Insurance Acquisition Considerations
We strongly encourage our clients to consider the following factors before acquiring life insurance.
Underwriting
Initial premium quotes are only estimates and may vary greatly from actual costs that are based on medical and financial underwriting. Do not commit to any one carrier until all underwriting offers are obtained.
Whole Life vs. Universal Life Product Structure
Whole life premiums are fixed and are generally higher than universal life premiums. A universal life structure provides the flexibility to maximize the death benefit for a given premium outlay, however universal life policies must be monitored more closely than whole life policies.
Traditional vs. Variable Life Insurance
Variable life is different from traditional life insurance in that the cash values are invested differently. The cash values of traditional life policies are invested in the general accounts of the life insurance carrier. The general account portfolios of all insurance carriers consist mostly of investment-grade bonds and mortgages. Variable life cash values are invested in separated account funds, much like mutual funds. The policy owner chooses from the alternatives made available by the carrier based on typical investment goals (i.e., time horizons, propensity for risk, etc.). Variable life is desirable for clients who want the potential advantage of higher equity-based total returns and are comfortable with the potential for negative returns.
Diversification
Based on projections, diversification of an insurance portfolio through the use of multiple carriers may slightly increase overall premium costs, however, it also spreads risk. Diversification is highly recommended for insurance acquisitions in excess of $5,000,000.
Number of Premium Payments
The premiums for most life insurance products today may be paid over a condensed period of time, over a certain period of years or over the insured's lifetime. However, a universal life policy provides the most flexibility.
Interest Rate Sensitivity
Some insurance products are more sensitive to interest rate and dividend scale fluctuations than others. This sensitivity should be thoroughly analyzed and compared to measure the risk inherent in each product.
Insurance Carrier Considerations
Carrier history and track record.
Has the carrier lived up to both qualitative and quantitative factors in ongoing product performance? Are there consistent profits without emphasis on trendy investments, i.e., junk bonds, derivatives, etc.?
Treatment of inforce policyholders.
Has the carrier demonstrated an equitable allocation of profits among all groups of policyholders? If new policies of a given product series earn a higher interest rate than inforce policies of the same product series, this may be an indication that the carrier is "buying business" at the expense of its inforce policyholders.
Ratings from various third-party rating services.
How does Standard & Poor's, Moody's, Duff & Phelps, A.M. Best rate the insurance carrier?
Market niche experience and commitment to the upscale market.
Does critical mass exist in certain product lines, giving the carrier the economies of scale and an incentive to remain competitive?
Responsiveness to industry, economic and legislative change.
Is the carrier a thoughtful leader, or a follower? Does the carrier have a track record of offering "bail-out" options in light of tax law changes that impact the insurance industry?
Commitment to systems and service.
Can the carrier actually service what they sell? Can they respond timely and accurately to complex and on-going questions?
Credible and profitable product pricing.
Is the product designed to withstand a reverse engineering process, which tests product pricing assumptions against standards set by an independent actuary? Guard against unseen assumptions that are too aggressive and are designed to attract sales. Beware if a product illustrates far superior compared to other products in its class. This may be an indication of aggressive assumptions that are not readily apparent.
Executive leadership.
Does the carrier have management stability and a history of discipline and innovation, void of sales gimmicks?
Fairness.
Fairness is a subjective perspective and is a function of the level of responsiveness a carrier has to issues not dealt with on a contractual basis. An example would be a change in pricing assumptions not envisioned at policy issue.