The lump sum capacity problem
By Jeff Reed
Kestler Financial Group
The recent announcement by Northwestern Mutual of a limitation on first year premiums is but the latest chapter in the saga of the current economic environment and its impact on the life insurance industry. The extended period of low interest rates combined with the anticipated continuation of low rates for the foreseeable future is pushing carrier after carrier to make some tough decisions. The conclusion more and more of them are coming to is that they need to limit the amount of large single premiums they accept, simply because there are so few current investment options that offer acceptable rates of return.
That leaves our clients with a much narrower set of options when it comes to carrier selection and funding patterns. We are limited to the few carriers who will still accept large single pays, or to stretching that premium over multiple years. The irony is that in some cases, stretching the premium is actually a superior design to the single pay. Prior to simply limiting the amount they would accept, many carriers used pricing to discourage single pay designs. Of course, when we are talking about 1035 exchanges, stretching that premium across multiple years becomes a problem.
So, where does that leave us? In some cases, it leaves us with limited choices, particularly when we factor in product type. The no lapse guaranteed UL selection is very limited and unless you have a career affiliation with a carrier that is still accepting single pays, finding a whole life contract that can get the job done is like looking for a needle in a haystack. The good news is that our haystack is pretty small, and we know exactly where the needles are.
So, just where do we go for product in this situation? A couple places, and the carriers may surprise you.
There is, however, more to the story than simply finding a carrier with a product and capacity. The rest of the story is about cash value preservation. Very few clients who have accumulated enough cash value to face the issue of limited options in the current market via 1035 exchange are willing to see that cash value vanish in a traditional NLG policy. That client is concerned about much more than the price. For them, it is the need for reasonably priced coverage with effective death benefit guarantees and the flexibility of having exit strategies should circumstances change.
As mentioned above, one potential solution is participating whole life, and MetLife is leading the charge. Their two current WL contracts are still accepting large single pays, and are strong performers for cash accumulation. Further, MetLife introduced three additional offerings in the whole life market at the end of April. In addition to participating WL, we can look to no lapse guarantee UL with liquidity features. At least one carrier we work with will still accept large single premiums into this policy type, and there are guaranteed return of premium features available that offer the flexibility mentioned above. If we are even a little more creative, we can find UL products with actual guaranteed cash values. While not as strong — particularly in the later policy years — as a WL contract, the price point can be a bit better here, offering superior guaranteed IRRs on the death benefit compared with a WL contract.
This entire exercise points out one additional factor that is becoming part of the new case design and product selection reality: Spreadsheeting is a losing strategy, and looking at the entire feature set of a product is the new norm. We are already seeing clients elect to pay more, and receive much more value in return, rather than save a few dollars on their premium. It is a refreshing change, and an opportunity to add real value to a client’s planning.