Dave Wickersham

So, let’s assume that the new DOL rule is enacted as written (a whole different discussion can be had another time). What are you going to do about life insurance now?  Most of us know already that we only sell life products in a very narrow area of qualified plans, such as split-funded plans or pension-max/IRA-max sales, and we expect that there will be negligible impact on what else we do- right?  Wrong!  

The expectation that just because you aren’t talking about a qualified plan eliminates compliance with this new rule is easy to overlook.  If you are an advisor that has clients with IRA rollovers that also have life insurance needs, you are directly in the sights of the new DOL rule.  If these customers have signed a BIC (Best Interest Contract Exemption) for their IRA rollover, it probably says that their relationship with your broker/dealer and you is a “best interest” relationship.  This opens up your life insurance sale (and any other recommendations you make) to the disclosures and compliance required by the rule.  This shouldn’t stop you from discussing or selling life insurance, it just changes the process that you will have to go through.  Every different broker/dealer will decide how they are going to handle this process and what additional paperwork, policies, procedures and costs will be required from you and your customer.  

The rule is clear that recommendations given relative to a qualified plan are subject to the fiduciary, best interest duty of care.  The broker/dealer world is split as to whether they are responsible as a fiduciary to the client for all advice or only the recommendations specifically relating to qualified accounts.  At this time most of the large wirehouse firms are taking the position that the BIC agreement is at a customer level and thus it specifies that all parts of their relationship with the customer are subject to the additional planning, disclosures and oversight prescribed by the rule.  In the long run, this should improve the consistency of the planning that customers receive, but it will add more paperwork to the process.  The flip side of this position is a transactional BIC that applies to each transaction and not the relationship with the customer.  This situation eliminates the requirement that each non-qualified recommendation be considered a fiduciary relationship and will allow for traditional sales of life insurance to continue regardless of other, qualified accounts with the customer.  

In either case, those advisors affiliated with a broker/dealer will have more robust planning tools as a result of the new rule, and that should help create additional reasons for financial advisors to talk to their clients about risk planning and insurance needs.  This process will create more opportunities for the public customer to get the life insurance planning that they have not been getting in the past, and give more chances for financial advisors to provide the most appropriate products to fulfill those needs.

Regardless of the position a broker/dealer takes, non-registered agents don’t have to be concerned about making any non-qualified life insurance sales to any customer.  However, if someone needs to give advice or make a sale in the qualified arena, i.e. split-funded plans, pension max, RMD max or IRA max, you will need to have a relationship with a “qualified financial institution”.  QFI is currently defined as a bank, life insurer, broker/dealer or RIA, but there may be some additional exceptions before the planned inception date of April 10, 2017.  While this won’t be quite as difficult as being registered with a BD, it will create additional paperwork, compliance and cost to the process.

Remember when you first heard about variable universal life (VUL)? You probably thought the same as most insurance professionals: “Interesting idea, but why would I use a mutual fund investment inside of a life insurance wrapper?” Well, after more than 30 years and multi-billions of dollars of premiums, VUL is alive and kicking—even thriving—in today’s changing life insurance scene. The first boom of VUL was in the mid 90s when many people sold it using illustrations of 10 percent or more and it looked like an inexpensive, permanent insurance alternative to term insurance. This was similar to the original UL policies with initial rates of 12-plus percent. Obviously neither scenario panned out well either for agents or their insured customers; however, what would have happened if VUL illustrations had been run and funded with more achievable rates of 7 percent? In that case the policies issued in the 90s and 2000s would have out-performed all other similar accumulation product types available at the time.

Since the onset of the new provisions of AG38 and AG37 in 2013, the landscape is changing for guaranteed products. When you look at many illustrations of the GVUL products alongside GUL there are three characteristics that usually stick out. First, the required premium is usually cheaper whether it is single pay, three-pay, ­seven-pay or lifetime premium. Second, there is significant cash value buildup even at the older ages, which allows more options for the customer as time goes by. If their health remains good, there may be opportunities to exchange into a new product if and when a new, better product comes along. Third, the target premium tends to be higher—especially in the older ages. Even survivorship VUL illustrates as a better alternative than similar SUL products. The guarantees are the same as GUL whether the carrier is using a shadow account guarantee or a general account guarantee. This may be a temporary phenomenon, but it may be an opportunity that you have overlooked, either because of previous bad experience with VUL or just not having the information.

Many of us have made the switch to IUL to provide the customer with fixed life protection and still allow for participation in market upswings. This is a good alternative for some customers; however, AG49 will give us new guidelines on illustrations, and the products may or may not be as competitive as they have appeared with past illustrations. Also, the history of IUL doesn’t give us a good indication of what the actual, long term results will be as compared to the illustrations that were run. Just like variable life, when there is no return on the index crediting amount, there is still the cost of insurance (COI) that reduces cash value on a monthly basis and that creates additional drag against the future cash value. For this reason, to get a similar comparison between most IUL and VUL policies, the illustrated rates need to be different to actually compare the expected results. According to Bobby Samuelson’s analysis, in his industry white paper “Hedging Strategies for Indexed UL Products” (https://www.leadersgroup.net/wp-content/uploads/2013/06/Bobby-Samuelson-IUL-Products-WP.pdf), indexed universal life policies should be illustrated at a maximum of 75 basis points above the current assumption UL rate (CAUL). So to illustrate a typical IUL policy at 7.5 percent, the equivalent comparison with a typical VUL policy would need to be 10.5 to 11 percent to be equivalent.

With the reduction of estate taxes, we have seen a movement to using cash value life insurance as an accumulation vehicle to create income in the future—i.e., supplemental retirement plans (SRPs) and life insurance retirement plans (LIRPs). When the three primary cash value products are compared (UL, IUL, VUL), the results are similar; however, if you look at the historic returns on all three product types, the over-funded VUL policy will usually outperform the other two over-funded products by 200-300 percent. The risk ratio is higher, but when you look at 20 year cycles, VUL would have outperformed in 24 of the last 25 cycles and even succeeded in the one cycle it was outperformed by UL ending in 2009. Financial advisors make these recommendations every day because of the probability of success.

We always have a desire to use the best rates we can to win the “spreadsheet game,” and as a result we often fail to achieve the results that the customer expects from the illustrations we run. I would not presume to say that VUL should be the exclusive product that a broker or BGA sells today, but 15-25 percent of the time it probably is the best choice for the client and should be one of the products that every broker is aware of and offers to his clients. Clients will be better served, and we will be doing a better job.