With this data, the carrier will often create a new version of the profitable product with lower pricing based on the superior mortality experience of the initial group of policyholders. Clients who get the new version benefit from the profits generated by previous policyholders. 

The current policyholders don’t. And shouldn’t they? Didn’t they help create the value?

Traditionally, the only way for an early policyholder to benefit from better pricing in later products was to surrender his or her existing policy, go through underwriting again (and potentially be turned down for his or her age, decreased health or other factors), and then, if approved, repurchase the new version of the product with a new surrender charge. But this method penalized them. 

Recognizing the unfairness, insurance advisors and insurers focused on the ultra-wealthy recently urged a dramatic change: They asked carriers to return a portion of the profits by reducing costs to existing policyholders without changing the policies.

The Impact of Lower Costs

For the policyholder, this approach offers significant benefits. Take one example: 

In June 1997, a 65-year-old male obtained a $2 million policy that was priced for very wealthy buyers and designed to have a non-guaranteed 8% net rate of return with a premium outlay of $85,985 for 10 years. As mortality rates improved, his advisor was able to negotiate with the insurer for all insured people in the risk pool to receive numerous cost reductions, including three cost-of-insurance charge reductions. 

As a result, the premium was lowered to $74,065 for 10 years—a 14% reduction totaling more than $10,000 in annual savings.

While past experience is no guarantee of future performance, the principle is the same: If the risk pool among the wealthy has experienced 53 cost decreases and no increases to date, savvy advisors can enjoy the lower initial pricing of the products, reflecting longer client life spans, and then negotiate even more favorable pricing in the future. This client advocacy delivers highly tangible value to very wealthy clients.

Delving into the Details

The management of in-force policies is complex, which is why it’s vital to work with an advisor who has the knowledge and experience to decipher the policies’ detailed expense pages. These include updated current annualized charges for policy expenses, premium loads, cost of insurance charges, cash-value-based wrap fees, etc. A qualified cost-reduction specialist will be able to provide clear examples of the original “as sold” illustrations and compare them with the current expense pages for the same insured client, with the same insurer, with new lower costs.

It’s part of the professional duty of fiduciaries, to prudently evaluate issues, including costs, and document that process. And as life insurance carriers continue to increase costs for some policies, diligent in-force policy management is vital to fulfilling that fiduciary duty. Moreover, this service is vital for providing the superior care that cements your role as a client’s trusted advisor. 

Whether you take on the challenge yourself or choose to work with a skilled life insurance specialist, now is the time to take advantage of the role you can play with your healthy, long-lived wealthy clients.

 

David Buckwald, CFP, CLU, ChFC, CLTC, is a partner with Atlas Advisory Group LLC, an independent planning firm based in Cranford, N.J.
Steven Zeiger, CEBS, TEP is an advisor with Waxman Lawson Financial in New York. Both firms are member firms of M Financial Group.

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