Your client's lifestyle could mean even lower premiums on term life insurance.
by: Bruce Cumming, CFP, RFP, CIM, CLU, CH.FC.
Founder of Cumming & Cumming Wealth Management Inc.
Your client's lifestyle could mean even lower premiums on term life insurance.
Dramatic changes to the landscape of term life insurance open up a number of opportunities for advisors. In fact, term life insurance looks very different today than it did just five years ago. The introduction of preferred underwriting and a savage price war between insurers have arguably changed the way term insurance should be sold.
But preferred underwriting is really the third revolution of term insurance pricing. About half a century ago actuaries realized that insurance should no longer be sold on a unisex basis and as a result, they introduced separate pricing based on sex. A second revolution occurred when smoking and non-smoking pricing were introduced. Now the advent of preferred underwriting opens up the possibility of even lower premiums. Smokers have been divided into two classes: cigarette and marijuana smokers versus cigar and pipe smokers. But the biggest change has emerged among non-smokers where several new classes have been introduced.
Today underwriters are not only interested in the applicant's smoking history and family medical history, but also their build, cholesterol and lipid levels, and even driving records. Now the applicant's "lifestyle" will have a greater impact on the final premium. An applicant with an exemplary lifestyle could receive a 20% discount on their term insurance premium.
Just like the ongoing decline in the price of computers, compared to several years ago, today term insurance can be bought at a lower price, even though the applicant is older. Add in the effect of preferred underwriting and many people can buy less-expensive term insurance than they may currently own.
There is another benefit other than pure pricing that will develop by replacing an older policy. You will be resetting the 10-year renewal period with a new policy. Although the insurance companies have slashed their premiums in price wars, they have partially made up for that by dramatically increasing their renewal premiums. It is not uncommon to see some pricing for the second 10-year term where the premium is triple or quadruple what the client was paying in premiums during the first 10 years. By replacing a 10-year policy at the midway point, you open up the possibility of gaining five additional years of lower premiums (since the client will not have to renew for another 10 years). This amounts to even more savings for the client.
While the insurance industry takes a very dim view of replacing insurance policies, the case can now be made that policy replacement is valid and good planning due to the lower premiums available. But be careful when making such a recommendation to a client, as you will be treading on some hallowed ground. Make sure your client understands the benefits as well as the downsides.
For example, by replacing a 10-year, renewable and convertible term policy that is five years old, you will also be restarting the two-year suicide and contestability periods. These periods would have already elapsed in the policy being replaced. This may seem trivial because you cannot imagine a client bent on self-destruction or misrepresenting themselves to you but it can and does happen. Advisor beware!
As advisors, when we open the prospect of replacing a policy, we also gain the opportunity to resell the benefits of life insurance. The first question to be answered in any life insurance sale is how much insurance is required. Most term insurance is purchased to replace the greatest asset a family enjoys — the ability to earn an income that will be lost due to an untimely death. A number of events may have occurred in the past five years that will impact the amount of insurance a family requires, such as:
- the income to be replaced is bigger due to promotions, salary increases or bonuses;
- the family is larger;
- the family has taken on higher debts; or
- the assumed rate of return that could be earned on the insurance proceeds, given recent market performance, could be reduced.
- Now may be the right time for your client to buy the right amount of life insurance because the premiums are lower and possibly the client's means have improved.
A separate opportunity is to discuss whether the family should be relying upon their group life insurance provided by their employer and/or their reliance on the life insurance on their mortgage provided by the mortgagor. With lower premiums available to many people needing insurance, it is now possible to challenge the long-held assumption that supplemental group insurance is cheaper than privately purchased life insurance. Too often our clients make the mistake of believing that their employer can provide all the life insurance they need... and we allow that mistake to be made. In fact, given today's turnover at all levels in the workplace it is unwise to expect that the employer will always be in the picture.
A valued advisor will also point out the potential shortcomings of using a mortgagor's life insurance product instead of rolling that insurance need into their own personal policy. Sometimes, a mortgage-linked life insurance policy from a bank is structured on a declining term basis, even though the insurance premium is not declining.
For example, with each mortgage payment the actual mortgage is being reduced and after several years the mortgage may be thousands of dollars lower. The insurance death benefit would pay off the existing mortgage, although the premium being charged remains the same. As a result, the death benefit would be lower than what the homeowner has been paying for. The client may have started with a $175,000 mortgage (upon which the insurance premiums are based) but that mortgage could be down to $150,000 at the time of death. Although the premiums are paid on the original amount, the value received is the latter amount.
Furthermore, the death benefit is payable to the mortgagor when it might be far more advisable to have the benefit paid to the surviving spouse and have them decide if they wish to pay off the mortgage. This added flexibility could be very important.
Many times couples will buy a joint first to die policy to cover their mortgage, mistakenly thinking that the lower premium for this type of policy is advantageous. First of all, the premium saving is minimal compared to each partner purchasing their own life insurance policy. Second, a joint first policy leaves the surviving partner without life insurance — just at a point in time when the need for life insurance is never higher. Imagine a family with young children that has just lost the breadwinner and the surviving spouse has no life insurance.
While on the subject of mortgage insurance, do not lose sight of the value of the 20-year term product instead of the more traditional 10-year term policy. If the need is going to go beyond 10 years, you should consider a 20-year term product that may offer your client some cost-cutting.
Let me close with one more contentious comment and challenge the value of adding two common riders to term policies: namely, the waiver of premium and accidental death and dismemberment riders. Waiver of premium means that if the policyholder becomes disabled the insurance company will keep the policy in force during the period of disability without the policyholder having to make premium payments. While this may sound good, the financial reality is less attractive. The definition of disability typically used with this type of rider s limited.
But what would be the real economic value of the insurance company paying the premiums during disability? I suggest not much value. After all, the premium is relatively modest because it is term insurance and if your client is disabled, he or she will want to ensure the premium is paid continually. If the payment of the premium were an issue during a disability, then the client does not have adequate disability coverage in the first place — that opens up a whole new subject to be reviewed.
AD&D is very similar in that it sounds good but does it meet the test of good economic value? If there was some valid reason for the additional coverage then factor in that need when reviewing how much life coverage is required and ensure the client buys the right face amount initially. For most clients that special need is not present so there is no need for the rider.
The steep decline in term premiums means advisors must revisit their clients' existing coverage. There may be a need to replace the policy with all the benefits and pitfalls that can entail. This is the perfect time to get the right amount of coverage in place.
Moreover, now the time is right to challenge the myths that pervade the term insurance marketplace. Mortgage insurance requirements need to be integrated into the family's total life insurance needs. The pricing provided by employers or affinity organizations and associations is not always less than private coverage. In fact, the opposite may be true.