The life insurance industry has evolved tremendously over the past 30 years, which has put pressure on carriers to keep product development a high priority within their organizations.
The high interest rate environment of the 1980s increased the popularity of universal life insurance (UL) as clients sought higher cash values. Different variations of universal life, such as secondary guarantee universal life, which were designed to provide greater peace-of-mind for clients, also appeared during this time. However, as interest rates decreased, clients again sought out products that could generate greater returns. The 1990s saw an increase in the popularity of variable universal life (VUL).
The current financial environment provides for neither of the factors that make UL or VUL an attractive option. Interest rates are at historic lows and stock market returns have not recovered from their 2008 levels. Many clients are seeking the more reliable returns of traditional whole life insurance as a way of having "the best of both worlds" -- the opportunity to generate guaranteed cash values while having a guaranteed death benefit. Many policies give clients the opportunity to build large amounts of cash value with higher premiums or, instead, use term and whole life blending strategies to create coverage that allows for cash value build-up while keeping premiums within the client's budget.
Many whole life insurance policies in the marketplace offer clients the opportunity to combine base whole life coverage with term coverage via a Blended Insurance Rider to create premiums that are closer to what is possible with universal life. Most of these riders function by having dividends purchase a combination of one-year term insurance and paid-up additional insurance equal to a specified amount of coverage. The maximum amount of blended insurance at issue is often determined by the amount of one-year term insurance that can be purchased by the projected first dividend, which is traditionally paid at the end of the second policy year. The expectation is that paid-up additions will replace the one-year term at some point in the future. It is important to note that dividends are a return of excess premium and are not guaranteed. This type of Blended Insurance Rider works well, but the client is limited by dividend projections on how much additional insurance they can add.
"Traditionally, whole life insurance has been perceived as rather expensive and inflexible, especially as compared to other forms of life insurance," says Clay Summers, field vice president with American United Life Insurance Company (AUL), a OneAmerica company. "Our new Enhanced Blended Insurance Rider provides tremendous flexibility and lower premiums while preserving the most attractive features of whole life, which are guaranteed premiums, guaranteed cash values and the enhancements that potential dividends provide."
The Enhanced Blended Insurance Rider (EBIR) allows both rider premiums and dividends to purchase one-year term insurance and paid-up additions equal to a specified amount of coverage. The result is coverage that provides a dual functionality at a competitive price.
"[It] is an excellent feature that further allows us to cater to the needs of baby boomers that for years had to settle for secondary guarantee universal life insurance," says Joe Kane, general agent with The Personal Economics Group. "By working with baby boomers to expand their insurance portfolios as they age, financial professionals can realize a whole market that is waiting to be accessed."
The premium on an enhanced blended insurance rider is based on issue age, gender, risk classification and the selected projected coverage duration at the assumed dividend scale. After issue, premiums may be increased or decreased, but only on policy anniversaries. The contract can be terminated at any time, which ends the one-year term. The specified face amount may not be increased or decreased after policy issue. One-year term may be converted in part or in whole to a separate permanent policy through age 64. A cancellation of the rider also terminates the rider premium, but has no effect on any existing paid-up additions.
This type of rider provides flexibility for clients because they can project the anticipated point in the future when one-year term insurance will not be supported by dividends and EBIR premiums. Clients also can choose how far into the future the EBIR is anticipated to persist and have the option of selecting a lower-than-current dividend scale to more conservatively project when the one-year term will not be supported.
With these features, clients have the opportunity to keep their premiums lower while providing coverage for the time period that it is needed. This flexibility often competes with secondary guarantee universal life insurance contracts. One advantage that a whole life policy with a premium-funded blended insurance rider provides, vs. secondary guarantee universal life, is guaranteed cash values. A caution of a whole life policy with a premium-funded blended insurance rider is that the rider is at least partially dependent on dividends, which are not guaranteed. Clients should review the advantages and disadvantages of each option to determine what is suitable for their situation.
As the face of the life insurance industry continues to transform and clients needs evolve, carriers must keep pace by offering clients innovative products. Products that offer guarantees while giving clients the opportunity to build cash value while keeping premiums within a budget will appeal to clients and lead to sales.
Dennis Martin is Vice President of Financial Operations, American United Life Insurance Company(R) (AUL), a OneAmerica company.
Policy form series, L-59 and LR-218. Products and riders may not be available in all states. Guarantees are subject to the claims paying ability of the issuing insurance company.
