Treasure Hunt

This Amazing Opportunity Is Spiritually Correct and Highly Profitable

For many years the soothsayers in our industry have predicted this coming decade to be the most lucrative in all history for life insurance and financial advisors. Why? Because the baby boomers are moving into their retirement years and are looking at protecting their assets and ultimately transferring what they have amassed over the past 40 years—the most affluent times in all of history.

 So! Just what is the biggest opportunity in the life insurance business today? Is it estate, legacy or charitable planning? Is it premium finance, tax-free retirement, infinite banking or LEAP? Is it some newfangled wealth-building or wealth-transfer concept? Is it partnering with CPAs, attorneys, tax preparers or other business consultants? Is it business insurance, exit strategies or executive bonus? Read on.

The answer is yes—it’s all of those and more. I’m suggesting that the most lucrative market in the life insurance industry is verifying that policies purchased in the past are doing their job. The fact is that all of the concepts mentioned earlier rely, all or in part, on the performance of cash value life insurance.

In the next dozen or so paragraphs I’m going to outline how you are literally sitting in the middle of acres of diamonds! These “diamonds” are in your file cabinets, in your neighborhood, at your accountant’s office—they are everywhere. Bear with me for a few more minutes and I will explain an amazingly simple strategy to mine these diamonds.

Basically it is a bad news, good news, bad news, good news scenario…

The first bad news: It is common knowledge that most cash value policies in force today will not perform as originally proposed.

Why are policies not performing as planned? Over the past few decades zillions of dollars worth of permanent life insurance has been put in force. In most cases a need was identified and life insurance proved to be the most efficient and reliable tool to meet the clients’ needs. In many cases, such as wealth transfer, charitable planning, business buyout arrangements, pension maximization and others, the policies put in force were intended to permanently guarantee the promises of the insured—and they were critical to the financial well-being of generations of surviving beneficiaries.

At the same time, the financial markets have, for the most part, wound up producing woeful results. Interest rates, stock markets and real estate markets have behaved in ways that no one alive has ever seen! We came to believe that interest rates would never go below 5 percent, the stock market would double every three to seven years, and that real estate would always appreciate.

What has actually happened? The Dow peaked at 11723 on January 14, 2000. After that it took a roller coaster ride for 13 years before it moved to positive territory above 11723 on December 1, 2011. In the past, values would have increased from two to five times—$100,000 would have grown to as much as half a million dollars or more.

With the market wildly gyrating for so many years, people lost faith in the stock market. People who relied on their 401(k)s to provide retirement security are devastated—or woefully behind on their retirement planning goals.

The shock has been even greater in the real estate markets. In December 2004, The Economist magazine predicted that because of the spike in real estate values, in order to return to historical growth, rates values would have to drop 40 percent or more and maintain those values for 10 years. Three years later real estate values began a descent and have plummeted 30, 40, even 50 percent or more below 2007 values. Trillions of dollars of personal wealth based on home equity simply vanished. Foreclosures and bankruptcies are at record highs; and many homeowners have a negative net worth due to their negative home equity, making them technically insolvent.

The greatest shock of all has been the interest rates, which have been on a downward slide for 31 years. For several years now financial pundits have claimed that interest rates couldn’t go lower; yet interest rates have continued to stay low and even continued to drop. As I write this in mid-June, Bankrate.com reports record low rates: The average 30-year fixed interest rate mortgage was 3.24 percent and it advertises rates as low as 3.05 percent.

What is the effect of all these financial market up-heavals on life insurance that is intended to be in force on the date of death, regardless of when it occurs?

Well, life insurance companies are strictly regulated. We have seen them survive in the face of the aforementioned financial holocaust. They are required to invest a major portion of their reserves in interest bearing government and high grade corporate bonds. The interest from these bonds drives policy performance and values. By definition, when interest rates are down, policy performance is down.

Most policies—especially if they are more than five years old—probably were excellent choices when purchased, based on the facts known at the time. They were created and planned at a time when no one expected the economy to be in the tailspin we have witnessed in recent years. As a result, if premiums are continued as planned on those policies, based on guaranteed interest rates and charges, the majority of life insurance policies in force today will explode prior to the insured’s life expectancy!

That’s right, given current market conditions, the majority of life insurance policies in force today will expire or lapse prior to the insured’s death! (In fact, no product is completely safe. We’ll get back to that by product type shortly.) In addition, we have found that policies designed in the higher interest rate markets of before are not as efficient as products designed in today’s low interest rate markets.

