While nearly everyone is familiar with the model the media promotes most often as term life insurance prospects -- young couple with children, mortgage, and low budget -- there are many other prospects for term insurance, especially in the affluent market.
Four producers affiliated with Lincoln Financial Advisors told me about the creative ways they use term life insurance to meet their clients' needs.
Irwin Gross, CFS, RFC, of Deerfield Beach, Fla.: I use term most often in conjunction with permanent life insurance, to help clients save money for other goals. I do sell to the standard term client: those with a large need and low budget. By thinking creatively, however, I find ways to use term insurance to complement permanent life insurance and help my wealthier clients meet their other needs and goals.
The biggest challenge I face is the competitive market. I overcome this by preparing client expectations; showing clients I am offering these products from top-quality companies. I inform clients about the value.
I start with a review of my clients' needs. From that, I determine which product is the best fit for them: term, permanent, or a combination of both.
If their need for coverage is great but their budget is limited, term insurance may be the only option. Convertibility, however, is a key factor in helping turn a "term client" into a long-term client.
I use the Internet to help show my clients that I use high-quality companies. While the Internet doesn't help me sell, as far as bringing quotes in the door, it does enable me to show the true value of what I'm offering prospects.
Looking to the future, things have been changing so much that I find it difficult to predict what will come next. I think rates will have to increase; I don't see how they can continue to stay this low for much longer.
One of the next big market segments for term insurance will be baby boomers' children. They are entering the work force and need insurance, but they like to spend their money on fun things, so usually don't have much to spend on insurance. There are good opportunities to use term insurance to meet their needs.
Kenneth D. Burack, CFP, of Long Island, N.Y.: My clients usually are retirees or business owners; the average age of my clients is in the 60s and older. Term life insurance doesn't have much of a place for this age group unless they have a limited cash flow for a short period. Term insurance then can provide a good temporary solution while their cash is tied up in stock options, for example. To meet their immediate need for protection, I lock in level term insurance with an option to convert the policy to permanent later when their cash flow improves. Term insurance can be a great economic solution, especially in funding buy-sell agreements among clients who have varying degrees of cash flow and net worth.
I had a couple of clients -- business partners -- and the older business partner had significantly more net worth than the younger partner. These two planned to sell the business within 10 years. In this case, using term insurance to help fund a buy-sell agreement enabled both partners to get the coverage they needed at a price they could afford. The younger partner bought a term policy on the older one, and the older partner bought a permanent policy on the younger one. The latter policy can be transferred to the younger partner in the future, when the two decide to sell the business.
Term insurance also provides an excellent buy-sell option for family-owned businesses. For example, I have a client in business with his two sons. He bought permanent policies on each of them, and they bought a term life policy on him. By using term as part of the buy-sell agreement, the father later can give or sell the sons the permanent insurance he bought on each of them. By that time, the policy will be fully funded, or almost fully funded. The sons then can use the policies for their personal needs and will not need to undergo any medical exams.
One of the biggest challenges with selling term insurance is that it continuously has gotten cheaper. It's sort of like Ponce de Leon and the Fountain of Youth; the rates keep going down and it's as if my clients keep getting younger and younger, based on the new rates for which they'd qualify. I find the insurance I've sold only recently suddenly is obsolete or outdated because the rates keep dropping. I guard against this by continuously reviewing and monitoring clients' policies and situations.
I refinance a client's insurance if he is in good health, just as I would a mortgage. I've helped my clients save significant amounts of money this way. I recommend they buy the lowest year term plan that will meet their needs (10-, 15-, or 20-year term). I lock up the rates for that period, but keep reviewing to see where I might be able to save them even more.
I had a client with a 10-year term policy. When it was 4 years old, I was able to save him $200 a year in premium, and extend his coverage for four more years by getting him a new 10-year policy at new, lower rates.
The Internet doesn't help me sell because my client age group usually is not computer-savvy. They are successful people with significant net worth, and they are experts at what they do. They expect me (as their adviser) to have a similar depth and breadth of knowledge, and they like the fact that I work with many companies and products. The more value I add to my relationship with a client, the better my retention is; if I continuously am monitoring my clients' policies and showing them I can make a difference for them and that I care, I won't have to worry that someone else will approach my client and take him or her away.
Peter D. Maller, MBA, CFP, of Lutherville, Md.: My average client is 55 years old, has a net worth of about $3 million, and investable assets of $750,000. Clients range from business owners to high net worth professionals; I even work with professional athletes. I also do business succession planning and work with retirees.
