Mark Peterson

Today, countless living benefit riders are available or included with various life insurance contracts, whether index universal life (IUL) insurance or guaranteed universal life (GUL) products. This article will focus on the role one specific type of rider, an accelerated benefit rider for chronic illness, is designed to serve when paired with an IUL product, and review some features to seek in this type of rider.

According to the Kaiser Family Foundation, by 2050 the U.S. population will have four times as many nonagenarians and centenarians—people in their 90s and 100s—as it did in 2010.¹ As Americans age, their health care costs surge, and traditional sources of retirement income come under increasing pressure. These consumers are grappling with uncertain financial futures. As The Wall Street Journal’s David Harrison has shared, “With roughly half of all Americans who turned 65 in 2014 projected to need expensive long term care and with new strains on pension systems and Social Security, it remains to be seen how tomorrow’s seniors will make ends meet.”²

If they can barely make ends meet, what will their quality of life be like in retirement? Consider that while some consumers plan for only a 20-year retirement and some don’t plan at all, the average American female who reaches age 65 in 2015 has more than a one-in-three chance of seeing her 90th birthday.³ It doesn’t take a rocket scientist to deduce that a client’s income may be insufficient to cover health care and other expenses during a retirement of 25-30 years or longer.

Not only are Americans living longer, they’re doing so with more chronic illnesses. In 2014, chronic disease cost our nation $2.3 trillion—four times the amount of the national debt for the year.⁴ What’s more, 95 percent of health care costs for older Americans can be attributed to chronic diseases.⁵

For the chronically ill—those diagnosed by a physician as unable, for the past 90 days, to perform two or more Activities of Daily Living (ADLs) such as feeding themselves, getting dressed, bathing and toileting, or suffering from a severe cognitive impairment—the potential need for long term care looms large. The prospect of nursing home care is alarming for clients and their families, from both an emotional and a financial perspective.

Fact: A private room in a nursing home costs more than $91,000 per year⁶ and long term care expenses will likely continue to escalate. Since 2005 the cost of nursing home care has risen 4.5 percent per year, compared to an overall inflation rate of 2.5 percent. If this trend continues, the average expense for a stay of one year in a nursing home will reach $146,000 in 2030.⁷ If, at that time, the average stay for a female in long term care is still 3.7 years (as it is now, according to the Department of Health and Human Services),⁸ the cost may total more than $540,000.

While some long term care insurance (LTCI) policies still are available on the market, how cost-efficient are the contracts these days? A certain type of value-intensive IUL policy, when properly structured and funded with an affordable chronic illness living benefit rider, may constitute the most appropriate solution for clients seeking flexibility, guarantees and the opportunity for upside market potential.

As chronic illness riders typically are based on an indemnification model, policyholders who experience a qualifying event are subject to virtually no restrictions on how they can utilize the accelerated portion of the death benefit and don’t have to furnish receipts for their health care or other expenses (whether or not related to the illness). How many consumers are up to the task of submitting receipts while grappling with a debilitating chronic illness or a profound cognitive impairment?

Clients deserve options. Some chronic illness riders available with IUL policies offer a choice of payout levels, such as 2 percent or 4 percent of the benefit amount per month, or the full Internal Revenue Service (IRS) allowable per diem at the time the benefit is exercised. Chronic illness riders with flexible payout options such as these are designed to empower clients to access the amount of money they need when they need it.

Furthermore, some chronic illness riders available with IUL contracts allow for a waiver of premiums on the entire policy if the client becomes eligible for benefits, even if he or she chooses to forgo the benefits. What client wouldn’t appreciate such a consumer-friendly feature?

Consumers who may be interested in pairing an IUL policy with a chronic illness accelerated benefit rider include those:

 • who would appreciate the potential for their life insurance policy to earn index interest crediting, based in part on an underlying index, while providing downside market protection;

 • who have experienced a severe health issue of a loved one and understand how costly it can be; and

 • who are in good health, overall, but would appreciate knowing they have flexible options if their health deteriorates later in life.

