Avoid lawsuits when selling EIUL insurance
By Roccy Defrancesco
The Wealth Preservation Institute
Equity indexed universal life (EIUL) insurance has been, and seemingly will continue to be, the life insurance policy of choice to aid clients in the generation of wealth for retirement in a tax-favorable manner. If you've read any of my past articles, you know that revolutionary life is my policy of choice. The reason I recommend this policy to clients, in addition to it being the best cash accumulator, is because it helps advisors avoid lawsuits.
It is vitally important to offer every client a policy with the following characteristics:
- Variable loans
- High cash value: One that has a 1.25 percent premium bonus, and one that credits 140 percent of what the S&P 500 returns
Variable loans: Good or bad?
The software at nearly every life insurance company selling EIUL defaults to something knows as variable loans (VLs), as opposed to wash loans, which are much more conservative. VLs are a great option for a client, but they may never come to fruition in the future. And, simply handing out illustrations on "default" rates set by the insurance carriers is a very aggressive way to illustrate these policies.
Let's look at an example that will help drive home this point. Assume you have a 45-year-old client who budgets $15,000 as a premium every year until age 65, and then wants to borrow from his life insurance policy (max loans) from ages 66-85.
- How much could be removed each year tax-free with wash loans if crediting and the lending rate is 7 percent? $56,568.
- How much could be removed each year tax-fee with a 7 percent crediting rate and a variable loan with a positive spread of 2 percent (in other words, with a 5 percent loan)? $70,374
High cash-value life insurance policies
Are you offering a high cash value EIUL policy to every one of your clients? If not, why not?
The vast majority of EIUL policies in the marketplace today do not have a high cash-value option. What does that mean? It means that, if you sold a policy with a budgeted premium for seven to 10 years and something happens in that client's life to cause a loss of income (loss of job, disability, or divorce), the client is most likely not going to be able to fund the life insurance policy as budgeted -- or maybe not at all.
If you used a high cash-value policy for a client who can no longer fund the policy as budgeted, there may be as much as 85 percent to 95 percent cash in that policy, which could then be surrendered for its cash and the client would not be harmed. However, if you used a non-high cash-value policy, there may be as little as 10 percent of the premium paid. And the client, who can no longer afford the premium, will eventually see his or her policy terminate due to lack of premium.
You must offer a high cash-value policy to every client. Ninety-five percent of them will not take it because there is a minor cost to have such a policy rider, but you can put a letter in your file that says you told them about the limitations with non-high cash-value policies. That letter will be your best friend if a client files a lawsuit when he or she can no longer pay the premium with a policy in its early years that lapses due to a lack of premium.
1.25 percent premium bonus
Are you illustrating at the default rates of between 7.9 percent and sometimes more than 8.5 percent? If you are, you aren't running what many would consider conservative illustrations. Illustrating at default rates is OK, but most clients today don't want to see illustrations above 7 percent.
If you want to run illustrations at 7 percent, virtually none of the policies in the market are designed to illustrate well at such low returns. Try it for yourself. However, one product out there has a 1.25 percent premium bonus that kicks in during year 11 and is based on the previous 10 years worth of premium payments. Because of this, the policy is designed to compete well against other wealth-building tools (mutual funds and 401(k) plans) with an illustrated rate going down as low at 4 percent.
140 percent of what the S&P 500 returns
Are you offering your clients a policy that credits 140 percent of what the S&P 500 returns? Why not? Don't you think your clients would like to have that option in a policy? If the S&P 500 returns 5 percent, the policy will credit 7 percent. What if you sell a policy to your clients that does not have the 140 percent crediting option, and the client finds out they could have purchased one with that option? Do you think they'd get upset? I can guarantee it.
EIUL policies can be tremendous wealth building tools. Unfortunately, they are not fully understood by the majority of agents who sell them, and most agents do not protect themselves from lawsuits by offering policies with the most protective features to their clients (high cash-value, 1.25 percent bonuses, returns that credit 140 percent of what the S&P 500 returns, and so on).
Remember: Document that you have offered your clients the best products and give them full disclosure on the issues covered in the article and you will go a long way towards insulating yourself from future lawsuits and selling your clients the best products in the marketplace.
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