My first step is to work up a comprehensive insurance analysis to determine the client's needs. In most cases, my client needs some combination of term and permanent insurance. Many times, using all permanent coverage to meet a client's needs is cost-prohibitive. To put it simply, term is cheap; it's there to cover the mortgage and the children while they're dependent; it also provides education protection. After that, though, clients want permanent protection, especially for estate planning purposes.
I recently did a comprehensive financial plan for a husband and wife in their mid 40s with three children, ages 5 to 15. He had an insurance need of $3 million for income replacement; she did not have an income to replace. I recommended $2 million of 20-year term insurance and $1 million of permanent universal life insurance for him. This combination helps cover his needs affordably through the college/dependent years of the children using the 20-year term policy, and the blend with universal life insurance adds the permanent coverage he still will need after that period. The combination provides the total $3 million coverage he needs.
Even though his wife had no income to replace, because she was caring for their three children, I recommended a $500,000 20-year term policy on her, to cover the potential costs of hiring care for the children if she were to die.
I also recommended a base $1 million second-to-die permanent universal life insurance policy for estate planning purposes. I then set up an irrevocable life insurance trust (ILIT) for both the husband's term and perm policies; an ILIT for the term policy on his wife; and an ILIT to handle the second-to-die policy. This moved the policies out of the couple's estate.
From a cost perspective, after the children are out of the house, the income replacement need goes down dramatically. The couple then can drop the term policies on their lives and invest those premium dollars. While they could convert those policies later, it would be extremely expensive. There isn't a need to do so, because the $1 million permanent policy already is in force. Term insurance is a cost-effective way to get the coverage they need only while they need it.
I sell term insurance predominantly, but I sell permanent insurance as well. I see more challenges with permanent insurance than with term. In my experience, people much prefer term because it's less expensive and they can invest the difference, although not all of them do. It also is easier for them to understand.
Permanent insurance isn't as easy a sale; it's a more complicated product and therefore isn't as easy to explain.
Term insurance works especially well for buy-sell arrangements. A client can fund a buy-sell agreement affordably using term life insurance for the 10 or 15 years the business owners plan to run the business. It also is an excellent vehicle for key-person coverage.
A critical part of my process is doing due diligence on the companies I recommend. I investigate whether a company is financially sound. Some companies may offer the least expensive coverage, but I never want to compromise on a company's financial strength. I want an "A" rating or better from A.M. Best. I also use ratings from Standard and Poor's, Moody's, and Duff and Phelps. Producers should do their due diligence and offer their clients high quality, not simply the lowest rate. We must make sure the company offering the product will be there for our clients when our clients need it.
Mel B. Bannon, CLU, ChFC, RFC, of Westlake Village, Calif.: My average client's net worth is between $5 and $15 million. Nearly all of my business is high-end estate planning, and I work mostly in brokerage areas. I do a Capital Needs Analysis for income replacement, determine how much coverage is needed, help clients identify what they can afford for premiums, and get a dollar commitment up front after their insurance need is identified.
I always work within my clients' needs. That's the driver. They know what the premiums will be up front. As I see it, my job is to take that dollar amount and build the best blend I can of term and permanent insurance for my clients.
I use term in four key ways: as income replacement for my young clients who need life insurance but haven't yet amassed much wealth (not the majority of my client base, but occasionally I have clients whose children fit this category); for debt coverage (even high net worth clients sometimes need temporary debt coverage); for buy-sell funding purposes (standard use); and for estate planning needs.
I also have used term insurance for short-term estate planning needs, when a client needs to reduce the taxability of a large estate but has liquidity issues and can't afford the premiums a permanent policy would require.
Typically, I use 10-year level term convertible policies insuring both spouses, then convert to second-to-die. I also create an ILIT for the term policy up front to get it out of the estate.
I can't stress enough the need to use a strong company, not only for the term component but also for the permanent component. The cheapest is not always the best. If the company doesn't have a good permanent product, it doesn't matter if its term rate is rock bottom. Advisers need to explain this balance to their clients who push for the lowest rate. They need to stress the balance between finding a low rate for clients now and providing excellent permanent coverage for them after the policy converts. The overall product portfolio is critical. I often have given business to a well-rated company over similar companies because of the total portfolio it offered. Not only was it competitive on the term rates, but those policies were convertible into strong permanent products.
In the future, I believe term's use will remain limited. It fits in nicely as a supplement to permanent products, but it never will be the mainstay (in my market), because it's not what my clients need first and foremost.