 Life insurance doesn’t have to serve just one purpose, and consumers don’t have to settle for costly, impractical products to protect them from the financial ravages of chronic illness. Brokers who partner an accessibly priced IUL solution with a smartly structured living benefit rider for chronic illness may just become their clients’ preferred partner. 

Footnotes:

 1. Tricia Neuman, Juliette Cubanski, et al; “The Rising Cost of Living Longer: Analysis of Medicare Spending by Age for Bene­fici-aries in Traditional Medicare;” Kaiser Family Foundation; Jan. 14, 2015; accessed July 30, 2015 at http://kff.org/report-section/the-rising-cost-of-living-longer-section-1-medicare-per-­capita-spending-by-age-among-traditional-medicare-beneficiaries-over-age-65-2011

 2. David Harrison: “We’re Living Longer, and Other Reasons to Worry About Americans’ Retirement Outlook”; WSJ.com; June 23, 2015; accessed July 30, 2015 at http://blogs.wsj.com/economics/2015/06/23/were-living-longer-and-other-reasons-to-worry-about-americans-retirement-outlook

 3. Ibid.

 4. Don C. Reed; “Disease-a-Week Challenge #1: How the California Stem Cell Program is Battling Lou Gehrig’s Disease;” Huffington Post; May 28, 2015; accessed July 30, 2015 at www.huffingtonpost.com/don-c-reed/diseasea

week-challenge-1-_b_7455178.html

 5. “The State of Aging and Health in America 2013;” Centers for Disease Control; 2013; accessed July 30, 2015 at www.cdc.gov/features/agingandhealth/state_of_aging_and_health_in_america_2013.pdf

 6. “Seniors’ Independence Shouldn’t be a Political Game”; AARP, updated June 2015; accessed July 30, 2015 at www.aarp.org/politics-society/advocacy/info-2014/where-aarp-stands-older-americans-act

 7. Andrew Melnyk, PhD, and Harsh Sharma; “Who Will Pay for Our Long-Term Care?” American Council of Life Insurers; Nov. 2014; accessed July 30, 2015 at https://www.acli.com/Consumers/Long-Term Care Insurance/Documents/LTC_Report-2.pdf

 8. “How Much Care Will You Need?” U.S. Department of Health & Human Services; accessed July 30, 2015 at http://longtermcare.gov/the-basics/how-much-care-will-you-need

When reflecting on the secret to his success, hockey great Wayne Gretzky shared these words of wisdom, “Skate to where the puck is going, not where it has been.”¹ It’s no secret that, if implemented, the proposed NAIC rules governing illustrations of index universal life (IUL) insurance products would change the way the products are marketed, but I believe some brokers are already updating their game plans and skating in the direction of the proposed rules with their IUL sales strategies.

Given consumer interest in IUL—sales of it represent more than half of UL premium²—you may be able to position countless clients appropriately for meeting their needs with IUL. As Ashley Durham, LIMRA senior research analyst, shared in a recent press release by the organization, “Market conditions and increased carrier and product options have led to a decade of positive growth for IUL.”³

Following are seven strategies designed to help you educate consumers about today’s IUL and leverage its power to meet their needs in virtually any market environment.

 1. Start by identifying a low-cost IUL product from a carrier that’s a pioneer in the IUL market. Accessibly priced IUL solutions that offer great flexibility may be the best choice to review with value-conscious consumers.

 2. Test the policy at a low interest rate. Show the client how the policy is designed to perform in the event of 2 or 3 percent returns. I believe products that perform well at a low interest rate are consistent with the intent of the proposed NAIC rules and have the potential to minimize the impacts of volatility.

 3. Fuel the contract with extra premium. If you planned to fly a plane from New York to Los Angeles, you wouldn’t put barely enough fuel in it to get directly to LA. Instead, you’d have a surplus of fuel so that you’re prepared if you encounter unforeseen risks, such as inclement weather, being rerouted, or having to circle the runway. Think of premium as the fuel for IUL policies and design the contracts with extra fuel, as feasible, so if clients encounter the headwinds of adverse market conditions they will still have the ability to reach their destination. If their IUL product doesn’t achieve the performance they have anticipated, they will have downside protection—and if it achieves very good performance, they may have the potential to access cash value in the policy.

