Admittedly, I'm not the biggest whole life insurance (WL) fan. Having said that, there is a unique type of WL policy I've found that few advisors are familiar with.
What is a single premium whole life policy?
A single premium whole life policy is designed to act partially like an annuity and partially like a long term care insurance (LTCI) policy. Most life insurance policies are funded for two reasons: death benefit or cash accumulation. A SPWL policy is funded partially for the death benefit, but it is also funded to provide significant "living" benefits (accelerated benefits for long term care expenses or if the client has a critical or terminal illnesses).
This article addresses using a SPWL policy for older clients who are not interested in fixed or other types of annuities or for clients who are not candidates for a traditional death benefit policy.
Benefits of a SPWL
A good way to help you understand why you need to learn about these products is simply to list the benefits. The benefits below are not necessarily offered with every product.
1. Simplified issue --
Some policies have full underwriting and some are simplified issued.
2. Long term care benefits --
This is a benefit built into almost all SPWL policies and the main reason clients will use them.
Most clients do not like the idea of paying LTCI insurance premiums -- they see it as a waste of money since they may never use it not to mention that it's expensive. Many clients will self-insure their LTCI expenses by keeping money available in CDs or money market accounts -- not a good use of the money since the returns are pathetic and taxable each year.
A SPWL policy will have tax-free LTCI benefits and if the client never uses those benefits, a nice death benefit will pass income-tax-free to the client's heirs (much more money will pass vs. keeping money in CDs or money market accounts).
3. Avoiding probate --
Because the death benefit from a SPWL policy is paid as a death benefit (which is not the case with CD or money market funds), the money will pass outside of the probate process. In some parts of the country, this can save the heirs up to 10 percent of the value of the asset.
4. Liquidity --
When we think of funding a life insurance policy, we typically think of large surrender charges. There are SPWL policies out there that have what is called a return of premium (ROP) option to them. That means that at any time, the client can surrender the product and receive their entire premium back.
5. High early cash value --
For those SPWL policies that do not have the ROP option, some are designed to have high early cash value. These policies act like money market accounts, in that they have a minimum guaranteed rate of return. So, policies with low surrender charges should in very short order (a few years) have a cash surrender value (CSV) equaling 100 percent of the client's premium, and then after that, the account balance should increase.
Again, the market for this product is a senior who is scared about LTCI expenses but does not want to pay for LTCI coverage they may never need. As such, having a policy with a high CSV is needed in order to make the client comfortable, because the insured can access all of the money paid in premiums shortly after funding.
6. Other living benefits --
Besides a LTCI benefit, some policies have other accelerated living benefits such as a terminal or critical illness rider. These riders allow the insured to access a significant portion of their death benefit while living vs. having to die in order for a life insurance policy to benefit the insured.
I wanted to compare the ROP product that has been on the market for some time with the new SPWL policy that just came out.
Assume the client is a 65-year-old female who is receiving Social Security benefits and who has $100,000 sitting in CDs. She does not want an annuity because of the surrender charges and is very worried about LTCI expenses.
What's the difference in the two policies?
The ROP policy is for someone more interested in LTCI benefits than anything else. The policy is not designed to provide accelerated benefits for critical or terminal illness. The policy is not designed to accumulate cash for potential borrowing or as quality savings account, because the CSV is low and it takes 11 years for the cash surrender value to equal the premiums paid.
- The ROP is nice, but if the client activates the ROP, they no longer have the policy and the return on the money is non-existent.
- ROP is simplified issue, while the non-ROP is not.
- The ROP product is an expense reimbursement product, meaning the client has to pay for the expenses and then is reimbursed for "actual" expenses. With the non-ROP product, once the insured can't perform two of six activities of daily living (ADLs), it simply pays the client regardless of expenses incurred.
- The non-ROP product is designed more for death benefit planning and for clients who want access to the death benefit prior to dying if they have a critical or terminal illness.
- The non-ROP product is a much better savings account -- the CSV equals the premiums paid in year three (projected) and is guaranteed to equal them in year five.
- The guaranteed CSV of the NON-ROP product is $140,000 (the projected value is $229,011) at age 85 as compared to $101,647 with the ROP product (which is also the projected value).
If you are providing financial planning, insurance or estate planning advice to clients, you must know about this product. How many clients are out there who have $50k-$100K+ sitting in CDs, bank or money market accounts? Millions. How many of those clients would rather:
- Obtain long term care benefits (and with the NON-ROP product an accelerated DB for critical and terminal illnesses).
- Avoid probate
- Pass significantly more wealth to the heirs upon death
I think many of them would, if they knew the product existed.
Because of the high cash value or ROP, depending on the product used, the client can feel comfortable knowing that if cash is needed in a pinch, it will be available and if not, they and/or their heirs will receive significantly more benefits than they will by leaving money sitting around in a CD or money market account.
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