Do you use the same life insurance strategy for every case? Get a fresh perspectiveArticle added by Jeff Reed on June 22, 2012
Jeff Reed

Jeff Reed

San Diego, CA

Joined: May 07, 2012

When we start to use life insurance as a part of an overall asset management strategy or estate planning strategy, the focus on the IRR at expected mortality begins to make much more sense than a vanilla design.

We are all creatures of habit to some degree, and as positive as some habits can be (going to the gym regularly, for instance), using the same old strategy for every life insurance case may not be the best way to serve our clients. Though it may be the path of least resistance, that's usually where the problem starts.

What problem? Call it group think, autopilot, or any other phrase that sticks in your mind. They all point to the same root problem: the belief that the way we currently design life insurance policies is the way we should continue to do so in the future.

Increasingly, the more sophisticated agency is finding ways to fund polices that result in superior returns at mortality. What are they doing that is so different? I think the most important difference is the focus on the performance of the policy in the same terms you would use in considering any other financial instrument or investment opportunity. Ask yourself, "What is the rate of return I can expect from my investment or, in this case, insurance premium?"

There is a second component to this: being very down to earth around mortality, particularly, the time horizon. How does this slightly different focus change the way we design policies? Consider the following:
  • Female age 55

  • Preferred health

  • $2 million face amount
Over the last 10 years, this type of case more than likely landed on a carrier using a guaranteed to age 100 or 120 design with extended maturity. When we look at the internal rate of return (IRR) at age 85 to 90 (expected mortality, more or less) we end up somewhere between 4.5 percent and 6 percent tax free. Not a bad deal by any means, particularly when you consider that this is a guaranteed return, rather than something that is subject to market risk. (Yes, I know there is a type of longevity risk that continues to drive down the IRR. Hang on for a minute.). This sale is almost always focused on who has the lowest premium, and I think that is the absolute worst way to evaluate an insurance policy.

So, what could we change? What would make a difference here in terms of IRR?

How about structuring the death benefit differently? Maybe use a little return of premium (ROP) rider? Now we may be on to something! Keep the premium the same, add the ROP rider, solve for the face... Hey, the IRR is about 40 basis points higher at life expectancy!
One problem: The initial death benefit is only $1.44 million and I need the full $2 million right now. What do we do?

If we hold the face amount constant at $2 million, we can achieve the same IRR, but have to pay quite a bit more per year. The actual performance is still 40 basis points higher at mortality, but I am on a budget here.

So, what do we do now? I still want to play with the ROP rider because I like the increased returns, but I need to keep my premium down.

In this case, we moved to a product that guarantees to age 85, projected performance to age 120, and an IRR at mortality that comes in at some 130 to 160 basis points higher than the vanilla guaranteed design.

Problem solved. I'll trade the shorter guarantee period for increased performance. The added benefit? The face amount at age 85 has increased to $2.68 million thanks to the ROP rider.

The reality is that not every client is going to be open to this, but some will be. In addition, when we start to use life insurance as a part of an overall asset management strategy or estate planning strategy, the focus on the IRR at expected mortality begins to make much more sense than a vanilla design.

Effective use of ROP riders is just one way we pull better performance out of the same product you may already be selling. Give your next case a fresh perspective.
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