The fact that the majority of policies are in danger is certainly bad news, but there is good news right along with it: Most policyholders have remedies.

Finding out if there is a problem is really simple but requires some action. The insurance companies do not emphasize the problem (basically because they don’t know what a client is planning). A client can order an in-force illustration from his insurance company. Of course, a professional advisor can assist in obtaining the information and in determining what adjustments, if any, are required to make up for this unexpectedly low interest rate market. At the same time, the advisor can verify that the beneficiaries are up to date and obtain current financial ratings data on the company. The good news is that if any adjustments are required, they are relatively painless. If the policyholder waits, however, the problem gets bigger and bigger until it is unsolvable.

Most advisors know what the remedies are for a policy that is underfunded. You simply ask the company for another illustration that shows what increase in premium is required to “shore up” the policy. Perhaps, because of budgetary constraints, a policyholder may want to reduce the face amount to extend the life of the policy to, or beyond, life expectancy.

Here is where the Treasure Hunt comes in!

First of all, according to LIMRA, very few policyholders see the writing agent after the initial sale is completed. The “annual review” rate is surprisingly low on even the largest of policies. Without being exposed to this information, policyholders, agents and the client’s accounting and legal advisors assume that the policy is fine. They are vaguely aware that the policy should be reviewed, but inertia gets in the way. Because of this, you owe it to your clients, your prospects, your friends and neighbors, your accountants and their accountants, and everybody else, to review any in-force policies…especially if those policies are more than five years old!

Wait…there’s more!

Do you remember that earlier in this article I mentioned that policies being designed in this low interest rate market could tend to be more efficient than policies that were designed when rates were higher? We have found that if we compare a policyholder’s current situation to what’s available in the marketplace today, more than half of the policies that we evaluate result in the placement of either additional or replacement coverage. If you remove the danger of a policy exploding prior to a client’s life expectancy, you have provided an invaluable service to that client, as well as his beneficiaries.

The steps are simple.

• Contact the company and ask policyholder services to run in-force illustrations. If you are not the agent of record, you will need the policyholder’s permission to request this information.

• Analyze the current policy(ies) to determine if the currently planned premiums will fund the policy to life expectancy or beyond.

• Compare the projected performance of in-force policy(ies) to determine if there is an alternate policy with better guarantees and/or premiums that is more suitable for the client.

• Obtain current company financial ratings reports on both the in-force policy(ies) and any alternative policies to include in your report to the client.

• Create a report for your client that summarizes each of his policies based on: current planned premium with information such as current and future cash accumulation; projected policy expiration date on a current and guaranteed basis versus life expectancy; current statements and reprojections from the existing policy(ies); any recommended suitable alternative products with full documentation; and current financial rating information on all policies in the report.

• Present the results to the client.

Note: If a new policy is indicated, do not cancel existing coverage until the new coverage is underwritten and put in force.

It turns out that roughly 65 percent of the policies for which our firm completes this analysis are underperforming to the point that some alternative is recommended.

A word about types of policies: Universal life cash values are dependent on interest rates; whole life dividend rates, which affect total policy values, are dependent, ultimately, on interest rates; variable life policy values are dependent on the stock market and/or interest rates.

A final word of caution: When is a guaranteed policy not guaranteed? Whenever any scheduled premium shown on the illustration was not paid on the exact day that was assumed on the illustration. We recently had a policyholder with a $2 million universal life policy with a no-lapse guarantee. The policy was guaranteed to age 90 regardless of interest rates or cost of insurance based on a eight-pay scenario. It turned out that the policyholder paid a few premiums ahead of time, which caused the guarantee period to drop by a number of years. More than $40,000 had to be deposited to the policy to reinstate the guarantees.

The only way to make sure that your client or prospect does not have this situation is to evaluate every lifetime guarantee policy you see. This holds true for both single life as well as second-to-die policies.

In summary, the message I would like to leave with you is that every policy needs to be reviewed every three to five years. The process will provide a follow-through of implied service to clients/prospects, create a professional relationship with policyholders, and, finally, provide a constant source of business and referrals.

Good servicing.

By Bill Zimmerman for July 2012 issue of Broker World Magazine. Author’s Bio Bill  Zimmerman is founder, president and CEO of LifePro Financial Services, Inc., a premier distributor of life, annuity, long term care, and securities-based insurance products.

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