The worst of the recession may be over, but the effect on investment and retirement portfolios is still being felt. Many high-income households have lost significant wealth, and some portfolios may never regain their pre-recession value.
In this environment, it's not surprising that people are flocking to cash value life insurance such as whole life and universal life (UL) policies. With their tax advantages, guaranteed death benefit, cash accumulation and earnings options, these cash value policies are meeting current needs for security and offering a way to compensate for diminished assets.
This environment has opened up a niche for advisors, who have the opportunity to sell to an untapped market of prospects and existing clients who don't yet have UL or whole life coverage. The value proposition: Cash value policies can cushion the impact of further financial damage (a particular advantage of whole life) and bring security, stability and flexibility now and for the future.
Advisors who understand how economic forces have shaped people's lives and financial well-being are in a position to take advantage of a proven and growing market for whole life or universal life policies.
In just the last year, sales have risen significantly, according to LIMRA. Universal life gained the most, with a 17% increase in annualized premiums from 1Q 2009 to 1Q 2010. Whole life, which was the only product to gain in 2009, continued its strong showing in 1Q 2010, with annualized premiums up 15% from the prior year. UL hadn't seen that level of growth since 2005; whole life last grew at that rate in 2002.
Right now, the big-ticket items people care most about -- retirement, education and health care costs -- are seriously underfunded in many cases. Even the most affluent households are feeling less confident, with nearly 75% of millionaire households feeling a "negative wealth effect." That means they feel less wealthy than they did in 2009, according to the 2010 Phoenix Wealth Survey.
People are also feeling anxious about taxes. Many economic and political analysts believe taxes are likely to rise, particularly for affluent families. The estate tax may also be reinstated for 2011.
With all those variables, the flexible options offered by cash value policies -- including full surrender of the basis value or a loan, both tax-free, or a systematic withdrawal that "annuitizes" the benefits -- can be very attractive. Further, whole life offers guaranteed dividends and UL offers variable interest payments.
Recession-driven losses create market for advisors
For advisors to be successful, they must understand the multiple roles cash value policies play for people at different life stages and with diverse needs, objectives and family situations. Advisors must communicate those benefits in a way that makes sense financially but also creates an emotional connection.
What follows are three questions advisors can ask to help clients and prospects determine if cash value insurance is a good choice for them.
1. Do you foresee needing a large loan to cover planned or unanticipated expenses?
With the downturn, existing policyholders have been dipping into their savings. The need for cash is likely to hold steady or increase as people find themselves coming up short paying for essentials. In some cases, the money is used to pay for a child's education. It can also be tapped for medical or other emergencies, business needs or other unexpected situations.
Loans from a cash value policy offer a number of advantages that are difficult to replicate. Generally, they don't have the steep penalties or tax consequences of a 401(k) withdrawal. They may also offer advantages over a home equity loan. Significantly, with the death benefit, the policyholder can still leave a legacy and provide for his or her family even with an outstanding loan, though loans reduce the net death benefit and cash value.
2. Are you between 35 to 55 years old and want to accumulate wealth while giving yourself financial flexibility?
These are the prime earnings years and a time of life when wealth building is often at its highest pitch. For people in their 30s and 40s, cash value policies can not only provide insurance protection, but also be a great way to supplement their savings and investment for future needs, such as a child's education.
From an investment perspective, whole life dividends can be substantial. UL also offers the possibility of good returns.
People in this age bracket who previously carried term life insurance may also be looking for a different option as a result of derailed plans and changing needs. When their term life policies come up for renewal, especially at a much higher cost, this could create another opportunity for advisors to discuss the multifaceted benefits of cash value insurance. Though cash value policies typically have surrender charges and costs not associated with term life, they can add value and still offer a competitive cost of insurance.
3. Is your retirement funded at a comfortable level and are you concerned about long-term health care costs?
Many baby boomers, and even post-boomers, are facing a retirement crisis. Retirement savings have taken a beating and experts predict slow growth and volatile, unpredictable markets for the foreseeable future. Replacing lost value will be challenging, particularly for people with a shorter time horizon. Another variable, of course, is Social Security, as some people question whether the program will be funded adequately for the future.
Cash value policies can be a valuable supplement to a retirement plan. For those nearing retirement, a whole life policy can be a dependable part of a fixed-income portfolio and can supplement fixed-income vehicles such as money market funds, CDs and mutual fund portfolios. Moreover, they provide peace of mind and can provide an additional source of income.
Buyers who are concerned about chronic and long-term illnesses, as well as the possibility that they will eventually need nursing home care, can also meet these needs with a rider or accelerated benefit some insurance companies are offering these days.
With financial experts predicting continuing volatility in the markets and slow and possibly erratic economic growth in the U.S., the need is greater than ever for cash value policies. The combination of cash accumulation, retirement security, income, tax savings and a death benefit is very attractive right now. These policies are one solution to the myriad financial roadblocks people face -- and a great opportunity for advisors to grow their business.
Lou DiGiacomo, CLU, is principal of Saybrus Partners. He manages Saybrus Partners' wholesaling team and is dedicated to servicing independent producers and brokerage general agencies. He has over 24 years of experience in the life and financial services industry, specifically managing distribution of products in several wholesale and retail channels.
