LIFE INSURANCE FOR P/C CUSTOMERS
One agent had this question: 'One of our P/C insureds is carrying a $1 million Life policy, and he is paying about $50,000 a year in premium. Unfortunately, we didn't write that policy. He now has about $425,000 in cash value in the policy. He doesn't need the cash and can easily afford the premium. As his P/C agent, I have easy access to him and a close professional relationship. I believe that he would follow any advice I gave him about the policy. He's 75 years old, a non-smoker, and in good health.
'As an agent dually licensed, principally in P/C, I know enough about Life insurance to handle small, uncomplicated cases, but I'm a little nervous about getting involved with this one. It's a big case, and if I make any mistake on the Life policy, I might lose all the client's P/C business, and that's very important to me. An outside broker advised me to leave this policy in force and find justification for the client to buy another large policy. Another outside broker advised using dividends and cash value to pay for a new policy. Advise, please.'
With a few variations in the situation and size of policy, this is a common dilemma that P/C agents face.
It calls for professionalism, weighing the legitimate alternatives with expertise, and applying that knowledge to the client's interests. (Incidentally, that same professionalism should be used on 'small, uncomplicated' cases, too. Life insurance premiums, services, and benefits are equally or more important to less wealthy individuals. In those cases, Life insurance may comprise up to 90% of assets that insureds leave behind. That percentage may be smaller among larger, wealthier clients.)
The existing policy has a cash value of about 42.5% of its death benefit. The carrier is getting $50,000 a year for the 'at risk' amount of $575,000, a rate roughly double what many carriers charge for men the client's age in relatively good health.
Consider alternatives such as a possible replacement policy in the same or different company. One option would be purchasing a new Whole Life or Universal Life policy with a death benefit of $575,000, then banking or investing the $425,000 cash value in the client's present policy to create a total combined 'benefit' equaling the present $1 million policy. With this option, premiums could drop by perhaps 50%, and much of the new premium could be earned by investing the former cash value. Another option: The client could roll the present cash value into a new replacement policy through a 1035 exchange, keeping the same death benefit. With the $425,000 in a newly purchased policy, his $1 million coverage could be bought for less than $5,000(!) in annual premiums and, under current projections, even those low premiums would end after 10 years.
There are caveats, however, and this is where professionalism counts. A new policy should be delivered and paid for before the existing policy is dropped. Even if the new policy is purchased from the existing company, there may be new suicide and incontestable clauses. Those clauses should be eliminated, if possible, by negotiation with the carrier. And the fund investment should be viewed conservatively as to safety and earnings potential. In this case, those dollars don't seem critical to the client, but in many other cases, they are very important in the total plan and should not be overestimated. The same caveat applies to Life insurance projections, of course.
WHAT IT MEANS TO YOU
Unfortunately, many companies and producers avoid replacement under any conditions. In this day and age, those companies and producers should be avoided. Replacement may not be the best advice in all situations, but it should never be avoided altogether because in some cases it will prove to be the best professional approach.
This question from the field illustrates the importance of establishing solid Life insurance connections. Whether inside or outside the P/C agency, expertise may be needed unexpectedly at any time.