Perhaps the advisor should drop his recommendation Male age 71 VII. Case 2 Term policy to age no cash value Premium $71,000 annually Death Benefit $2,000,000 Age Benefit Return 81 2,000, % 86 2,000, % 91 2,000, % 96 2,000, % Fact Set: VII. Case 3 M55/F45 Special needs son age 15. M uninsurable. Broker recommends a special needs trust funded with $1 million cash. CLU suggests 20-pay whole life insurance on spouse instead. Which is smarter? Or does it matter? [email protected] 14

15 VII. Case 3 VII. Case 3 Female age Payment Whole Life funding special needs trust Premium $22,120 Starting Death Benefit $1,000,000 Female age 45 Term to age 100 funding special needs trust Premium $22,120 Starting Death Benefit $1,000,000 Age Cash Value Death Benefit Return 80 1,600,000 2,300, % 85 2,100,000 2,700, % 90 2,700,000 3,250, % 95 3,400,000 3,800, % Age Cash Value Death Benefit Return ,900, % ,900, % ,900, % ,900, % Fact Set: VII. Case 4 M75/F60 Second marriage. 15 year age differential between spouses. Client wants life insurance for wealth transfer to children of first marriage. VII. Case 4 10 million single life policy 10 million 2 nd to die policy Premium $525,000 Premium - $185,000 Financial advisor, who sells life insurance as a side line, offers second-to-die product. Is 2 nd to die the right choice? [email protected] 15

16 VII. Case 4 10 million single life policy 10 million 2 nd to die policy VII. Case 4 10 million single life policy 10 million 2 nd to die policy Premium $525,000 Premium - $185,000 Premium $525,000 Premium - $185,000 M dies age 85 (F70) F dies age 95 M dies age 85 (F70) F dies age 95 Annual premium savings $340,000 for 10 yrs earning 6% to age F95 VII. Case 4 10 million single life policy 10 million 2 nd to die policy VII. Case 4 10 million single life policy 10 million 2 nd to die policy Premium $525,000 Premium - $185,000 Premium $525,000 Premium - $185,000 M dies age 85 (F70) F dies age 95 Annual premium savings $345,000 for 10 yrs earning 6% to age F95 20 million 10 million (2 nd to die) M dies age 85 (F70) F dies age 95 Annual premium savings $345,000 for 10 yrs earning 6% to age F95 20 million 10 million (2 nd to die) 30 million [email protected] 16

17 VII. Case 4 10 million single life policy 10 million 2 nd to die policy VII. Case 4 10 million single life policy 10 million 2 nd to die policy Premium $525,000 Premium - $185,000 Premium $525,000 Premium - $185,000 M dies age 85 (F70) F dies age 95 M dies age 85 (F70) F dies age 95 $10 million (he dies) earning 6% for 25 yrs (she dies) Annual premium savings $345,000 for 10 yrs earning 6% to age F95 20 million 10 million (2 nd to die) $10 million (he dies) earning 6% for 25 yrs (she dies) Annual premium savings $345,000 for 10 yrs earning 6% to age F95 20 million 10 million (2 nd to die) 30 million 43 million 30 million VII. Case 4 VIII. Questions & Discussion 10 million single life policy 10 million 2 nd to die policy Premium $525,000 Premium - $185,000 $10 million (he dies) earning 6% for 25 yrs (she dies) M dies age 85 (F70) F dies age 95 Annual premium savings $345,000 for 10 yrs earning 6% to age F95 20 million 10 million (2 nd to die) Thank you for attending today s Greater Miami Estate Planning Council study session. 43 million 30 million Tasciotti Financial The Retirement Conversation [email protected] 17

18 Life Insurance Technical Manual Technical issues surrounding one of the biggest assets owned by successful clients life insurance. Presented by: Daniel Tasciotti, CLU, ChFC, CFP, AEP, MBA Estate Planning Council of Greater Miami November 21,