A year ago, no one could have predicted the sudden focus on life insurance that has occurred in the wake of the COVID-19 pandemic. The global health-care crisis has made death a much more tangible reality for many, and people of all income levels are questioning if they have enough coverage—or the right coverage—to protect their families in a worst-case scenario. At the same time, skyrocketing unemployment and the anticipation of an economic crisis following the months-long global shutdown have created a desperate search for sources of cash, making cash-strong permanent life insurance policies a prime target for families who need immediate liquidity.
For financial planners and wealth managers, such unusual circumstances can make it more challenging than ever to ensure that your clients’ wealth is properly protected. Further complicating matters is New York’s recently enacted Regulation 187, which has set a precedent for legislation requiring advisors to ensure “suitability and best interests” in life insurance and annuity transactions. This is a critical time to address the role of life insurance in your clients’ wealth management plans, to analyze the suitability of existing policies, to adopt additional coverage if needed, and to explore liquidity options for clients who need cash immediately to weather the current storm. Throughout this process, the following should be every advisor’s top priorities:
• Get your clients covered. Recommending appropriate life insurance coverage is an important piece of every client’s financial planning puzzle. Regardless of whether you are licensed to sell life products or are restricted to recommending products, you must take into account current market and interest rates, both of which have the power to alter the suitability of a product. The key is to select the most appropriate tool based on the needs of the client, and then to structure the policy properly, including funding it appropriately, completing an accurate cost analysis, and carefully back-testing assumptions to ensure the policy can perform in the client’s best interest.
Note that with a renewed focus on the liquidity benefits of cash-value policies, now may be an ideal time to discuss permanent coverage with clients who may have preferred term policies in the past. This is particularly true for high-net-worth (HNW) clients whose coverage needs may have evolved considerably since their existing policies were selected and put into place.
• Keep your clients covered. Almost overnight, the unemployment rate in the United States has surpassed that of the Great Depression, creating an urgent need for cash. For many, one of the best and easiest sources of cash is an existing permanent life policy. If clients do need cash immediately and an in-force life policy is their best available option, begin by stressing the importance of maintaining premium payments to keep the policy in-force. Next, review the policy to understand the methods available.
While some policies allow the policyholder to skip out-of-pocket premium payments, those payments are typically drawn directly from the cash value. In this case, take steps to ensure enough cash value remains to cover premium payments and keep the policy in-force until the death benefit is needed. When allowed, borrowing against the cash value of a policy may be an option. Again, be sure your client has a concrete plan for repaying the loan, with interest, to avoid having the amount due deducted from the actual death benefit. At the very least, the plan should be back-tested to be certain that, if the loan is not repaid quickly, the loan won’t grow to the point that the client will be forced to pay additional interest out of pocket. As a last resort, consider surrendering the policy, but only if that choice makes sense in the scope of the client’s overall financial plan, including the tax implications of the resulting gain.
• Ensure compliance. While you’re working to protect your clients’ financial well-being, maintaining compliance with every recommendation is key. Last summer, New York amended its Regulation 187, renaming it “Suitability and Best Interests in Life Insurance and Annuity Transactions.” The change is indicative of a widespread emphasis on the legal obligations surrounding insurance recommendations. New York may have been the first to address the issue through legislation, but advisors in every state would be wise to take steps to ensure compliance and avoid potential litigation in the future. In short, the new regulation requires advisors to:
• Make sure every recommendation is suitable.
• Ensure that every aspect of what you recommend is in your client’s best interest—not your own.
• Disclose all relevant suitability considerations and the pros and cons of each product to your client.
• Maintain proof of due diligence by documenting your analysis and recommendations.
What can put advisors at risk of non-compliance is that suitability can be influenced by a variety of factors and, importantly, those factors can change over time. That means that a policy may be “suitable” on the day it becomes in-force, but not suitable in the future. A changing market environment, fluctuating interest rates, or a reduction in funding can all potentially alter the suitability of a policy—and every one of these factors are highly likely to be in play today.
• Review existing policies. Amid the current crisis, policy reviews are perhaps the most effective way for advisors to ensure suitable coverage for clients while maintaining compliance. When policies sit in a drawer—or in a trust—until a death claim is made, the potential for suitability issues grows, and determining current suitability is much more complex than many advisors are aware. For this reason, your most prudent option may be to collaborate with an experienced specialist to review and analyze your clients’ life policies, and carefully document the process to support due diligence requirements. This is true even if you are not selling insurance yourself, but simply recommending a particular policy or reviewing an existing policy. A comprehensive policy review analyzes detailed components such as: