Summary of life insurance traps to avoid.

Here is a brief summary of the traps you should look out for when considering the purchase of a proposed (or illustrated) permanent policy. The information herein is based on the sections presented throughout the article "How to avoid the life insurance illustration trap!"

 

Considered below are universal life and participating whole life illustration traps to avoid.

 

Universal Life Illustration Traps:

1. First and foremost, there is no such thing as a "one-size-fits-all" policy! Some financial advisors are forced to sell the policies of the one or two companies they represent. Many policies from different companies are structured to meet the needs of specific circumstances. Find a broker that, with experience, can help you find the right plan.
2. Do not allow your financial advisor to select an investment mix without first completing with you a risk assessment profile.
3. Ensure your chosen investment mix correlate with your risk tolerance!
4. Ensure the interest rate assumption chosen is no greater than the 30-year median interest return of the combined investment mix less the corresponding management/administration fees and any pertinent taxes. For example, if your advisor is recommending your investment mix to consist primarily of income funds and bonds, accept an interest rate of no greater than 5.0% (generally 7.7% minus management fee).
5. Ensure you receive an illustration of at least 2% less than the interest assumption to show how your policy would function under less favourable economic conditions. So if the advisor uses 7.3% for the primary illustration, a reduced scenario of 5.3% should also be illustrated.
6. Remember that these rates are only for illustration purpose. There are generally no guarantees and no predictions in relation to investment returns! Any promised guarantees must be indicated clearly on the illustration.
7. Ensure your plan does not lapse prematurely. Low premiums can be enticing, but you may be required to pay thousands of dollars more in later years just to keep the plan in force!
8. Remember, bonus interest is nice to receive, but beware of all the conditions that must be met in order to receive payment. Can you realistically satisfy all those conditions? If not, maybe another policy might better suit your needs. Consider any interest bonus as "icing on the cake."
9. Remember that some companies charge higher administration charges to compensate you with higher bonuses! These policies tend to reward policy owners that greatly over fund their policy.
10. The best policy is by no means not always the one with the highest return illustrated. Many factors which rely on you and your goals can significantly change the outcome of the policy cash funds.
11. Don't fall for the "pay the minimum premiums only" trap! Universal life is not about minimum premiums. You must over-fund your policy to ensure permanent coverage. If you are concerned more about low cost insurance, then you should really consider term insurance. If you are concerned about buying the cheapest universal life plan, then your advisor has not conveyed to you the true purpose of the plan.

Participating Whole Life Illustration Traps:

1. As with universal life, there is no such thing as a "one-size-fits-all" policy! Some financial advisors are forced to sell the policies of the one or two companies they represent. Many policies from different companies are structured to meet the needs of specific circumstances. Find a broker that, with experience, can help you find the right plan.
2. Since the company has complete control over the policy investment mix, do check their current financial strength. Verify their financial ratings and ask to see their reports. A financially strong company will have a higher likelihood of returning better results.
3. Don't be fooled by a company's recent high interest or dividend payout. Ask about the company's historical performance, preferably over a long period of 30 or more years.
4. Beware of "quick-pay" plans that promise your policy will be paid up after a certain number of years. Remember, dividends are generally not guaranteed!
5. Ensure you receive an illustration to show how your policy would function under less favourable economic conditions.

That's it for now. If you've read this far then you will have noticed that participating whole life illustrations have fewer caveats. The trade-off is that you do get a far less flexible whole life plan. Universal life is not for everyone, and neither is participating whole life. But they have their purpose, and when designed correctly and fitted with the right individual they can prove to be powerful and purposeful policies.

 

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Click a link below to jump to another section of the article:

 

What is the purpose of life insurance illustrations?

 

What is a reasonable period of time an illustration should consider?

 

How does the interest rate chosen make a significant difference in investment returns?

 

What are reasonable interest assumptions for Universal Life plans?

 

How should I consider interest bonuses?

 

What are reasonable interest assumptions for Whole Life plans?

 

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