Recently, a prospect approached me for $1 million in term life. He was shopping around for the best price.
I took the client through a 15-minute 7,3,3,4 discussion, and the prospect ended up buying a permanent whole life policy with a base of $250,000 and term rider of $750,000 instead. The premium went from $90 a month to $450. I made five times more money, and the client got a better plan.
When I work on larger cases, I like to use 7, 3, 3, 4 approach to help clients make better decisions. It’s a process we have used in our agency, and we’ve also trained outside advisors on how to implement it in their own practices. Here’s how it works.
The 7 elements
The “7” in the 7, 3, 3, 4 approach stands for the seven elements. The goal is to provide your client with enough information to make an informed decision regarding the following seven topic areas:
- Amount of risk: The client must choose no risk, moderate risk, high risk or total risk.
- Premium level: The client must choose high-, mid- or low-premium (per dollar of death benefit illustrated).
- Premium duration: The client must choose the number of years of out-of-pocket premiums paid, keeping in mind that the number of out-of-pocket premiums impacts the benefit.
- Cash value accumulation vs. death benefit: The client must decide whether the policy should focus on cash value or death benefit, keeping in mind that the higher the cash value per dollar of premium, the better the performance, the lower the risk.
- Time horizon: The client must decide whether the policy should focus on short-, mid- or long-term policy benefits, keeping in mind that the duration depends on the purpose of the insurance and that specific policies excel at different durations.
- Riders: The client must decide which rider(s) to choose, if any. Riders can enhance the protection against lapse as well as provide additional benefits.
- Ultimate illustration performance: The client must understand that all products that are built similarly should illustrate similarly when looking backwards from life expectancy. Keep in mind that you are comparing insurance companies that are similar in financial strength.
To provide your client with sufficient information to make a decision on these seven elements, lead them through the rest of the 7, 3, 3, 4 sequence: the three components of life insurance, the three variables of life insurance and the four product universes.
The three components:
- Premium, which is the amount of money contributed to the policy.
- Cash value, which is the vested equity reserve that builds up tax-deferred in the policy. The performance of the policy is determined based on the amount of cash value per dollar of premium. The higher the cash value per dollar of premium, the better the performance.
- Death benefit, which is the cash paid out to beneficiaries, income tax free, at the death of the insured(s).
The three variables of permanent life insurance:
- Interest: What interest rate (or, for index policies, credited rate), can be earned? Investment results of the insurance company (or index returns in an index policy) impact the performance of dividends and interest crediting. The higher the results, the better able the company is to provide a higher interest return to the policyholder.
- Mortality: At what age are people going to die? The ability of the insurance company to credit the mortality portion of dividend or excess interest or index performance is determined by the actual mortality experience of the company. The more diligent an insurance company’s underwriting practices, the better the mortality performance of its insurance policies, the better the long-term value for its policyholders.
- Expenses: What are overhead costs for the company to deliver its products? If per policy costs are not kept to a minimum, they could impact the company’s profits and returns and, therefore, may decrease the company’s ability to pay dividends, excess interest or index credit.
The four main universes:
- No risk (guaranteed insurance): There are no moving parts/variables with this type of contract. The premiums, cash value, death benefit and expenses are all guaranteed. These contracts provide comparatively low cash value and death benefit per premium dollar expended.
- Moderate risk (whole life with interest/dividend crediting, index life with downside protection, some universal life): Premiums are generally guaranteed not to change at the illustrated rate. The face amount of the contract is generally guaranteed not to go below a specific amount if the guaranteed premium is paid. Some contracts in this universe have a death benefit guarantee for a time frame you can preset, to a specific age. There are floor guarantees for cash value and death benefit. If the contract experiences favorable interest/dividend or index-credited earnings and mortality, the favorable experience is credited directly to the policy. Favorable interest and mortality significantly increases cash value and death benefit per dollar of premium. You can reach a point where the premiums are no longer required if performance is very, very good.
- High risk (some universal life and most variable life): Premiums, cash value, and death benefit are not guaranteed at the illustrated rate. Generally, this type of contract “illustrates” the highest cash value and death benefit per premium dollar. Also there are usually much less-substantial floor guarantees as to cash value and death benefit.
- Total risk (term): This type of contract provides the highest death benefit per premium dollar expended. Premiums are guaranteed for a set time period, not to life expectancy. After the set time period, the premiums are not guaranteed and increase dramatically over time. This type of policy becomes more expensive than permanent fairly quickly. Coverage is not available to life expectancy.
Learn this approach. Develop this outline into a client presentation. It works. Role play, get some help, make it yours.
The sale is made when you get to the four universe discussion. Given these four choices, ask your clients what feels best. Stop and listen. They may like to see a couple of choices. They will tell you.
You are now positioned to follow your “normal” client sales process, using illustrations with more certainty and larger cases.
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