Funding universal life insurance at target? You're missing the point
By Sheryl J. Moore
Moore Market Intelligence
Throughout the past 15 years of working with universal life (UL) products, one comment in particular has been overheard far too often:
“…fund this UL at [X percent] over target.”
This comment is especially popular in the indexed life market, where the product may be new to producers, and a lack of product knowledge may run rampant. What is most scary, however, is the fact that “experts” who’ve been in this market for longer than I’ve been alive still use this methodology when funding UL plans.
Because of the flexible nature of the premium payments on universal life products, it is important to understand the pricing objective of the product you are reviewing. Is it an extended no lapse guarantee (ENLG) product? If so, search for the ENLG premium in the illustration software. If it is a premium-to-endow sale, solve for when the cash value will equal the death benefit amount at a specified point in-time. If it is a cash accumulation sale … well, that may be a little more subjective based on what your client is trying to achieve.
Nonetheless, using the term “target premium” in reference to required funding levels is absolutely asinine. Why?
Target premium is simply the amount of premium that the selling agent will be paid full commission on — nothing more, nothing less.
In fact, from a pricing perspective, the target premium has no correlation to the adequacy of premiums paid on UL products. The target premium may carry the policy to age 60 or 120; it absolutely will not provide an appropriate guideline on how much premium the client should pay. That is, unless the objective is merely to ensure that the selling agent is paid optimally. (Hint: that is sarcasm.)
Even suggesting that a client pay [20 percent] over target is inappropriate. What does the target premium have to do with how long the policy will remain in force? Nothing!
Therefore, when you are searching to see how a UL policy should be funded, you need to first ask a couple of questions:
What is my client’s goal with this UL?
For example, a premium-to-endow sale will likely require a much lower premium level than a cash accumulation sale.
Is the product in consideration priced for the same objective that my client is trying to meet?
All too often, I see agents trying to sell an ENLG product for a cash accumulation sale. Too bad the cash is being sucked out of the policy by the charges that are needed to support the ENLG. Is the death benefit of the policy appropriate, based on my client’s objective and budget?
Don’t sell a $1 million policy to someone who can only afford $100,000, or the policy will lapse and you will face a chargeback. Likewise, if the sales objective is cash accumulation, you want to suppress the death benefit amount in order to accelerate the cash accumulation as much as possible. So in this case, a higher death benefit amount would be counterproductive.
Ultimately, making blanket statements about any product type is dangerous. Every sale and every prospect is unique. Funding any type of UL at any percentage of target premium just makes one appear inexperienced and uneducated on the very product they are selling.