All Guarantees Are Not Created Equal

    Life insurance can be complex.  With all of the moving parts—interest rates, dividends, crediting methods, living and death benefits, etc.—our products can be difficult for the average consumer to fully understand.  That said, there are aspects of what we do that should be very simple.  Take guarantees for example.  The word guarantee used to be easy to define.  Something guaranteed was certain to perform as prescribed.  It was universally understood as an unbreakable promise and its value was borne from and backed by a company’s hard earned credibility and trust.  Unfortunately, in our business, the word guarantee doesn’t carry the same weight that it once did.  Over the last couple of decades, our industry has invented terms like “partial guarantee” and “conditional guarantee,” which are cheaper and provide less benefit when compared to a true guarantee.  We have guaranteed and non-guaranteed product features and use those terms to explain to a client why what we sold them may not have performed as expected.  It’s no wonder that our clients are confused.

    Adding to the complexity are the myriad products that we market. However, these products are not the same since all guarantees are not created equal.  Just because two products have guaranteed in the name does not mean that they are equal—not in value to the client and certainly not in the features and benefits that they provide.  Take a traditional guaranteed UL product.  When first introduced, the theory was great.  Now, if a 45 year old needed $500,000 in death benefit, we could provide the maximum amount of guaranteed death benefit for the lowest out-of-pocket cost all the way to age 120.  As long as the client paid their premium on time, their coverage was guaranteed to be there.  A full, lifetime guarantee!  But is this a realistic guarantee?  The illustrations showed a death benefit amount guaranteed all the way to age 120, but zero cash values for most of the life of the policy.  What happened if the client paid their premium late or skipped a premium payment?  Your policy might not be guaranteed to 120 anymore or it might go away entirely.  Newer versions of guaranteed ULs have addressed late payments by extending the grace periods, but even with those a skipped premium payment can have significant consequences.  For our 45 year old client, the assumption is that the policy could be inforce for 50 years or even longer.  Is it unreasonable to assume that, in the course of those 50+ years, the client might forget to make a payment?  Might pay late by accident?  If so, the guaranteed product they bought might no longer be guaranteed, or might no longer be there at all, because there is no guaranteed cash value to provide a safety net.  If there is no guaranteed cash value, and therefore no safety net, is the guarantee associated with this product realistic?

    Let’s look at the same scenario from a different perspective.  One of the basic benefits of any universal life policy is the flexibility.  Your policy is flexible to allow you to adjust as life changes.  Is that the case here? For our 45 year old client this policy may be perfect for his current needs.  The $500,000 guaranteed death benefit covers his mortgage, makes sure his kids can go to school and provides some income protection as well.  Now let’s fast-forward 15 years.  He’s 60 years old.  His house is paid for, his kids are out of school and he’s thinking about retirement for the next 20 years rather than income protection.  Maybe he needs something less than his $500,000 death benefit or, because retirement is on the horizon, maybe he would like to use some of the money he is using to pay his premium for other purposes.  What are his options?  With a traditional guaranteed UL he doesn’t really have any.  If he tries to lower the amount of premium being paid, his contract may no longer be guaranteed to 120 and will eventually go away entirely.  If he stops paying premium, his contract will lapse.  His company may consider allowing him to decrease the face amount, but that is generally done by company practice and is made considerably more difficult by the lack of guaranteed cash value.  The contract has no guaranteed cash value, so he won’t receive anything back if he surrenders.  In a sense, the only guaranteed options that he has, if he wants to get anything back for all of the premium that he has paid, is to keep paying that premium or die.  

    Despite having “guaranteed” in the name, without guaranteed cash value the guarantees, while real, may not be realistic.  In fact, your client is actually providing the company with a guarantee of their own—that their needs will never change—because their contract can’t change to meet their needs.  To get a fully guaranteed contract that changes as your clients’ needs change and remains fully guaranteed, you need to go back to basics.  You need to go back to whole life.  Whole life guarantees your client’s premium, death benefit and cash value growth, year after year.  Let’s look again at our 45 year old client.  With a whole life policy he gets his $500,000 death benefit and a guaranteed premium.  He also gets a schedule of guaranteed cash values that grows every year and is always accessible, because whole life has no surrender charges.  What he also gets though is flexibility.  Whole life offers non-forfeiture options, so if he pays a premium late or skips a premium altogether his coverage doesn’t lapse.  Put another way, he can make a mistake.  Fifteen years down the road, when his kids are out of school, his house is paid for and he is contemplating retirement, he has options.  If he doesn’t need $500,000 in death benefits anymore, he can make his policy reduced paid up (RPU) and use his cash value as a single premium to purchase a lower death benefit that is guaranteed for life.  If he wants the $500,000, but doesn’t want to pay the premiums anymore, he can pay his premiums from policy values (PPV) and allow the cash value to cover his premiums.  If he needs cash, he can start taking income from his policy cash value.  Finally, if he decides that he doesn’t need the coverage at all, he can surrender the policy for cash and, in many cases, get more back than what he paid in premiums.  That’s a full guarantee.  That’s what whole life can do for your client—because there is more to whole life than just the death benefit.

    The purpose of this article is not to say that a guaranteed UL policy or any life insurance policy is bad.  Rather, the purpose is to highlight the differences that exist within the realm of guaranteed products.   We need to remember that just because two products are called guaranteed does not mean that they are the same.  When all is said and done, the best life insurance policy for any client is the one that is inforce the day that he or she dies.  It’s up to us to make sure that the policies that we sell give the client every opportunity to make sure that is the case.

    Luke Cosme is senior vice president, chief sales and marketing officer at Mutual Trust Insurance Company, A Pan-American Life Insurance Group Stock Company, where he manages the company's distribution and sales development and support efforts. Cosme joined Mutual Trust in February 2014 after serving for a decade as sales vice president at North American Company for Life and Health, where he was responsible for the recruitment and development of MGA relationships, sales strategies and case placement.

    Cosme started his career at North American in 1997 after graduating from the University of Illinois at Urbana-Champaign, where he majored in economics. At North American, he held positions as sales director, financial institutions, and worked in client services before being promoted to sales vice president in 2004.

    Cosme can be reached at Mutual Trust Insurance Company, 1200 Jorie Boulevard, Oak Brook, IL 60523. Telephone: 800-323-7320, ext. 5300. Email: