4 - 1 How To Determine The Right Policy Areas of analysis Selection of the proper type of product ...

4 - 1

How To Determine The Right Policy

Areas of analysis

Selection of the proper type of product

Deciphering life insurance policy illustrations

Reviewing policy comparison measurements

Studying company comparison measurements

Chapter 4Tools & Techniques of Life

Insurance Planning

4 - 2


Selection of the proper type of product Personal preferences

“Own” versus “renting” insurance Cash accumulation versus buy term and invest the difference

Rules of thumb Buy term

If risk taking propensity is high If client has a lease versus own preference

Buy permanent If client has an “own rather than loan” preference If client wants something to show for the money

Buy a blend if client is somewhere in between these two preferences


Insurance Planning

4 - 3


Amount of insurance needed Rules of thumb

Buy term when there is no way to satisfy the death need without it

Buy a combination of term and permanent insurance Client can cover the entire death need, and Able and willing to allocate additional dollars to appropriate permanent coverage

Cash flow considerations Multiple premium cash flow combinations (examples)

Pre-pay coverage as fast as possible Limited payments over a regular interval Pay premiums over a lifetime


Insurance Planning

4 - 4


Cash flow considerations (cont'd) Rules of Thumb

Prepay coverage if the client expects to live longer than average

Pay on an installment basis if the client expects to face a greater than average mortality risk

Purchase YRT if the client wants to pay the absolutely minimum premiums But is willing to pay increasingly larger premiums each and every year

Duration of need considerations Needs less than 10 years – Term

Needs 10 to 15 years – Term and/or permanent coverage


Insurance Planning

4 - 5


Duration of need considerations (cont'd) Needs 15 years or more – Permanent coverage

Needs to cover buy-sell agreement – permanent coverage

Needs to cover estate taxes – permanent coverage

How to decipher policy illustrations Identify the columns

Premiums, cash values, death benefits

Policy dividends


Insurance Planning

4 - 6


How to decipher policy illustrations (cont'd) Critical questions to ask

What does the client pay versus what the client gets if the client lives and the beneficiaries receive if the client dies?

What portion of those amounts are guaranteed and what portion of those amounts are not?

What interest or other assumptions are built into these figures?

Emphasis on Surrender charges

Cash value projections

Policy loans

Dividends


Insurance Planning

4 - 7


How to decipher policy illustrations (cont'd) Surrender charges

Difference between the gross cash value and the net surrender value for the given year

Cash value projections Based on the guaranteed interest rate versus current portfolio earnings

Questions to ask Are the assumptions realistic?

Does the guaranteed cash value drop to zero after some duration?

When does the policy lapse?


Insurance Planning

4 - 8


How to decipher policy illustrations (cont'd) Policy Loans

Ledger statement will indicate the interest rate charged and if it is fixed or variable If variable – is it reasonable over the policy period?

Dividends Dividends are not guaranteed

Are dividends reduced when loans are outstanding?

What interest rate must the company earn to support policy dividends?

Ledger statement should reflect how dividends are being used


Insurance Planning

4 - 9


How to decipher policy illustrations (cont'd) Dividends (cont'd)

Questions to ask Is illustration from the home office or from the agent’s computer?

Does the illustration use a reasonable interest rate assumption?

Are dividends “puffed”?

Are cash flow amounts in one illustration comparable to those in another?

For universal life policies What variables are incorporated in the illustration?

Insist all competitive illustrations use the same assumptions


Insurance Planning

4 - 10


How to compare policies The Traditional Net Cost Method

[Sum of Premiums Paid] – [Sum of Dividends] – [Net Cash Value]

Face Amount of the Policy (in thousands)

Step 1divided by the number of years index is targeting

This measure ignores the time value of money


Insurance Planning

4 - 11


Example - The Traditional Net Cost Method*

1. Total Premiums $222.402. Minus Total Dividends -55.103. Equals Total Net Premiums $167.30

4. Cash Value Year 10 $160.005. Plus Terminal Dividend + 5.256. Minus surrender charge - 0.007. Equals Net Cash Value $165.25

8. Total Premiums $167.309. Minus Net Cash Value -165.2510. Equals Total Net Cost $ 2.05

11. Total Net Cost $ 2.0512. Divided by Number of Years / 10

Equals Traditional Net Cost Per $1,000 Per Yr. = $0.205* All premiums, dividends, and cash values are per $1,000 of coverage


Insurance Planning

4 - 12


How to compare policies (cont'd) The Interest-Adjusted Cost Methods

Compare the cost of policies considering that money spent on premium dollars could have been invested elsewhere and earned a minimum after-tax return

Interest-Adjusted Net Surrender Cost Index Relative measure of the cost of a policy assuming it is surrendered

Interest-Adjusted Net Payment Cost Index Relative measure of the cost of a policy assuming the insured dies


Insurance Planning

4 - 13


Example – Interest Adjusted Surrender Cost Index*

1. Total Premiums Compounded @ 5% $293.722. Minus Total Dividends @ 5% -68.263. Equals FV Net Premiums $225.46

4. Cash Value Year 10 $160.005. Plus Terminal Dividend + 5.256. Minus surrender charge - 0.007. Equals Net Cash Value $165.25

8. FV Net Premiums $225.469. Minus Net Cash Value - 165.2510. Equals FV Net Cost $ 60.21

11. FV Net Cost $ 60.2112. Divided by Annuity Due Factor / 13.2068

Equals Surrender Cost Index(Per $1,000) $4.56*All premiums, dividends and cash values are per $1,000 of coverage


Insurance Planning

4 - 14


Example – Payment Cost Index*

1. Total Premiums Compounded @ 5% $293.72

2. Minus Total Dividends @ 5% -68.26

3. Equals FV Net Premiums $225.46

4. FV of Net Premiums $225.46

5. Divided by Annuity Due Factor / 13.2068

Equals Payment Cost Index(Per $1,000) $ 17.07

* All premiums, dividends and cash values are per $1,000 of coverage


Insurance Planning

4 - 1 How To Determine The Right Policy Areas of analysis Selection of the proper type of product ...

Documents

Transcript of 4 - 1 How To Determine The Right Policy Areas of analysis Selection of the proper type of product ...