Participating insurance works for retirees

Fewer life insurance companies selling participating insurance now than there were 30 years ago. That’s because participating, or par, insurance policies allow the owners to share in the risk and profits of the participating line of business. The profits are paid out as dividends.

On the other hand, non-par products drive profit to shareholders. Also, non-par products are re-priced quickly when the anticipated level of profitability isn’t materializing as expected.

But more clients are learning the advantages of par insurance as they retire, because these policies include several stop-gap features that are advantageous for older people looking to reduce out-of-pocket expenses.

Many advisors forget to share these advantages with their prospects and clients. The guaranteed and level premium payments represent a decreasing percentage of disposable income as the policy owners’ earnings go up. This is extremely attractive when compared to the exorbitant price increases of term insurance renewals at older ages. One gentleman I know had his term insurance premiums go from $300 per month to over $1,200 per month.

Another attractive feature is the Automatic Premium Loan (APL), which automatically pays the entire premium, including the term rider if applicable.

This makes the term rider lapse-proof as long as there is enough cash value to keep paying the annual premium. This feature is increasingly important option with aging clients, who may forget to pay annual bills.

It also protects a senior’s Financial Power of Attorney from liability if he or she doesn’t realize there are annual premiums due. The POA may also not know whether those contracts are term or minimum-funded Universal Life (UL) insurance that automatically lapse after the grace period expires.

Paid Up or Bonus Additions (PUA) are single premium life insurance policies that are bought automatically each year with the profits (dividends) of the base policy. These additional policies have an immediate cash value, increase the death benefit every year, and are participating so they too earn dividends. This adds a compounding factor, which serves to help maintain the purchasing power of the death benefit.

Another point is that once a policy dividend is declared it is vested to policy. There is never any question of a declared dividend being clawed back.

Baby boomers who had the good fortune to have bought permanent participating life insurance in the 1970’s and 1980’s (before UL gained popularity) are now starting to retire. A reduced and fixed retirement income means they start looking for ways to cut back their out-of-pocket expenses.

The Reduced Paid-Up feature allows them to:

• stop paying out-of-pocket premiums,
• maintain permanent coverage, and
• continue to increase the permanent death benefit through the paid-up additions / bonus additions dividend option (if that is the dividend option at the time of taking the reduced paid-up contract).

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It should be noted though that policies that have no more money being funneled to them have lower dividends than policies which are still being paid for.

Also, in many cases the annual dividend will be large enough to pay the annual premium, so a simple change in dividend option to Premium Payment or Premium Reduction will do the trick.

Compare all of these options for retiring clients who face issues such as:

• being uninsurable and facing exorbitant term insurance renewal costs;
• conversion to permanent coverage at their current age rates;
• partial conversion (if they haven’t missed the conversion date deadline) that reduces their insurance coverage, but still at the very high cost of their current age;
• life insurance premiums that represent a huge percentage increase of their limited/fixed retirement income.