Low Load Life Insurance
Low-Load Life Insurance: Why haven't you heard about it?
Over the years, most of the financial publications have published articles on the advantages to the consumer that low-load life insurance offers. Those few agents who bring awareness of the product to their clients and prospective clients experience an acceptance factor well over 90%. This policy has no surrender charges, wide flexibility of premium design, full disclosure of premium breakdown and costs, first year cash values that could exceed premium, and total control by the client.
If your agent has not shown you this policy, it may be because (a) they handle equity/investments only; (b) they prefer to use commission policies that pay high first year commissions without full disclosure as to how much they are being remunerated; (c) they have heard about it but have not taken the time to find out how to properly use it; or (d) they have not heard about it.
What is the difference between Low-Load and No-Load Life Insurance?
There is some confusion about the difference between low-load and no-load. Actually, they are almost the same. The first product design used a universal life policy and was labeled no-load. Then came the introduction of subsequent products that were labeled as low-load due to their complex nature. Different label, same concept.
Comparing premiums and cash values, we can take a look at a sample case, using a 40 year old male, non-smoker, and a $500,000 universal life policy. Illustrated is a no-load product and a commission product from the same company so as to keep the comparisons fair. This is an example only.
Minimum 1st Year Premium $ 4,140 $ 600
Cash Values based on Premium of $4,140
1st Year Cash Value $ -0- $ 3,856
Cash Values based on Maximum
7-Pay Premium of $ 19,300 $11,252 $19,925
You can see that the no-load policy gives you much more flexibility in premium latitude, much higher cash value in same-premium comparison, and much higher cash value in maximum 7-Pay premium design.
In fact, the 1st year cash value of the no-load product exceeds the 7-Pay premium payment.
In addition to the basic cost efficiencies, consider the use and application when doing Estate Planning, or Business Planning. Such strategies as family split dollar can be very exciting with low-load insurance.
For those who may own a business, creative strategies with universal low-load insurance in the area of Key-Person insurance, Buy & Sell Arrangements, and Deferred Compensation will astound you. If you have, or have seen a Split Dollar strategy, consider this: with a commission policy used in equity split dollar plans, the insured/executive is on the hook with personal assets until the cash surrender value of the policy exceeds the premium payments made...usually 7 to 12 years. Hardly anyone knows that. However, with the low-load policy, you are out of harms way right at the beginning.
Advantages of Low-Load Insurance:
- Most advantageous for client.
- Full Disclosure.
- Cost efficient death benefit.
- High liquidity beginning in the first year for asset accumulation.
- No surrender charges.
- Strips out agents high first year commission and renewal commissions.
- Minimal Loads (low).
- Increases client control of policy due to high liquidity.
- Expanded planning capabilities.
- Real tax advantages.
- Allows for the development of "Unique" strategies.
- Sustains advantages in "Full Cycle" planning.
- Creates planning opportunities for corporate clients.
- Removes the negatives usually associated with life insurance.
- Identifies the "Smoke & Mirrors" of traditional illustrations.
- Much more effective than a "rebated" commission policy.
The design of the low-load life insurance product has created much more than a very cost effective policy. Flexibility is increased to benefit both the client and the agent. This flexibility relates to the spread between the maximum 7-pay premium limits (usually established to preserve all of the tax benefits of a life policy) and the minimum first year premium required to purchase the policy.
For example, for a 40 year old non-smoking male, the minimum first year premium required with a universal life, commission policy would have a range of $3,800 to $4,600 (general average), whereas the minimum for a low-load policy would have a range of $480 to $750 (general average).
When planning for asset accumulation, high first year values are very important. With the 40 year old male in the example above, a first year premium of $4,140, the first year surrender value of the commission policy would be $0, whereas the low-load policy would have $3,796. (If desired, the agent could design the premium so that the first year cash surrender value exceeded the premium, unless rated, giving the client maximum control of the policy.)
Such expanded flexibility not only gives the client maximum control of the policy, but also allows the agent maximum design capabilities, whether the objective be death benefit efficiency or asset accumulation.This design capacity allows for strategies that fully realize the clients objectives,and concepts that have not been seen in the market. One example in the business planning area is that of split-dollar. Although many corporations have instituted this strategy for their executives (or company owners),few are aware, including their agents,that the executive/owner is personally liable for the obligation that is represented by the spread between the cumulative corporate outlay of premiums and the surrender value of the contract. The use of a properly designed low-load life product can eliminate this liability by providing first year cash value liquidity that exceeds the premium paid.
