BAD TIMES CAN LEAD TO GOOD SALES
Life insurance products are necessities, of course, in good times or bad.
In addition to selling annuities, there are two easy steps that Life producers can take in hard economic times. The first is to review all existing Life programs to find money that's idle and/or to reduce premiums without reducing benefits. Elimination or reduction of ratings, for example, can knock premiums down, even on an existing policy renewal. Policy dividends offer many ways to help; the buyer can take accumulated dividends or apply future dividends against premium, or take the cash value from paid additions.
(Participating Life policies are, as a class, part of the problem when premium money is tight, for 'par' policies carry a built-in overcharge which takes years -- often 15, 20, or more -- to build any kind of return that's reasonable. Our discussion of dividend options, then, is not to be taken as an endorsement of par policies. On the contrary, selling non-par is usually a premium-containment step.)
Another course to consider in reviewing existing programs is replacement of existing policies, which often provides more coverage for less premium, even though the insured is older at replacement time. Frequently, older age is offset by new mortality tables and new policy concepts with heavy improvements. Legal rebates are also an option to be considered in states where rebating is legal (only California and Florida at this writing). Also explore at review time any possible tax advantages for which the policyholder might qualify.
The second step that Life producers can take in hard times is to sell low-cost Term insurance. This is neither the time nor place to discuss the Term vs. Whole Life debate; Life producers should, of course, know the strengths and weaknesses of each type before they approach clients. Nor is it our purpose to recommend Term insurance carte blanche, for each sale should be tailored to the client's needs. We are saying that Term policies fit many situations on a permanent basis and may be appropriate for long-term needs. Even when Whole Life or other Cash-Value high-premium policies are desirable, Term policies might fill the need temporarily on an affordable basis until the higher-priced products can be bought.
Robert Miller, CLU, ChFC, MSFS, calls Term insurance 'recession-proof sales.' He is director of marketing services for Kemper Life Insurance Companies, based in Illinois. He listed some of the ways that Term coverage can be used in a recent issue of Broker World:
- Make Group insurance portable
- Replace reduced Cash-Value insurance
- Replace reduced interest earnings in an estate plan
- Cover refinanced/equity loan mortgages
- Insure college graduates and their future
- Cover completion of students' education by insuring the breadwinner until graduation
- Increase Key Person coverages in business
- Update and/or fund Buy/Sell Agreements
- Cover new-business debt or personal debt
Miller elaborated on each of these scenarios:
MAKING GROUP COVERAGE PORTABLE-If a client is afraid of losing his/her job, of not earning as much this year due to loss of overtime or bonus income, or of losing benefits at work, Term insurance can be attractive. Replacing excess Group Life with individual Term insurance is one way to keep coverage. In fact, says Miller, the individual Term rates will often be less than the Table I cost of excess coverage at work. So the agent is not only selling to clients portable coverage, but also saving them money in the process.
REPLACING REDUCED VALUES-Many assets owned by clients have decreased in value temporarily, Miller points out. This decrease might have little or no effect on their financial plans if they are not forced to sell the assets now -- but if death creates the need to sell these depressed assets, the value to the survivors could be much lower than if the assets could be held until the economy rebounds. Term insurance offers a low-cost way to replace the current lost value of those assets.
REPLACING LOST INTEREST-Some clients' estate plans were written when interest rates were in the double-digit range and those clients relied on those high rates to make the plan work. But if the assumed interest rates drop from, say, 10% to 7%, the amount of capital needed to support the family's needs increases dramatically. Additional Term insurance is a low-cost answer for extra capital in event of death.
Now is the time to review clients' estate plans, Miller advises. Term insurance solves this problem better than Whole Life, according to Miller. (He uses the word 'permanent' to refer to Cash-Value policies, but we avoid that misnomer because Term policies may also run to age 100, so they're as 'permanent' as any other.) When interest rates rise again-if they do- the extra insurance may not be needed. If rates stay low, however, then the Term can be converted to another form of insurance if desired. Term provides liquidity and capital now, as well as the time needed to review the estate's long-term situation.
If interest rates go up or temporary needs disappear or alleviate (for example, children outgrow dependency, educational expenses are no longer needed, or liquidity for assets that can't be sold in the current economy is not necessary), the Term coverage can be dropped, having served its purpose. If the needs become permanent in the future, then the Term can be kept or converted.
COVERING MORTGAGES-Several people carry decreasing Term policies to cover mortgage obligations. However, such policies become expensive on a per-thousand basis as the coverage declines but the premium remains level. Now with home mortgage rates at historic lows, many people are refinancing to save thousands of dollars in future interest payments. They should also consider upgrading or improving their Mortgage insurance. With today's new Term plans, agents may provide more insurance for less premium.
Many clients have obtained equity loans, a popular form of financing since interest is still tax-deductible. But many of them don't buy additional Mortgage Life insurance to cover this second mortgage. The result could be the loss of the family home at one's death because of this oversight, Miller notes. He advises agents to ask clients if they have taken equity loans, using that as a valid reason to review the insurance program and improve it.
BOLSTERING THE 'BOOMERS'-The famous baby boomers are reaching the age when their children are going to college. Miller suggests they buy an extra $50,000 of Term insurance to fund the completion of college if the breadwinner should die. The cost of the insurance could be less than $200 a year.
Prospects may be found in P/C agency files. Check birthdates for 15- to 20-years old, starting with driver records and Homeowners insurance records. High school seniors or juniors and freshmen at local colleges can be sources of new sales, as well as new clients.
Other college markets are graduation classes or enrollees for higher-level degrees. As they grow into professional-level jobs, their Term policies can serve as a base for ongoing insurance relationships.
KEY PERSON COVERAGES-The death of a key person in a company that has already reduced its staff could cause the death of the company itself. As companies reduce staffs to reduce expenses, each key person becomes more critical. Look at businesses that have cut back; talk to them about the financial risk facing them with the loss of a key person.
BUY/SELL AGREEMENT-With interest rates down, borrowing to fund a buy/sell agreement is less expensive-if the loan can be obtained. Many banks won't loan money to a business that recently lost a major principal to death. Further, the value of the business may already be depressed, so the survivors could get less than they thought from the business. The answer is a fully funded Buy/Sell Agreement using Term insurance to keep costs down. Keep an eye out for Buy/Sell Agreements that have not been funded at all; hard economic times make funding more difficult and increase the chance that the Buy/Sell will fall apart due to lack of funds.
WHAT IT MEANS TO YOU
Miller summarizes that the days are gone when Term insurance was available only with annually increasing rates or decreasing face amounts. New plans have low, level rates that won't increase for five, 10, 15, or 20 years. Agents can tailor a plan to suit a client's needs and situations, knowing exactly what the total cost of the plan will be throughout the period selected. He calls these 'recession-proof premium plans.' And don't forget, Term policies offer potential for future conversions, if appropriate.