Without proper follow-through, the implementation of a life insurance program is an incomplete process. Not only is high-quality servicing a responsibility accepted with the placing of the insurance, it makes good business sense. If the servicing is done properly, these efforts are rewarded with client loyalty and new business opportunities.
Conversely, if the servicing is not done properly, the relationship with the client is very likely to suffer. At best, the relationship will prove troublesome; worse, it will disintegrate; and at worst, it will be a total failure with potentially severe adverse consequences such as lawsuits. From a position of credibility and integrity, high-quality policy servicing is essential. And it makes good business sense.
Policy servicing should also be looked at from a different point of view, from the perspective of the advisor's compensation. Is the compensation adequate, considering the level of effort and scope of work involved in the case? How will the advisor be compensated? Will it be from renewal commissions and servicing fees from the issuing insurance company, fees from the client, or a combination of both? An advisor's decision about this and a prospective client's agreement or objections will determine whether the advisor should accept the potential client and/or whether the advisor recommends the insurance placement be handled by someone else.
What Is Policy Servicing?
In policy servicing, there are two main elements to review: (1) the product and funding and (2) the environment. These elements are interrelated, regardless of the particular life insurance product. Additionally, there often is direct client contact in order ensure that the client understands what is happening. Apart from building and cementing a good relationship, client contact, as will be seen, is a necessary part of the process.
The start of the policy-servicing process takes place when the program is implemented. It begins with the initial management of client expectations. A client's expectations are managed by ensuring he/she is educated as to the policy and what will happen going forward. Many questions, all of which are about appropriateness and understanding, should have been addressed when the life insurance product was selected. Among some of the most important are:
Do the product and payment technique meet with the client's:
Risk tolerance?
Complexity tolerance?
Needs or wants?
Financial situation?
Is the product appropriate for and coordinated with the selected strategy (i.e. funding estate tax payment)?
Does the client understand the assumptions that go into pricing the policy, such as expenses, mortality cost and investment earnings?
Does the client understand how the risk is divided between her/him and the insurance company?
Is the client aware of what are "projections of assumptions" and what are guarantees?
If there are any assumption projections:
Is the client aware that the policy will not perform the way it is illustrated?
Is the client aware of the implications of this, both bad and good?
Has the client seen modeled alternative scenarios and products and is therefore comfortable with the selected product?
Is the funding strategy understood (i.e., amount and timing of premium payments)?
Is the funding technique understood (e.g., split dollar)?
If split-dollar or any strategy that needs to be terminated during life is used, has an exit strategy been planned?
Have all of the above been documented and given to the client and any appropriate advisors when the policy was delivered?
More Considerations
At each policy anniversary, if there are any nonguaranteed elements, the policy performance has to be compared with the original projections. If there is a difference, what has caused it? What are the implications going forward? What are the client's options? These all need to be communicated to the client and followed up by discussion.
There were a slew of other assumptions that went into the purchase of the policy, all concerning why that policy was selected and how it was to be funded. With the certainty of change, a number of interrelated factors in the environment always must be considered when servicing a policy. They include:
Changes in the client's circumstances.
The ongoing viability of the strategy or tactic that the policy is implementing.
Changes, if any, in the legal and regulatory environment.
New products coming onto the market and their competitiveness compared with what the client purchased.
When the policy was purchased, the client's circumstances were taken into account. These circumstances must be reassessed continually. Examples of this include:
Does the client have the continuing ability to fund premium payments?
Have the client's wants and needs changed?
Has there been the birth of a child or grandchild?
Does the client have any new obligations?
Does the client still have the desire to fund those payments?
If the client bought the life insurance to benefit one or more people, is that intention still the same? Divorces, alienation and changes in business relationships, circumstances and conditions all have a bearing.
Information about health issues must be obtained and addressed.
The insurance policy was bought to implement a particular tactic or strategy. It is hoped that at inception, you explained how the policy fits in with that objective. What is essential to know now is if that is still the case. Whether it's for family income or as part of a benefits package, reviewing this element is part of the servicing. Is the amount and type of insurance still appropriate? Is the strategy still viable? Is there a new strategy that will better accomplish the goal? If the life insurance was to fund business fringe benefits, are there people to be added or removed?
If the program requires administration, it is highly likely that the advisor has responsibility for part of it. Is split-dollar involved? Is an irrevocable life insurance trust the owner? Is the insurance part of a fringe benefit such as a SERP or qualified retirement plan? In all events, the client must be aware of the advisor's responsibilities, and they must be executed well.
Laws And Rules
The legal and regulatory environment can have a profound effect. Life insurance itself and many of the ways it is used are premised on an unchanging legal and tax environment. SEC and NASD laws and regulations have become important as equity-based products have come to the fore. And currently, insurance companies and their products are regulated separately by each state.
With changing regulatory rules and laws, annual tax laws, IRS pronouncements and legal decisions, we know we can't take anything for granted. Therefore, these need to be reviewed continually when servicing a policy. Just consider IRS Proposed Regulation 2001-10 and its consequences to split-dollar techniques and pension plans partially funded by life insurance.
The new estate, gift and income tax law requires consideration in any program that involves wealth transfer. Some questions requiring answers include:
Does the strategy involve the current payment of gift taxes?
How does the client view the sunset provision and the uncertainty it creates?
What about carryover as opposed to step-up in basis at death?
Product Innovations
Creativity in that changing environment also is an important factor. New strategies and techniques using life insurance are perpetually evolving. Among those are SERP swaps and IRA "stretch" and "rescue" plans. Some push the envelope, while others cross over the line of legitimacy. Remember charitable reverse split-dollar and prime trusts?
Products and their popularity evolve in response to laws and rules, as well as to competition and demand. Guaranteed death benefits, policy extension, private placement, no-load and low-load policies are all examples of this. Pricing varies in part based on competition and changes in expenses mortality tables. But those are not the only issues that need to be looked at to see if the current program is still the most viable.
There are strategies and noninsurance products that have to be examined. Many of these are tax-driven. Some reduce or eliminate the transfer taxes. Grantor-retained annuity trusts, charitable lead trusts, charitable remainder trusts, sales of assets to a grantor trust, self-canceling installment notes and private annuities are among the most widely known. Noninsurance income tax deferral or elimination products such as Cashless Collars and Prepaid Forwards can positively or negatively affect the viability of life insurance.
Policy servicing is essential. It is the absolute responsibility of the advisor who provided the policy, and it builds business. High-quality follow-through translates into greater and higher-quality business.
That said, how it's done is as important as doing it at all. Policy servicing is not simple. It is not mechanical. Above all, it is not to be left to the insurance company. Policy servicing is an integral component of the entire client-oriented relationship process. And policy servicing is a great opportunity because comparatively few advisors do a reasonable job at it.
We have all seen it. If policy servicing is not done properly, the client relationship suffers. If the client relationship suffers, there are negative business and practice consequences, which could include no new business, a refusal to make referrals and potential litigation. High-quality policy servicing is essential because it is professional and because it builds practices. If policy servicing is done properly, the client relationship blooms, and there are positive business consequences.
Russ Alan Prince, president of Prince & Associates, and Richard L. Harris, managing principal of BPN Montaigne LLC, are co-authors of Advanced Planning with the Ultra-Affluent (www.iihighnetworth.com).