Knowledge And Expertise

Knowledge And Expertise

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.

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: cosmel@mutualtrust.com.