How Far Guarantees Should Go

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For many years I have been working the number side of life insurance products, always working to provide your clients with the best pricing and the best product alternatives.  The rule with me has always been to make the product offering straight forward, clean, and in the consumers’ best interests.

After the crazy 80’s and 90’s, with many producers showing absurd projections and “quick money” pictures (happy to say we did not do that, and used reasonable assumptions throughout with the caveat that “perhaps” they might even do better), products changed to emphasize long guarantees of premium, death benefit and even cash accumulation.  In my mind, starting in the early 2000’s, we had a time of consumer driven products that removed the worry of fiduciary negligence from the producer—the client knew what and when to pay and, in return, had guaranteed death benefits for their entire lives.  Aggressively priced term products created liquidity for temporary needs and for those with high needs who did not have the funds to purchase products for their entire lives.  We work with our brokers to help term purchasers convert their term products to longer guarantee alternatives.  We always have and will continue to show whole life products with guaranteed death benefits—either in the form of participating whole life or guaranteed universal life.

We now have carriers who have, and are currently re-pricing term and UL, increasing prices and SHORTENING GUARANTEES.  Current regulations have increased reserve financing costs to the carriers considerably and that, combined with the low interest rate environment, has made long guarantee products more expensive.  It is more than reasonable to accept that carriers MUST have profitable business and MUST comply with current regulations.  Our current economic environment is what it is—and we must adapt.

HOWEVER, I want to point out some facts that I hope will impact your decision of what products to use and how you want us to price them for your appointments.  The question that really needs to be asked is, “HOW LONG IS A LIFETIME”?  If you paid for flood insurance on your home for twenty years, lost your coverage for whatever reason (Too expensive?  Lack of a carrier? Forgot to pay the premium?) –and the following year your home was wiped out by a storm, how would you feel?  Would you not add up your twenty years of premiums paid for “nothing” and feel robbed?  Similarly, how do you think the family of a 103 year old will feel when they learn the million dollar policy the parent paid for, year after year, until age 100 was NO LONGER INFORCE BECAUSE THE POLICY DEATH BENEFIT GUARANTEE ENDED AT AGE 100?

Here are the facts:  By 2020 the number of people turning 100 could increase as much as seven fold.  By 2050 the Census Bureau’s high estimate is more than 15 times the low estimate (AP story:  April 27, 2011).  Based on the Valuation Basic Table from the Society of Actuaries, a healthy 65 year old woman and a healthy 55 year old man have over a 20% chance of living to 100.  That same 55 year old man has a 9% chance of making it to 105 and 3% to 110 (female 65 had a 9% chance to make it to 105).  What is the ultimate pattern of mortality?  You, and what you tell your clients, determine the guarantee length that they buy.  Why are so many of you so sure that your clients won’t last past 100?  That opinion is NOT necessarily correct!

This is the kicker.  Do you know how small a difference there is in premiums provide guarantees to age 120 versus 100?  It might be as little as 3-4%!  I took one of our leading A+ Carriers and ran a male 55, preferred best nonsmoker at a one million dollar death benefit.  The difference in annual premium between a guaranteed death benefit to 121 and that to age 100 was $430 dollars a year.  IS THE DIFFERENCE IN COST WORTH THE RISK?

We have good alternatives in UL with well-priced guarantees to age 121, as well as great par whole life products with lifetime guarantees.  I know that many carriers are pushing “current assumption” products with guarantees to age 100 or even just through current mortality.  Are you (or is anyone?) really able to predict current and future earnings that will be needed to be sure the product will hold up for a person’s entire life?  I personally favor BEING SURE a death benefit will be there when it is needed—and MAYBE there will be a bunch of extra benefits too, if the interest rates go high and stay there.  As long as we have long guarantee products from companies who are able to reserve for them and still be profitable, why in the world would you NOT offer them to your clients?