Luke Cosme

Often the subject of Legacy Building leads to a discussion of a single premium solution and understandably so. For many of us, the focus throughout our working lives begins with getting life started. Then we move to supporting our families, paying for college and saving for retirement. The concept of having extra money at some point that we want to leave to our children or grandchildren is a possibility, but not necessarily one for which we plan. The hope is that we have planned well and made good decisions so that, at some point, we’ll discover that the possibility of leaving that legacy has become a reality. When that occurs there is nothing easier than single premium life to accomplish that goal.

However, what if there was a way to increase the likelihood of that possibility becoming reality? What if we could guarantee it? Even better, what if we could accomplish all of that by using the same dollars that the client is using to protect his or her family today?

Let’s say that we have a client who is 50 years old. He’s in his prime earning years now and on track to retire at 65. His kids are in high school, college, or maybe he has one or two in both. He’s doing well, but he still has 15 years of income, five to 10 years of tuition and a retirement to protect. The bottom line is he needs more life insurance. I would be willing to bet folding money that there are a lot of clients out there in this age range that are facing a similar situation.

There are a lot of potential solutions for these clients as well and most of them will accomplish the goal of getting the client to retirement with those very important needs protected. But what if we could do that and more? What if we could help the client protect his family now and create a legacy? Not only is it possible, but it could be guaranteed, using participating whole life with a Reduced Paid-Up (RPU) option. This feature, found in most participating whole life policies, allows the client to use the cash value in their policy to have a guaranteed paid-up death benefit that remains in force for the rest of the client’s life. The paid-up policy acts just like a single premium whole life policy from that point forward. The client has no more premiums to pay, but the guaranteed cash value continues to grow and the policy continues to have the ability to earn dividends which can further increase the cash value and the death benefit. The client now has a legacy plan that leaves an income tax-free death benefit for his kids and guaranteed cash value that he can access in case of emergency at any time (specifying the cash value can be used pre or post RPU is important). All using the same policy and the same premium dollars that were used to protect his family before he retired!

Let’s see how this works. Using the same scenario from earlier, our 50 year old client purchases a $500,000 participating whole life policy for $9,465 per year. Should something happen to him between now and retirement, his family gets $500,000 to help pay tuition, replace income, etc. However, because he’s using participating whole life, there is more to his life insurance policy than just the death benefit. He also has guaranteed cash value and guaranteed cash value growth that provide additional “living benefits” that he can rely on if needed. For example:

• By year three his guaranteed cash value is increasing by an amount greater than his premium paid. In other words, his premium is paying for his death benefit and contributing more than $9,465 to guaranteed cash value growth every year.
• Cash surrender values at years five, 10 and 15 are more than $31,000, $81,000 and $140,000, respectively. Remember, there are no surrender charges with whole life, so the client has access to every dollar of that surrender value at any time.
• When the client reaches age 65, he has paid $141,975 in premium and has cash surrender value of $140,782. The net cost of his life insurance coverage for those 15 years is $1,193–total! By any measure, that’s a great deal.
• The cash value of his whole life gives him options when he retires. He can keep paying premium and continue his policy as is. He can surrender his policy and get almost all of his money back, as described above. He can elect to pay his premium from policy values and continue his death benefit without having to pay more out of pocket. Or he can elect an RPU option and create a legacy for his family.

In short, cash value means flexibility. With participating whole life, however, it can also mean leaving a legacy. The Reduced Paid-Up option for this client will take his cash surrender value of $140,782 and create a paid-up, guaranteed death benefit of $282,500. Not only does that mean no additional premium but, because he has a participating whole life policy, the death benefit and cash value will continue to grow and can continue to earn dividends which can accelerate that growth.

Using the same premium dollars and the same policy that protected his family before he retired, he is able to create a tax-free legacy for his children and grandchildren.

In summary, our 50 year old client can purchase $500,000 in whole life insurance death benefit to protect his family and his income for net cost over 15 years of $1,193. He can then create a legacy, guaranteed for life, of more than $280,000 for his children and grandchildren for no additional premium! The best part is that few clients, if any, know that this is even possible. That’s a conversation worth having. That’s whole life insurance for a client’s whole life!

Generational conflict is a time-honored tradition in our society. To some extent, every generation believes that the generation that follows has it a little easier than they did and shakes their collective heads at the younger generation’s priorities, decision-making, way of thinking and especially their taste in music. As with most things in life, this is a dynamic and ironic cycle because everyone in an older generation used to be the “they” at which they find themselves shaking their heads. Put another way, my belief that U2 is the greatest band of all time mirrors my dad’s belief that it is The Beatles and my daughter’s belief that it is Taylor Swift. While this can be the basis of many good-natured arguments, it can also be the basis of misunderstandings, as we might assume that our priorities, decision-making and way of thinking is the right way, or even worse, the only way. This is especially true when it comes to perceptions and understanding of finances. To truly be of value to younger generations, we need to understand the issues that most concern them, their expectations and their ultimate goals, while accepting that those may be different than our own.