Also, in the corporate environment, there would be no "hit" to earnings with COLI, key person, buy and sell, split dollar, etc.
Q. Are the cash values in a low-load product that much higher than those in a commission policy?
A. Yes. There is a substantial difference starting in the first year if you compare apple-to-apple same premium payments. It is important to compare "surrender" values and not "account" values, as the surrender value represents real money. In some cases, a commission policy will show no cash surrender value in the first year, whereas the low-load policy may show a cash value of 70% to over 90% of the premium payment. Keep in mind that there are no surrender charges in a true low-load policy.
Q. Why are high first year surrender values so important?
A. There are several reasons: (1) It generally is the surrender values that will perpetuate a policy if premiums are skipped (which is supposed to be one of the benefits of a flexible premium style policy).If the surrender value is -0-, or less than that needed to cover the cost of continuance, the policy will lapse.To check this out, run an illustration on a commission policy using the target premium. Then re-run the illustration with no premium paid after the first year and see what happens. It almost always lapses. Using the same method with a low-load policy, the illustration will project coverage continuing for 3 to 7 years, depending on the scenario. (2) Since no one, agent or client, can state with absolute certainty that nothing will change after the first policy anniversary, we feel it is important for the client to have maximum control and liquidity, should anything change in the near-term future.
Q. This may be true, but life insurance is a long term planning vehicle, not a short term investment.
A. That is what we all hope for, but reality indicates something else. First, statistics point to the fact that a very high percentage of policies lapse/terminate before ten years (almost 50% after 5 years). These lapses are due to a number of various factors, but the fact is that such lapses take place during the surrender charge period of the policy costing the client money. In addition, access to cash values in short to intermediate time frames constitute the need for higher liquidity up front, even if the planning objective may be longer term.
Q. I have seen commission policy illustrations show higher cash value in the 25th and/or 30th year than the low-load policy illustrations. Shouldn't the low-load do better?
A. Once you understand how illustration software and product is developed, you will come to the realization that illustrations are worthless and without merit. We did a research study and "tweaked" some of the many variable components that make up the cost structure of a policy and i.e. the illustration. Current methods of policy comparisons are archaic and have no basis.
Q. Then how do we now which policy is better? Which one has the best pricing and cost positions?
A. Until we get to a point of "full disclosure" and un-bundle the premium, it is almost impossible. You would need to request that the company send you a complete and separate breakdown of each cost component, which they usually do not supply. Our position is that with a low-load product, we get full disclosure, unbundled premium, and design flexibility. This allows us to design concepts where the client may have cash value that equals or exceeds the premium in the first year. Since all policies have components that are established with a potential of change, we prefer to keep our clients as liquid and as "in control" as possible.
Q. You keep referring to premium flexibility. What do you mean by that?
A. Commission policies have a target premium, which is often the minimum required premium to place the policy in force. This target premium represents the fully loaded amount that pays the maximum commission. As the low-load product does not pay the agent any sales commission, the range of premium is expanded to the downside. For example, a $1 Million universal life survivorship policy on a male, aged 65 and a female, aged 62 can be purchased for under $800 in the first year. Compare that to a minimum premium of a commission policy, which would be in the multiple thousands.
Q. I can reduce the clients' premium by blending term insurance on a base universal policy. Wouldn't that work just as well?
A. Many astute agents are starting to frown on that practice for several reasons. The guarantees of the term rider are often misleading or inconsistent with the long-term illustration. You may show a level death benefit illustrated for 20 or 30 years, but the guarantee of the term rates are for only 5 or 10 years, and the illustrations often don't reference that, or it becomes an obscure footnote. If there is a 20 or 30-year guarantee on the term, why not use all term? After all, the purpose of a cash value style of policy is to secure control for longevity. A blend is saying that you want the base policy for commission generation. Also, the pricing development of 30 year term is suspect. In addition, the software illustrating the blend is not always programmed properly in regard to the cash value corridor testing to insure that a MEC isn't created. The question then is, why do it? Why not give the client a better policy, unconfused and controlled.