Is Association Term Insurance Really a Good Deal?

February 20th, 2019 No comments

Young professionals don’t stay young forever.

If your client is in his 20s and is a young lawyer, accountant, doctor or member of any association, he’s no doubt been offered the opportunity to purchase inexpensive term insurance through his association. He gets all the benefits of easy enrollment and no lengthy forms nor medical questionnaires to complete. He may not even have to pay a bill as everything might be done electronically through his payroll department. Then, to top it all off, he receives a dividend/refund check making the price even lower. He’s convinced association term life insurance is the best and only way he should ever buy term insurance for his family—after all, the members of his profession are clearly a better risk than the public at large. The only problem is those automatic five-year increases become very expensive once he hits age 40.

A Closer Look

Let’s take a closer look and see what actually happens. In the early years, your client doesn’t feel each of the five-year incremental increases because they’re very small. The dividend refunds during the first 20 years (ages 25 to 45) are in the 40 percent to 45 percent range, and your client is made to feel association term life insurance is inexpensive and the best deal possible, because for the first 20 years, several life insurance agents had unsuccessfully tried to compete for his business with a lower price but couldn’t because the association rates were extremely inexpensive.

However, once your client hits age 45, his cost for the same $1 million of coverage over the past five years triples. Once that same individual hits age 50, the cost almost doubles, and it increases 90 percent at age 55. The cost then continues to increase by approximately 90 percent every five years up until age 75, when the coverage gets cut by 50 percent.

Those dividends that reduced the premium by 46 percent at ages 20 to 40, and were thought to continue throughout the life of the policy, have now been reduced to 36 percent at ages 40 to 50, 20 percent at ages 50 to 60 and down to 10 percent at ages 60 to 80.

A significantly better strategy, if your client’s intent is to keep the coverage for 10 years or more, would be to lock in the premium for a 10-, 15-, 20- or even 30-year period, which would result in a significantly less expensive cumulative premium. Not only would the cost be less, but more important, the death benefit wouldn’t be cut in half at age 75.

Conversion Due to Ill Health

Another significant drawback with association insurance is that if the client needs to convert to a permanent policy due to ill health, there’s often only one poor option, which is extremely overpriced, because they know he’s trapped. A private term product would provide an array of more competitive products to choose from. An example is an individual age 64 who becomes ill, can’t get coverage elsewhere and would like to continue his coverage beyond age 75. His cost to convert his $1 million policy to the association’s conversion product is $44,000. Had he initially purchased a nonassociation private term product, the cost to convert $1 million of coverage would have been $16,000.

Keep in mind that although the association makes it easy by not requiring a medical exam and providing convenient, automatic payroll deduction, it’s simply not worth the additional cost if your client plans to keep his coverage beyond age 50.  If he’s relatively healthy and chooses an association term product, he’s unintentionally subsidizing those individuals who have health issues and are unable to qualify for a standard or preferred rating on their own.

Group Term Insurance

Group term insurance is often the same story. A recently evaluated situation showed a husband and wife’s group coverage was so outrageously expensive that they could cut their costs by more than half out of the gate. Furthermore, in five years, their cost for individual coverage would be 25 percent of what they were paying for group coverage, and in the last five years of a 20-year term policy, the monthly premium for their group coverage would be equal to the premium for an entire year of an underwritten market alternative.

When It Works

Association term is a competitive, if not quality,  product if your client is under age 40 and looking for short-term coverage. This is especially so if he’s unable to qualify for life insurance coverage on his own. However, if he’s over age 40, in good health and would like to continue his life insurance coverage for 10 years or more or through retirement or even beyond, then it will likely be substantially less expensive to lock in a nonassociation 20- or 30-year premium, as it will have a cumulative lower net cost and, if desired, will provide better conversion options and longer coverage duration. Every type of life insurance policy, even term insurance, should be periodically reevaluated to determine if what your client has can be improved upon with what else may be available in the marketplace today. Sometimes the answer to an individual requiring additional coverage may simply be to rearrange what he already has.

 

Bill Boersma is a CLU, AEP and LIC and can be contacted at bill@oc-lic.com. Henry Montag is a CFP and CLTC and can be contacted at henry@thetolicentereast.com

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February 12th, 2019 No comments

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Life Insurance Reviews Don’t Always End in Disappointment

February 7th, 2019 No comments

Just as with routine physicals, a “well visit” can identify opportunity.

Sometimes I think my job is basically giving people bad news. As a consultant, yes, I see more than my fair share of sick policies just as the number of patients that come through a doctor’s office in the course of a day who are sick is likely greater than the population at large. Sick people congregate at the doctor’s office and sick policies congregate on my desk.

The main issue with educating the advisor market on sending sick policies to me is that they don’t always send policies to me that aren’t obviously sick. Often times, sick policies don’t look sick and when one waits long enough to see the sick, they’re terminal. Hey, just like with people.   For full post, click here…

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January 22nd, 2019 No comments

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January 8th, 2019 No comments

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When Is Whole Life Not Really Whole Life?

January 7th, 2019 No comments

Whole life insurance has been held up as somewhat holy and unaffected by the travails of universal life insurance. This has got to stop.

Over the years, there’ve been innumerable pieces written on the failings of universal life insurance. However, if consumers paid attention when these products were explained to them, they’d be no more surprised by this when discovering their retirement plans weren’t going to pan out when they experienced only half the expected market return. None of this should be a surprise; if projections aren’t realized, results will differ.

That being said, there’s little discussion about the failings of whole life insurance. Now, when I say WL, I mean actual WL and not just permanent cash value life insurance. Somehow, WL has been held up as somewhat holy and unaffected by the travails of UL. This has got to stop because many policyowners and their policies are suffering for it. For full post, click here…

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January 2nd, 2019 No comments

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Letter of Explanation – Premium Financing

December 20th, 2018 No comments

Following is an email I recently received:

Over this past year I have been contacted several times (by parties that I respect) asking me to get involved with Premium Financing…    The pitch is compelling – that Indexed life insurance is great (a game changer); that some carriers offer immediate surrender free CV of 100% of the premium deposit(s); that super large banks are happy to do the lending…   on and on…

I just read your take on this and I respect your opinion…     Could I ask you, if I was to get involved, what insurance companies or financial firms do you think are respectable and experienced (and doing the best job) in this specialized arena? For full post, click here…

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Saving Money on Life Insurance – Part 3

December 19th, 2018 No comments

The real-life effects of premium funding differences.

Trying to save money on life insurance may not be a good idea (as discussed in Parts 1 and 2 of this series).

The underlying expense structure and chances of a policy having a life expectancy longer than the insured individual is often determined by how much goes into the contract. Why not go a step further? What about evaluating a life insurance transaction like any other investment opportunity? For full post, click here…

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A Life Insurance Primer: Life Insurance Basics by Bill Boersma & Marty Shenkman

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