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Life Insurance ReplacementGood or Evil?

Copyright 2008

The Wealth Preservation Institute

3260 S. Lakeshore Dr.

St. Joseph, MI 49085

269-216-9978

www.thewpi.org

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Duties and Responsibilities

• The Wealth Preservation Institute is all about making sure advisors are educated so they can provide the “best” advice to their clients.

• It is The WPI’s opinion that every financial planner and insurance agent should have a process by which they review new and current client’s life insurance policies.

• It is The WPI’s opinion that every CPA/EA/accountant and attorney who provides “estate planning” advice should have a process by which they review new and current client’s life insurance policies.

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Is life Insurance Replacement Evil?

• No.

• In fact, not only is it not evil, The WPI believes it is the duty of a quality advisor to review policies on a periodic basis.

• To do otherwise could leave clients with life policies that are not sufficient, not competitive, not the proper kind, not owned by the right person or trust, or are simply too expensive.

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Paramount Principle

• To ensure that all clients have the best possible life insurance solutions available.

Is your client’s insurance up to P.A.R?

For All Recommendations…

• Always put the client first

• Highest ethical standards

• Gather all of the facts

• Abide by the “golden rule” – provide the same service and recommendations to clients which, in the same circumstances, you would apply to yourself

Issues You May Uncover

• Amount No Longer Appropriate For Clients’ Needs

• Change in Clients’ Needs or Objectives– Family situation has changed– Client may have new goals– Business need has changed– Changes in lifestyle

Clients May Own Life Insurances Policies That:

• Need no changes, giving client peace of mind • Need beneficiary designations updated• Could be more efficiently consolidated into a

single policy• Are under-funded

Issues You May Uncover

Some Policies May be in Danger of Lapsing Because:

Low interest rate environment/ low interest crediting rate

Lower than anticipated investment performance (VUL) review subaccount allocations

More premium may be needed to fulfill the original goal.

Issues You May Uncover

Some Policies May be in Danger of Lapsing Because:

Reduction in Dividend Rates (WLP) Increasing Premium (Term) Direct recognition -- Loans on participating whole

life that have lower dividends on policy loans

More premium may be needed to fulfill the original goal

Issues You May Uncover

Some Policies May be in Danger of Lapsing

Because of Policyholder’s:

Taking multiple policy loans Making excessive withdrawals Not making premium payments Changing the face amount or death benefit

More premium may be needed to fulfill the original goal

Issues You May Uncover

Some Policies May be in Danger of Lapsing Because of Policyholder’s:

Adding riders Resistance to paying escalating premiums

Term Insurance and Blended Policies (combo of term and permanent)

Lower cost initially, but can be more expensive later

More premium may be needed to fulfill the original goal

Issues You May Uncover

Why a Review of all Policies?

If Your Client Owns Multiple Policies, All Policies Should be Reviewed.

Determine why there are multiple policies.

Each policy should efficiently contribute to the coordination of the client’s comprehensive insurance program.

Consider group as well as individual coverage.

Why a Review?

Provide Value to Client

More Competitive Products Significant Reduction in

Mortality Costs over the last 5-10 years

New Business & Referrals

Avoid a Complaint

Re-evaluation of Underwriting

More history since health occurrence Improved health, lost weight, healthier lifestyle Change in smoking status Do they qualify for one of the new, improved

underwriting classes available today? Change in avocation status

More experience (Example: pilots, divers) Age of traffic violations

Why a Review?

If Under-Funded…

Possible Solutions Increase the future premiums to make up for the

shortfall. Improve underwriting class, if eligible Drop unnecessary riders Decrease face if need has decreased

Problems With These Solutions

Clients may not want to pay more Increased premiums to ILIT’s may create

taxable gifts Reluctance to contribute to policy in economic

environment of low interest rates (UL) or low subaccount growth (VUL)

If Under-Funded…

Problems With These Solutions

If policy has an existing loan and client making further loans to make premium and interest payments, problem only becomes worse

Need for current level of insurance remains Desired changes may not be available nor

meet planning objectives

If Under-Funded…

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A New Policy… But Be Cautious:• Ensure that every client has the best possible life

insurance solution based on the client’s needs and wants – whether it is keeping and adjusting his/her current policy or replacing it with a more appropriate policy.

Another Possible Solution

Potential Solutions

Reasons to Keep Current Policy

Surrender of an existing policy may incur a surrender charge; purchase of a new policy would impose yet another surrender schedule

Need for life insurance is temporary Higher guaranteed minimum interest crediting

rates may be available in the current policy

Reasons to Keep Current Policy

Adverse health change New contestable and suicide periods Limits on transferring loans Tax consequences Tax benefits issues New acquisition costs

Potential Solutions

Reasons to Consider Exchange or Replacement

Company strength – has the existing Insurer had significant recent drops in ratings

Has company increased mortality costs, lowered crediting rates or modified bonuses on current policy?