 4. Seek unique ways to access cash value. If the policy is overfunded or conditions are positive, resulting in strong index performance, some IUL products provide the ability to access cash value in the contract—while maintaining the death benefit. As a broker, you have the responsibility to help your client understand the potential risks of funding the contract “skinny,” but also how your client might benefit from funding it with extra fuel or experiencing strong index performance.

 5. Address the sequencing of returns issue. I believe our industry is beginning to understand more about the ramifications of the sequencing of the returns on IUL product performance. An illustration might show a 7 percent rate year after year, but I’ve never seen a contract earn a 7 percent static rate of return over time. It may earn 14 percent one year, zero the next, seven the next, etc., to equal an average of 7 percent over many years. How the returns are sequenced will likely have as much to do with the policy’s performance as the rates themselves. Turn toward an IUL solution that utilizes a form of volatility control—a rules-based index strategy designed to remove the highest highs and the lowest lows. The solution I’m thinking of is subject to a participation rate, but addresses the sequencing of returns challenge and allows for an uncapped return to the client.

 6. Seek a guaranteed persistency bonus. Some IUL products offer a persistency bonus, but some bonuses are guaranteed and some are not. Therefore, while some IUL products may be illustrated with a persistency bonus 20, 40 or 50 years out, that bonus may never be paid—or, at the carrier’s discretion, it may be paid at a lower rate than in the current illustration. Be sure clients know whether the persistency bonus is guaranteed and at what rate. Try to avoid propping up an illustration with a persistency bonus that may not materialize.

 7. Look for a flexible chronic illness rider. A living benefit rider designed to pay on an indemnification model for policyholders who experience a qualifying event allows them to use their benefits virtually however they choose. A rider that features flexible payout choices, such as 2 percent of the death benefit, 4 percent, or the maximum IRS per diem, is designed to help clients access the amount of money they need when they need it. Riders available on some IUL products today also provide a waiver of premium on the entire policy as long as the client is eligible for benefits, even if he chooses not to take the benefits.

Ultimately, when determining the IUL product that’s most appropriate for each client, take the time to understand how the offerings—not just the riders and features—are designed to work in any market environment. Read the policies and encourage your customer to read them as well, to help differentiate the various IUL offerings from each other in the great product soup of IUL today.

Keep in mind also that racing to where the puck is headed may help win hockey games, but racing to the table with any old IUL offering might not be what the client needs. Strive to put your customer in a position for success through value-conscious IUL product selection, responsible illustrations and sufficient fueling with premium.

Footnotes:

 1. “Wayne Gretzky,” BrainyQuote.com. Xplore Inc., 2015, accessed June 1, 2015 at www.brainyquote.com/quotes/quotes/w/

waynegretz383282.html

 2. “LIMRA: Individual Life Insurance Sales Experience Strong Fourth Quarter Growth.” LIMRA, March 16, 2015, accessed June 1, 2015 at www.limra.com/Posts/PR/News_Releases/LIMRA_

Individual_Life_Insurance_Sales_Experience_Strong_

Fourth_Quarter_Growth.aspx?

 3. Ibid

Our fellow Americans know they need life insurance, but that doesn’t mean they’re buying it. As LIMRA relayed in a recent press release about its 2014 Insurance Barometer Study with Life Happens (formerly the LIFE Foundation), and as is consistent with prior years, “…65 percent of consumers agree that they personally need life insurance and one in four (27 percent) believe they need more…The most commonly cited reason survey respondents provide for not purchasing more is cost (63 percent cited ‘too expensive’) followed next by having ‘other financial priorities’ (59 percent).”¹

Yet misperceptions abound about the cost of life insurance. As Maggie Leyes, vice president of content strategy for Life Happens, blogged on the organization’s website following the release of the study results, “Get this: When asked the price per year for a $250,000 20-year, level-term life insurance policy for a healthy 30-year-old, the median cost given by those 25 and younger was $1,000—nearly 10 times its actual cost of $150 a year.”²

So, what’s a broker to do for clients or prospects who know they need life insurance but who have balked about paying the premiums? Term life insurance has long been a go-to solution for a modestly priced, guaranteed death benefit. But even with the typically lower premiums for term life compared to permanent life policies, one size doesn’t always fit all.

