Case design from the ground up

By Jeff Reed

Kestler Financial Group

It is a clear reminder that we need to approach each case as a blank slate.

I was working on a case recently that involved a rather challenging set of circumstances:
  • Healthy clients (preferred nonsmoker), male age 68, female age 66
  • $3.5 million current assumption survivorship UL
  • Current premium of $18,250
  • Current CSV of $285,000
  • Duration of guaranteed coverage — 11 years from today
  • Duration of projected coverage — 33 years from today
Doesn't sound too bad, right? One problem: They don't want to continue paying premiums. What does that do to the policy? Nine years of guaranteed coverage and 18 years of projected coverage. Not nearly enough.

The policy was issued 15 years ago and they are still healthy, so we should be able to re-write this and extend the coverage, right? Not so fast. Let's take another look at this in-force ledger.

The current interest rate is at 4.10 percent, a mere 10 basis points above the guarantee. The chances that MetLife, the carrier on the in-force coverage, is going to increase M&E is pretty low, so we are really looking at 18 years as our measuring stick. A quick survey of the current market comes back with only marginal improvement — 21 years of guaranteed coverage. Perhaps not enough to motivate the client to take action.

The solution on this one is still to be determined, but it is going to take a compromise on a couple fronts: Duration of coverage (probably age 90) and the need to continue to pay premiums, although at a reduced rate versus the current $18,250 (perhaps as low as $5,000).

The real issue that is lurking behind the scenes on this case is that the producer wants to get into underwriting right away. While I would normally be right there with him, without landing the plane on premium structure, we are really at a loss regarding who to apply with.

Why is that? Take a look at this concept ledger.

It shows the relative position of 13 carriers we reviewed for the case in three different scenarios:
  • Solve for the premium to guarantee coverage to age 100
  • Continue to pay the $18,250 and let it ride
  • Pay no further premium and let it ride
The problem should be readily apparent: There is really no clear winner in all three scenarios. In fact, the winner in two of them is dead last in the third. Conversely, the last place carrier in the age to 100 solve is the second best performer when we execute on the exchange only with no further premium payments.

Why is this? Carriers have had to pay careful attention to the creative premium payment structures that we in the field employ. Product design now attempts to exclude the designs the carrier is not comfortable with or those that are unprofitable, as well as highlight the structures in which they want to be competitive.

So, what is the lesson in all of this? In my mind, there are two, starting with the conversations we collectively have with our clients. For some time now, I have referred to what I call the planning environment that we are operating in for a given case. The discussion above is a clear example. If all we did was run the lowest carrier based on a solve-to-age-100 and defer the decision about how to fund the contract, we would almost certainly over-pay.

The other is really for the design experts like myself. It is a clear reminder that we need to approach each case as a blank slate. Believing that the product that had the best age 100 guarantee premium is the carrier of choice for this case could not only result in the client over-paying, but could jeopardize the producer's competitive position. Fortunately in this case, the producer and I are on the same page and he agrees that we need to define the premium structure before we move forward in underwriting.