New benefits/riders may not be available on older plans

Term insurance getting expensive and need continues

Potential Solutions

Case Study # 1

Existing Policy • Male 66, UL Issued in 1986• Premium = $7,200• Death benefit = $500K• $74,890 Cash Surrender• At current assumptions, policy

will lapse at age 79

New Policy• New Generation UL • Premium = $7,200• Death benefit = $500K• $74,890 1035 Exch. • Guaranteed to age 96

Results: 17 additional years of coverage (guaranteed) for the same premium!

Option #1

Existing Policy • Male 66, UL issued 1986• Increase premium to $9,694• Death benefit = $500K• At current assumptions, policy

will lapse at age 82.

New Policy• New Generation UL • Premium = $9,694• Death benefit = $500K• Guaranteed for life• $178,269 of cash value at

age 82

Results: Lifetime coverage for the same premium and strong cash values!

Option #2

Case Study # 1

• Husband and wife (ages 71/68) bought 4 SUL policies from 1992-1996

• Purpose of sale was estate liquidity • Total premiums = $260,374• Total cash value = $147,694• $10M death benefit total• Both husband and wife issued standard

Case Study # 2

Review Revealed Clients:

Wanted cash value in policy in case estate tax repealed

Would like to lower gifts to trust Could qualify for preferred non smoking rate Some policies would lapse soon without increased

premium

Case Study # 2

Action Proposed:

• 1035 all 4 policies into $10M New Generation Survivorship Life Policy

Results: Lower annual premiums to $162,128

(client saves $98,246 per year)Cash surrender value on current non-

guaranteed factors = $844,499 in year 2011; almost $2.4M at age 100

Case Study # 2

Underwriting Enhancements

• Male, age 56, Standard in 2002• $400,000 face amount

– High cholesterol, overweight– Lost weight, lowered cholesterol– 2004: Upgrade to preferred

plus

Result: Existing Policy RetainedClient Saves $5,494 per year

Case Study # 3

Avocation or Risk Changes• Male, age 40, preferred non-tobacco, issued in

2001 • Multiple speeding violations within 3 years prior to

issue• $1M face amount• Reviewed in 2004 – clear MVRs and all other

factors• Upgrade to preferred plus ratesResult: Existing Policy RetainedClient saves $810 per year

Case Study # 4

Points To Remember

• Life Insurance is like a home mortgage, you do need to compare and evaluate from time to time. – If you ever refinanced your mortgage you know

the importance of interest rates.

• Inaction could cost your clients thousands of dollars.

• With changes in interest rates, and for variable products, fluctuations in subaccounts, many life insurance contracts are not performing as originally expected.

• Old policies could die before the client does.

Points To Remember

• New policy designs are coming out all the time from the insurance industry.

• For example-

– Revolutionary Life offers several riders (some for free) like:

Points To Remember

• Accelerated Benefits– Terminal Illness– Chronic Illness– Critical Illness

• Accidental Death Benefit• Children’s Term• Disability Income

– 2-year– 5-year

Extension of Benefits

Guaranteed Insurability

Long-Term Care

Other Insured

Unemployment

Waiver of Target Premium

The Review Process

1. Who should receive a review?

• All of your clients should receive a periodic life insurance needs analysis and evaluation of their existing policies. We recommend that this service be provided at least every 1 to 3 years.

2. Send out pre-approach letter and follow up.

• Perform a complete needs analysis to determine clients’ current and future needs.

• Request and review one or more in-force illustrations from existing carrier.

The Review Process

1. Review the existing policies.

2. Compare all of the alternatives.

3. Help clients make the right decision.

• If new policy is recommended, submit the appropriate application.

Do not replace existing insurance until replacement insurance is in force and accepted by the client.

The Review Process

Life Insurance Professional Analysis and Review...Why offer one?

• Deliver Value → Client satisfaction.

• Deliver Value → Client retention.

• Deliver Value → More referrals.

• Deliver Value → Enhance your professionalism.

P.A.R. program

Great for Networking With:• CPAs, • Attorneys, • Trust Officers• P&C firms• Banks

Policy Analysis & Review

ISN Marketing Material

• Pre-approach letters for – Clients– Attorneys– Trust officers – CPAs– Agents

• Producer Guide– Issues to discuss; pros/cons of keeping existing insurance

versus new coverage

• Policy Analysis and Review Software• See attached part of a typical sales presentation

you would provide to your clients.

Policy Analysis & Review

For Complete information on our Life Insurance Professional

Analysis and Review, contact Jeffrey Berson; President

ISN Network800-338-1892 x 215

jberson@teamisn.com

Policy Analysis & Review

QUESTIONS?