There’s simply no reason for clients to pay for more coverage than they need, because today it’s possible to help them customize with highly flexible term life policies. Whether their goal, in the event of their unexpected death, is protecting their families until retirement age, paying off a mortgage, or helping to ensure that their kids can attend college, they can utilize a laddering strategy to buy only the exact amount of coverage they need.

Laddering, as a reminder, means matching durations of a financial product with client needs. For example, instead of offering one single, large term life policy to meet the client’s longest possible need, you would tailor the coverage, matching smaller policies to individual needs.

Here’s how laddering works:

 • Identify the client’s needs.

 • Determine how long the client will need coverage.

 • Determine the amount for those needs.

 • Advise the client to buy  multiple, smaller term policies that match the needs exactly instead of one larger policy.

By laddering the policies, your client can purchase the appropriate amount of coverage in a cost-effective way. This can enable the consumer to (for example) utilize multiple term policies to match a current mortgage duration, provide coverage until the kids are grown and gone, or until retirement at the age of 62, 65, 67, 70 or whenever.

Let’s imagine that your client calls and wants a 30-year term policy with a $1 million face value. Larry, age 39, has two children, ages 5 and 8. He wants to purchase life insurance to provide for his family in the following situations:

 • $250,000 of coverage on himself until his youngest child reaches the age of 21.

 • $500,000 of coverage until retirement at age 62 to protect his family’s income needs.

 • $250,000 of coverage to pay off his mortgage, which has 27 years remaining.

That means he needs $250,000 for 16 years; $500,000 for 23 years; and $250,000 for 27 years. Larry could buy a single $1 million policy, but the closest available term period offered by some life insurance carriers would be 30 years. Instead, it’s possible for him to buy a separate policy for each of his three situations. 

By structuring his life insurance on his terms, Larry may potentially save several thousand dollars, if he were to drop the 30-year policy after 27 years. This example is not an actual case, of course; it is used for illustrative purposes only and assumes that each policy is kept in force for its full level-premium term period. Also, as you would likely expect, premiums vary by carrier, product, underwriting classes, ages, payment plans and other factors (and some conditions apply)—but the point is, the laddering strategy is designed to efficiently utilize the client’s budget while providing money for each child to attend college, covering the remaining amount of the mortgage, and providing income protection until retirement.

However, all term life policies are not the same, despite the highly commoditized nature of term products. When considering a term life laddering strategy for clients or prospects, closely review the carrier and product attributes. Among the attributes you may want to look for are:

 • Competitive 15-, 20-, 25- and 30-year term classes

 • Many available durations

 • Technology

 • Convertibility

 • Extended ages and durations

 • Competitive rated case pricing

 • Competitive pricing for cases greater than $1 million

 • An intuitive Web tool that supports a simplified submission process.

Look, as well, for innovative riders that are offered with certain term life products. For example, it’s possible today to attach a select income rider to a term policy to provide clients with a guaranteed benefit of $500 or more per month for a specified time period, to supplement the lump-sum death benefit. Keep in mind that all guarantees are backed by the claims-paying ability of the issuing insurance company.

That type of payout structure certainly seems to merit consideration. An optional income rider may be extremely beneficial in helping families manage their monthly cash flow after the death of an income-earning parent. What’s more, there’s no rocket science to it; the rider is easily put into place and has the potential to mitigate worries over money management.

Truly, isn’t that what we are all in this profession to do—help provide clients protection, guarantees, flexibility and peace of mind?

Footnotes:

 1. “Millennials, Younger Americans Continue to Show More Anxiety About Common

Financial Planning Issues than Older Generations,” LIMRA, April 7, 2014,

accessed April 29, 2014, www.limra.com/Posts/PR/News_Releases/Millennials,_

Younger_Americans_Continue_to_Show_More_Anxiety_

About_Common_Financial_Planning_Issues_than_

Older_Generations.aspx

 2. “Our Views on Life Insurance and Finances—In Tweetable Facts,”

Life Happens, April 10, 2014, accessed April 29, 2014, www.lifehappens.org/blog/author/mleyes