Cost vs. Premium and the Evolution of the Hybrid GUL Marketplace
Price is the only factor in the absence of differentiators. If all else is equal, the only question is how much is it going to cost me? So why in the life insurance marketplace, which is one of the most subjective of marketplaces, is price the main factor that we focus on? I believe it has a lot to do with a lack of diversification and a one size fits all approach to insurance needs. In the brokerage marketplace, we are constantly analyzing one contract to another, but within reason there are multiple policies that can be combined to fit into your client’s budget that can do more than any one policy can do. Portfolios heavily weighted to term insurance are generally outlived and leave a client with no insurance or value. Conversely, a portfolio with majority of insurance in permanent coverage often times underinsures the client. For clients who outlive their insurance need they are rewarded.
So what does this all have to do with cost? Well the lowest priced contracts, are often the highest cost. Term insurance and guaranteed universal life for example are 100% cost, nothing else. Contracts that offer cash value almost always come with a set of tradeoffs. These tradeoffs are often a higher price, less guarantees or a transfer of risks. If Whole Life and GUL cost the same amount then GUL would not exist. Let’s explore the tradeoffs when you shift to lower cost products and stray away from pure insurance contracts.
The first tradeoff is price. Clients do not have an unlimited budget, so there is only so much to allocate to obtain the right mix of coverage and quality of life insurance coverage. One option is to just buy less coverage. Another counter to a higher price is to mix in a combination of term, GUL to a WL or IUL portfolio. WL and IUL are designed to peak late and increase in death benefit which is the perfect complement to an underfunded GUL or term that is designed to intentionally expire before your client does. Let us know what scenario you want to see by comparing a blended portfolio to your last personally owned GUL sale.
The next tradeoff mentioned above is a lower guarantee. Current Assumption contracts were generally heavily dependent on interest rates and had very high potential cost of insurance increases. The carriers responded a number of years to this by offering products that have long guarantees that go away prior to maturity. This eases their reserving requirements and allows them flexibility later to adjust for errors in pricing, underwriting or interest rate decisions. The rewards are passed along to the client in the form of liquidity. Liquidity is not just a pile of money that your client runs away with and leaves their heirs with no coverage. Liquidity is flexibility. Liquidity is suspending payments in retirement, or when you are sick. Take a look at the attached product comparison chart that shows various contracts against a control group (GUL) and shows the incremental returns of various contracts. The incremental IRR in some scenarios can reach double digit returns for relatively low increases in overall price. So how do you counter the dilemma of having to decide between your insurance and your cash value? Same answer as the price tradeoff, diversify with multiple policies. That way if your client doesn’t need the coverage, or really needs the cash value, they can leave the majority of their coverage undisturbed. They also can mix in some guaranteed lifetime coverage to properly hedge for outliving the guaranteed period. With many IUL contracts and current assumption having guarantees to age 90, in some instances at the same price or lower than the GUL, it may be worth at minimum having the conversation with the insured. If GUL still prevails, look to lifetime guaranteed IUL, or GUL with enhanced surrender values that may return 100% or more of your premium in the future.
The last tradeoff is a pure transfer of risk to the client. This would involve purchasing contracts where you have to take on cost of insurance and interest rate risks. In these contracts, especially survivorship index universal life, the tradeoff is that the client has very little costs of insurance for many years. What you can do in those scenarios is significantly overfund these contracts. Overfunding may naturally create extended guarantees that the product was not intended to have. These guarantees can protect your client on the downside, while not removing any of their upside of their interest rate risk that they took on. If you compliment these contracts with the right guaranteed products, you can build a portfolio that may be the lowest cost of all.
Clients with high insurance needs and a low budget, have to maximize their quantity of coverage within their budget while sacrificing quality. Every other client may be surprised what else is out there. Work with us to put together portfolio approach designs for your clients that achieve more than any one contract can do for them.