Perhaps no generation has been analyzed, dissected and, in some cases, unfairly ridiculed more than millennials, who provide the very best example of what I described. If as much time was spent gaining an understanding of their perspective, then the enormous opportunity that they present to our industry could be realized. The question is how we get there. I don’t profess to have all the answers, but I would like to posit a theory and a potential sales opportunity using whole life insurance.

A survey was done a couple of years back that compared and contrasted the priorities and saving habits of millennials with those of Generation X and the Baby Boomers. I think it produced some interesting insights that are worth exploring.

Millennials are more conservative as investors than either Gen X or Baby Boomers because of the 2008 recession and the impact it had on their parents and on them. There is almost a post-traumatic stress reaction because it may have impacted them just as they were beginning their careers or it may have impacted their parents’ ability to pay for college. This subsequently impacted them because of the stress that they saw it place on their parents and because of the student loan burden that many of them took on to finish school. Either way, the fear of what could be lost weighs heavily on their decisions.

This manifests itself in their investing behavior as, on average, they allocate one-third less to equities than Gen X or Baby Boomers, but still expect higher returns. While this may seem incongruous to many of us, that frankly doesn’t matter. Gaining an understanding of that perspective and tailoring our potential solutions to meet that expectation is what matters.

“Long term” has always been a relative term, but even more so in the case of these younger investors. I have always considered long term to be decades or retirement age. For two-thirds of those surveyed, “long term” was defined as less than five years.
Another interesting insight of the survey was that millennials keep about 25 percent of their assets in cash versus 17 percent for Baby Boomers (there was no result given for Gen X). Unobstructed access to their money is important to them and an important point to keep in mind as we look at options.

Finally, and most importantly for our purposes here, millennials have access to information. The internet and the world are at their fingertips. What they want and what they value is access to knowledge and expertise. In other words, they have the information but need help with what to do with it. This is where our opportunity lies.

Let’s take a 35 year-old man with a young family and a good job. He needs life insurance and he’s in good health, so obtaining it at a good rate is not a problem for him. What is the kind of policy for him? Right off the bat, many would suggest a term policy or a long term guaranteed UL, as they potentially give him the most death benefit for his premium dollar. But do these products meet his expectations? Two observations from our survey suggest that the answer may be no. First, for our client, long term is not 20 years, or to age 100. He’s looking out about five years. If he decides to go in another direction, do those products offer an exit strategy for him in five years? How about 10? With no guaranteed cash value, the answer is no. He can decide to stop paying, but he’ll get nothing in return and his policies will lapse. The lack of guaranteed cash value also informs our second observation. Our potential client likes to keep cash and wants to have access to it. No cash value means no access. Now, this is not to say that either of these options are bad for the client. On the contrary, the best life insurance policy is the one that is in force on the day that the client dies. An internet search will tell our potential client that and will also probably tell him that one of those options is cheap and easy to get. However, cheap and easy doesn’t mean right. It also doesn’t require an advisor.

Here is where knowledge and expertise can win the day for this potential client and for the advisor, simply by recognizing and addressing the observations made in the survey we discussed earlier. We’ll start with a solution that you may not have considered—participating whole life. A $500,000 death benefit policy for our 35 year-old male at best class will cost $5,030 per year. Yes, that is more out-of-pocket for the client than either of the solutions described previously, but does it still meet his expectations? Take a look

• Our client is conservative, so guarantees will be appealing. Like term and long term guaranteed UL, participating whole life offers a guaranteed premium and a guaranteed death benefit.
• Participating whole life also offers guaranteed cash value and guaranteed cash value growth. Why is this important? Because long term means something a little different to our client. With some participating whole life plans, the guaranteed cash value growth can exceed the premium paid as early as the third year. Our client will see tangible growth within that five year window.
• He likes to have cash and have access to it. At the end of five years, he has more than $16,000 in guaranteed cash value. By year 10, he has over $40,000. In year 19, his guaranteed cash value exceeds his total premiums paid. Even better, he has access to every dollar of that cash at any time because participating whole life has no surrender charges.
• Our client may be skeptical of the stock market as we described previously. However, he also expects a good return. Participating whole life can help here as well. Whole life does require more premium out-of-pocket than the other options, but in return it also provides cash value which the other options do not. In addition to the guaranteed cash value, participating whole life also may pay a dividend which can be used to further enhance the cash value growth. This is a significant benefit. If we take the difference in premium between the whole life policy and the guaranteed UL policy and invest it, the alternative investment would need to earn a 5.25 percent guaranteed, tax free return to match the guaranteed cash value in the whole life policy by year 30. When we include dividends, the return needed is a tax free 6.80 percent. I think that our client would agree that those are pretty good returns, especially in today’s environment.
• Finally, the cash value and the cash value growth in whole life provide another benefit that the alternatives cannot—an exit strategy that allows the client to get something while they’re still alive. Our 35 year-old client may not be paying much attention to retirement at this point, so here’s a benefit that doesn’t require his attention until then. Thirty years down the road our client may decide that he doesn’t need to keep paying for his life insurance. His kids are grown, his house is paid for and he doesn’t need to worry about replacing income anymore because he’s about to retire. His whole life policy allows him to do just that. If he elects reduced paid-up, he will have a fully guaranteed, fully paid up death benefit of $496,000 for the rest of his life. Since he no longer has to pay his premium, it also frees up $5,000 per year that he can use for other purposes. If he also elects to receive his dividend as cash at that point, he’ll have more than $4,000 more per year that he can use for whatever he wants. That’s over $9,000 in additional disposable income that will continue to grow as the dividend grows. Death benefit and income? That’s a result that few solutions can match!

The best part about all of this is that the overwhelming majority of potential clients have no idea that a solution like this exists. That’s why they need you! They have all the information they could ever use at their fingertips, what they need is the knowledge and expertise to apply that information for something that works for them. For advisors and for clients, there’s never been a better time to take a new look at an old friend—participating whole life.

Surreal. Like a movie. Like a dream. Eerie. Scary. It is a good bet that each of us has used one or all of those to describe the situation that we find ourselves in today. We have dealt with crises before, but this time not only feels different, it is different. During the financial crisis, we were afraid of losing our jobs, our homes, and our savings. We feared for our financial futures, but we didn’t worry about a run on the grocery stores. After 9/11, we were afraid that someone wanted to do us harm because of where we were born and what we believe, but we didn’t have to fear the neighbor walking on the same side of the street. Each of these crises involved degrees of uncertainty, financial and political for sure, but not existential. That is what is different this time. Now the unknown can affect our health and that of our families and our friends. It can come from anywhere, so the best thing we can do is stay apart when every instinct we have is to hold each other closer. That’s a lot of uncertainty to handle.

I remember a line from an episode of the television show The West Wing. The President was trying to quantify the potential impact to the beef industry and the U.S. economy of a possible incidence of Mad Cow Disease in a single cow. Though it was only one potential case out of millions of head of cattle, the effect would ripple through the U.S. economy because of the uncertainty it would cause in a crucial part of the food supply chain. “The most costly disruptions always happen when something we take completely for granted stops working for a minute,” he said. Does that not perfectly describe our last several weeks? We had grown accustomed to record-setting markets, record-low unemployment, fully stocked grocery store shelves and all the toilet paper that we needed. Uncertainty around our ability to diagnose and treat COVID-19 upended all of that in a matter of days. That uncertainty rippled through the economy and manifested itself in every grocery store in every part of the country. When faced with uncertainty people try to find something certain, something they can control. In this case, it was stocking up on groceries and, yes, toilet paper.

So what does whole life insurance have to do with all of this? A little bit of certainty. Before COVID-19 there were still many things out of our control, both good and bad. In our new world, when it seems as though there are so many more things out of our control and not many of them are good, isn’t it incumbent upon us to try to help people find a little bit of certainty? For the clients who have purchased a whole life policy, that is exactly what they have.

Certainty in premium. Whole life premiums are guaranteed. Your client can take comfort in knowing that the company cannot increase their premium or the cost of their coverage. Additionally, whole life policies come with non-forfeiture options that keep the policy inforce if your client cannot pay their premium. Most policies offer a number of options to meet different client needs:

• Premiums can be paid from policy cash values.
• Automatic Premium Loan—As the name suggests, a loan against the policy cash values is taken to pay the premium.
• Extended Term Insurance—The policy cash value is used to purchase term insurance for the death benefit amount.
• Reduced Paid Up—The policy cash value is used as a single premium to purchase a paid up policy.

Certainty in cash values. Whole life policies not only provide guaranteed cash values that the client can access at any time for any reason, they also provide guaranteed cash value growth. Every year. The schedule of guaranteed cash values and guaranteed cash value growth is written into the policy and is not subject to interest rate changes or the performance of a market index. If your client pays the premium, the guaranteed cash value grows. Every year. Zero is not your hero when you can have guaranteed growth!

Certainty in death benefits. Whole life death benefits are guaranteed. As long as your client pays the premium, the death benefit is guaranteed to stay in force regardless of changes in interest rates or the performance of a market index.

Certainty in performance. With premiums, cash values and death benefits all guaranteed, your client knows exactly what they will have today, tomorrow and every day. In fact, the only way your client’s policy can change is if the company pays a dividend, and then it changes for the better! If your client elects to have dividends purchase paid up additions, which many clients do, the result is an increase in the guaranteed cash value and the guaranteed death benefit. Those increases are guaranteed for life!

The guarantees in whole life provide your clients with certainty. They know their coverage will be there. They know what it will cost. They know what their cash value will be and they know that they can access it. Whole life can be a valuable part of any financial plan because of the certainty that it provides even when the things that we take for granted stop working. Life is uncertain. Whole life is guaranteed.