FAQ's

The following questions always relate to the universal life (UL) and variable universal life (VUL) policy styles.

Since these two policy styles are "cash value dependent" and not "premium dependent" there are no contractual required premiums. Therefore, the development of premium deposit strategies (premium design) is the responsibility of the advisor, who depends on the illustration software as provided by the insurance company. This software has a "black box" of calculating formulas with no definition or disclosed economic substantiation that can validate the projections.

Understanding the conceptual design and characteristics of how these "cash-value dependent" policy styles are supposed to operate helps to separate the "illusion" of illustrations from the "functionality" of the product.

Q. I have seen commission policy illustrations that show higher cash value in the 25th and/or 30th year, or have a lower annual premium than the no-load policy illustrations. Shouldn't the no-load do better?

A. Once you understand how illustration software and product is developed, you will come to the realization that illustrations are worthless and without merit. We did a research study and "tweaked" some of the many variable components that make up the cost structure of a VUL policy as per the illustration. You can do a little study yourself: Run an illustration and select one sub-account...the one with the lowest sub-account management charge. Now, re-run the same case using a different sub-account (one with the highest sub-account management charge). Compare the difference in cash value in the 30th year. WOW!

Which policy is better? It is the same policy! And this is just one example. Current methods of policy comparisons by illustrations are archaic and have no basis. The above test/study only affects one of a multitude of cost components. Most of the other cost components are hidden in the "black box".

Although we provide fiduciary based analytical tools that can expose the pricing anomalies within a "black box", the easiest way to compare is to look at first year only cash value and minimum premium/cost to purchase the coverage in the first year. Then compare the full disclosure pages of the no-load policy to that of the commission policy.

Q. Are the cash values in a no-load product that much higher than those in a commission policy?

A. Yes. There is a substantial difference starting in the first year if you compare "surrender" values and not "account" values, as the surrender value represents real money. In some cases, a commission policy will show no cash surrender value in the first year, whereas the no-load policy may show a cash value of 70% to over 90% of the premium payment. Keep in mind that there are no surrender charges in a true no-load policy.

Q. What do you mean by true no-load policy?

A. There are a number of companies that refer to a product as a no-load policy but the term is misleading.

For example, Fortis had announced a new no-load variable policy, but, upon inquiry, we found that it was in fact a traditional commission product. They had lowered the asset management fee of the sub-accounts, which is commendable, but doesn't qualify as a no-load policy as we all know the term to mean. Other company's have lowered commission on a product, but still maintain all the other high loads. These do not qualify as a no-load policy either.

Q. Why are high first year surrender values so important?

A. There are several reasons: (1) It generally is the surrender values that will perpetuate a policy if premiums are skipped (which is supposed to be one of the benefits of a flexible premium, cash-value dependent policy style). If the surrender value is -0- , or less than that which is needed to cover the cost of continuance, the policy will lapse.

To check this out, run an illustration on a commission policy using the target premium. Then re-run the illustration with no premium paid after the first year and see what happens. It almost always lapses. Using the same method with a no-load policy, the illustration will project coverage continuing for 3 to 7 years, depending on the scenario.

(2) UL and VUL were initially designed to provide a combination of death benefit (based on current costs) and a liquid asset in a tax-wrapped product. Since no one, advisor or client, can state with absolute certainty that nothing will change after the first policy anniversary, we feel it is important for the client to have maximum control and liquidity should anything change in the near-term future. Control and flexibility are always directly related to the degree of liquidity in the policy. A policy that has a lien (surrender charge) against the asset restricts liquidity and therefore restricts control and flexibility.

Q. This may be true, but life insurance is a long term planning vehicle,  not a short term investment.

A. That is what we all hope for, but reality indicates something else. First, statistics point to the fact that a very high percentage of  policies lapse/terminate before ten years (almost 50% after 5 years). These lapses are due to a number of various reasons, but the fact is that such lapses take place during the surrender charge period of the policy, costing the client money.  Second, there is the use of variable life and survivorship policies as a wealth accumulation tool due to the tax-sheltered wrap they provide. As a tax advantaged investment tool, access to cash values in short to intermediate time frames constitute the need for higher liquidity up front, even if the planning objective may be longer term.

Q. You keep referring to premium flexibility. What do you mean by that?

A. Commission policies have a target premium, which is often the minimum required premium to place the policy in force. This target premium represents the fully loaded amount that pays the maximum commission. As the no-load product does not pay the planner/advisor any sales commission, the range of premium is expanded to the downside. For example, a $1 Million survivorship policy on a male, aged 65 and a female, aged 62 can be purchased for under $800 in the first year. Compare that to a minimum premium of a commission policy (which would be in the thousands of dollars).

Q. I can reduce the clients' premium or increase the early years cash values by blending term insurance on a base universal or variable life policy. Wouldn't that work just as well?

A. Many astute advisors are starting to frown on that practice for several reasons.

Such a policy illustration lacks full disclosure and fiduciary guidelines for transparency.

The guarantees of the term rider are often misleading or inconsistent with the long-term illustration. You may show a level death benefit illustrated for 20 or 30 years, but the guarantee of the term rates are for only 5 or 10 years (and the illustrations often don't reference that fact, or it becomes an obscure footnote). If there is a 20 or 30-year guarantee on the term, why not use all term? After all, the purpose of a cash value style of policy is to secure control for longevity. A blend is saying that you want the base policy for commission generation. Also, the pricing development of 30 year term is suspect.

In addition, the software illustrating the blend is not always programmed properly in regard to the cash value corridor testing to insure that a MEC isn't created. The question then is, why do it? Why not give the client a better policy, unconfused and controlled.

Q. Then how do we know which policy is better? Which one has the best pricing and cost positions?

A. Become informed and understand the structural functionality of UL and VUL policy styles. You will find that they do not function properly in a commission environment. The Network also provides analytical tools that help to guide the advisor into the discovery of actual policy costs through reverse engineering of illustrations.

Until we get to a point of "full disclosure" and un-bundle the premium, it is almost impossible. You would need to request that the company send you a complete and separate breakdown of each cost component, which they usually do not supply. Our position is that with a no-load product, we get full-disclosure, unbundled premium, and design flexibility. This allows us to design concepts where the client may have cash value that equals or exceeds the premium in the first year. Since all policies have components that are established with a potential of change, we prefer to keep our clients as liquid and as "in control" as possible.

Q. Are you against advisors receiving commissions, or using commission policies?

A. No. Although we believe and can substantiate our feelings that the no-load UL and VUL policy is superior, we also believe that it is up to the consumer to make that choice. As long as there is full disclosure without omission to the client, let them choose. They may feel more comfortable with the traditional arrangement of commissions. However, our experience is that in 92% of the presentations made, the consumer has selected the fee-based no-load policy.

In addition, there are some policy styles which are not yet available in a no-load version, but may fit the needs of the client. The real point is this: The advisor is not a true fiduciary/advisor/planner unless he/she provides the client with a full choice of policy style options, regardless of the compensation model.

Q. How do I establish what my fee should be?

A. That is the most frequently asked question by the professional community. We teach our members the benchmarking process so that the client can easily see the value added service your bringing to the table and how the fee equates to the economic benefits enjoyed by the proposal submitted for consideration.