Case Study

Client Challenge

A husband and wife, ages 69 and 64, had a life insurance portfolio that was managed by a trust company.  This portfolio contained a $2.4 million Survivorship Variable Universal Life Policy.  After 9 years, their portfolio objectives changed.  The husband and wife had lost retirement savings in the stock market, and as a result, became more conservative investors.  They wanted to change the investment allocation and portfolio objectives of their policy to no longer pay premiums while reducing market risk, they were willing to decrease the death benefit in order to not pay premiums.

The trust company, acting in their fiduciary duty, requested an internal exchange with the insurance company to a universal life product that was more conservative, and that the clients would maintain their current health ratings with no formal underwriting.  The incumbent insurance company denied these requests, and they came back with a counter proposal: To reduce the death benefit of the in-force policy to $890,000, and change the allocation to the fixed account.  The cash values would be sufficient to cover all future Cost of Insurance charges and other internal expenses based on the fixed account’s non-guaranteed 4.00% earnings assumption.  Overall, this was a decrease of 63% in death benefit from $2.4 million to $890,000.  This plan design would not be cost effective for the clients, because a VUL policy allocated to the fixed account, would still incur VUL charges which are higher on average than universal life.  If a new policy could provide lower costs to the clients; they could potentially have no market risk, no more premiums to pay for the life of the policy and maintain more death benefit.

Analysis

Coincidently, the trust company was introduced to THEInsuranceAdvisor.COM by an advisor in Dallas.  The trustee decided to run a Confidential Policy Evaluator (CPE) Research Report to measure the suitability of the in-force policy, and whether it currently met the new portfolio objectives.  Compared to the marketplace, the in-force policy received a 4 ½ star rating out of 5 stars.  The half star was for average historical performance on the policy sub-accounts compared to industry benchmarks, but according to the clients’ new portfolio objectives, they wanted a more conservative product with no market risk.  Even though this was a strong policy, it was not meeting all of the new portfolio objectives.

The trust company then researched the market to find the best available rates and terms for their clients assuming their previous health rates.  The search results found a $1.2 million Survivor Universal Life (SUL) policy with secondary death benefit guarantees.  No further premiums would be required, and the clients would receive 35% more death benefit from the proposed $890,000 in-force face amount reduction due to the lower costs in the new SUL policy.  Paying no more premiums, having a more conservative product, along with maintaining the optimal death benefit coverage was the plan design the clients desired, and so they decided to undergo the formal underwriting process.

Solution

The formal underwriting results collectively improved from the in-force policy, with the male receiving the same table 4 rating and the female’s rating improving from standard to preferred.  Due to the health rating improvement, the clients qualified for a $1.4 million Survivorship Universal Life policy with a guaranteed death benefit, no market risk in the fixed account, and no further premiums. 

The trust company ran a Confidential Policy Evaluator (CPE) Research Report on the $1.4 million, and it was rated a 4 ½ out of 5 star policy, with a half star for financial strength of the insurer being average compared to industry benchmarks.  Despite the two policies having the same star rating, the SUL was the right product for the clients’ new portfolio objectives. 

Results

Trustee fulfilled fiduciary duty – According to the Uniform Prudent Investor Act (UPIA), a trustee shall invest and manage trust assets as a prudent investor would, by considering the purpose, terms, requirements and other circumstances of the trust.  By using THEInsuranceAdvisor.COM the trustee was able to monitor, investigate, and manage the trust holdings through third party research.  By delegating these functions to third party research, the trustee is not liable for the decisions or actions of the agent.

Death Benefit Increase by 57% - The trustee was not limited with one quote from the incumbent insurance company.  THEInsuranceAdvisor.COM CPE Research Report confirmed the policy was strong, but did not meet the clients’ new portfolio objectives.  The rates and terms in the market revealed the previous policy could be improved upon, and provided the grantors with an increase in death benefit of 57%, removal of market risk and no more premiums!

Internal costs were lowered – THEInsuranceAdvisor.COM report on the in-force policy along with the best available rates and terms search revealed internal costs could be improved.  According to Section 7 of the UPIA, in investing and managing trust assets, a trustee may only incur costs that are appropriate and reasonable in relation to the assets, the trust’s purpose, and the skills of the trustee.   The new policy lowered the internal costs, increased the death benefit, and the policy will last for the lives of the insureds with no additional premiums.

Improved Health Rating – THEInsuranceAdvisor.COM CPE Research Report presented the opportunity for the client to go through the underwriting process again in order to qualify for a better policy.  The new insurance company rated the female better than previously, and it helped increase the death benefit by $200,000 for the same policy.

Client now has the right policy – Due to a change in the clients’ financial situation, the clients became more conservative and risk averse.  The CPE Research Report helped identify the best policy for the client which was a guaranteed survivorship UL with 57% more death benefit, no market risk, no premium and lower costs.

Tools Used

THEInsuranceAdvisor.COM and Confidential Policy Evaluator (CPE) Research Report- THEInsuranceAdvisor.COM is simply the fastest, easiest, and most credible, comprehensive and cost-effective way to independently prove to clients and particularly their advisors whether or not the pricing and performance of existing or proposed life insurance is suitable.  Only THEInsuranceAdvisor.COM is accepted by the AICPA, endorsed by the New York Bankers Association (NYBA) and compliant with the leading regulatory agency. 

Use the Confidential Policy Evaluator (CPE) Research Reports to determine the appropriateness of pricing, the reasonableness of performance expectations for invested assets underlying policy cash values, and overall suitability for you(r) clients' policies based on the 5 factors of suitability.  Click here and get up to 3 Confidential Policy Evaluator (CPE) research reports under our NO-Risk trial subscription.