Title: Areas of analysis
1How To Determine The Right Policy
Chapter 4 Tools Techniques of Life Insurance
Planning
- Areas of analysis
- Selection of the proper type of product
- Deciphering life insurance policy illustrations
- Reviewing policy comparison measurements
- Studying company comparison measurements
2How To Determine The Right Policy
Chapter 4 Tools Techniques of Life Insurance
Planning
- Selection of the proper type of product
- Personal preferences
- Own versus renting insurance
- Cash accumulation versus buy term and invest the
difference
- Rules of thumb
- Buy term
- If risk taking propensity is high
- If client has a lease versus own preference
- Buy permanent
- If client has an own rather than loan
preference
- If client wants something to show for the money
- Buy a blend
- if client is somewhere in between these two
preferences
3How To Determine The Right Policy
Chapter 4 Tools Techniques of Life Insurance
Planning
- Amount of insurance needed
- Rules of thumb
- Buy term when there is no way to satisfy the
death need without it
- Buy a combination of term and permanent insurance
- Client can cover the entire death need, and
- Able and willing to allocate additional dollars
to appropriate permanent coverage
- Cash flow considerations
- Multiple premium cash flow combinations
(examples)
- Pre-pay coverage as fast as possible
- Limited payments over a regular interval
- Pay premiums over a lifetime
4How To Determine The Right Policy
Chapter 4 Tools Techniques of Life Insurance
Planning
- Cash flow considerations (cont'd)
- Rules of Thumb
- Prepay coverage if the client expects to live
longer than average
- Pay on an installment basis if the client expects
to face a greater than average mortality risk
- Purchase YRT if the client wants to pay the
absolutely minimum premiums
- But is willing to pay increasingly larger
premiums each and every year
- Duration of need considerations
- Needs less than 10 years Term
- Needs 10 to 15 years Term and/or permanent
coverage
5How To Determine The Right Policy
Chapter 4 Tools Techniques of Life Insurance
Planning
- Duration of need considerations (cont'd)
- Needs 15 years or more Permanent coverage
- Needs to cover buy-sell agreement permanent
coverage
- Needs to cover estate taxes permanent coverage
- How to decipher policy illustrations
- Identify the columns
- Premiums, cash values, death benefits
- Policy dividends
6How To Determine The Right Policy
Chapter 4 Tools Techniques of Life Insurance
Planning
- How to decipher policy illustrations (cont'd)
- Critical questions to ask
- What does the client pay versus what the client
gets if the client lives and the beneficiaries
receive if the client dies?
- What portion of those amounts are guaranteed and
what portion of those amounts are not?
- What interest or other assumptions are built into
these figures?
- Emphasis on
- Surrender charges
- Cash value projections
- Policy loans
- Dividends
7How To Determine The Right Policy
Chapter 4 Tools Techniques of Life Insurance
Planning
- How to decipher policy illustrations (cont'd)
- Surrender charges
- Difference between the gross cash value and the
net surrender value for the given year
- Cash value projections
- Based on the guaranteed interest rate versus
current portfolio earnings
- Questions to ask
- Are the assumptions realistic?
- Does the guaranteed cash value drop to zero after
some duration?
- When does the policy lapse?
8How To Determine The Right Policy
Chapter 4 Tools Techniques of Life Insurance
Planning
- How to decipher policy illustrations (cont'd)
- Policy Loans
- Ledger statement will indicate the interest rate
charged and if it is fixed or variable
- If variable is it reasonable over the policy
period?
- Dividends
- Dividends are not guaranteed
- Are dividends reduced when loans are
outstanding?
- What interest rate must the company earn to
support policy dividends?
- Ledger statement should reflect how dividends are
being used
9How To Determine The Right Policy
Chapter 4 Tools Techniques of Life Insurance
Planning
- How to decipher policy illustrations (cont'd)
- Dividends (cont'd)
- Questions to ask
- Is illustration from the home office or from the
agents computer?
- Does the illustration use a reasonable interest
rate assumption?
- Are dividends puffed?
- Are cash flow amounts in one illustration
comparable to those in another?
- For universal life policies
- What variables are incorporated in the
illustration?
- Insist all competitive illustrations use the same
assumptions
10How To Determine The Right Policy
Chapter 4 Tools Techniques of Life Insurance
Planning
- How to compare policies
- The Traditional Net Cost Method
- Sum of Premiums Paid Sum of Dividends
Net Cash Value
- Face Amount of the Policy (in
thousands)
- Step 1divided by the number of years index is
targeting
- This measure ignores the time value of money
11How To Determine The Right Policy
Chapter 4 Tools Techniques of Life Insurance
Planning
- Example - The Traditional Net Cost Method
- Total Premiums 222.40
- Minus Total Dividends -55.10
- Equals Total Net Premiums 167.30
- Cash Value Year 10 160.00
- Plus Terminal Dividend 5.25
- Minus surrender charge - 0.00
- Equals Net Cash Value 165.25
- Total Premiums 167.30
- Minus Net Cash Value -165.25
- Equals Total Net Cost 2.05
- Total Net Cost 2.05
- Divided by Number of Years / 10
12How To Determine The Right Policy
Chapter 4 Tools Techniques of Life Insurance
Planning
- How to compare policies (cont'd)
- The Interest-Adjusted Cost Methods
- Compare the cost of policies considering that
money spent on premium dollars could have been
invested elsewhere and earned a minimum after-tax
return - Interest-Adjusted Net Surrender Cost Index
- Relative measure of the cost of a policy assuming
it is surrendered
- Interest-Adjusted Net Payment Cost Index
- Relative measure of the cost of a policy assuming
the insured dies
13How To Determine The Right Policy
Chapter 4 Tools Techniques of Life Insurance
Planning
- Example Interest Adjusted Surrender Cost
Index
- Total Premiums Compounded _at_ 5 293.72
- Minus Total Dividends _at_ 5 -68.26
- Equals FV Net Premiums 225.46
- Cash Value Year 10 160.00
- Plus Terminal Dividend 5.25
- Minus surrender charge - 0.00
- Equals Net Cash Value 165.25
- FV Net Premiums 225.46
- Minus Net Cash Value - 165.25
- Equals FV Net Cost 60.21
- FV Net Cost 60.21
- Divided by Annuity Due Factor / 13.2068
- Equals Surrender Cost Index(Per 1,000)
4.56
14How To Determine The Right Policy
Chapter 4 Tools Techniques of Life Insurance
Planning
- Example Payment Cost Index
-
- Total Premiums Compounded _at_ 5 293.72
- Minus Total Dividends _at_ 5 -68.26
- Equals FV Net Premiums 225.46
- FV of Net Premiums 225.46
- Divided by Annuity Due Factor / 13.2068
- Equals Payment Cost Index(Per 1,000) 17.07
- All premiums, dividends and cash values are per
1,000 of coverage