It’s a fact: People are living longer. And part of the reason for that is medical advances that prolong life by reversing the outcomes of diseases that, in the past, were considered death sentences. Cancer. Stroke. Heart disease. Diabetes. According to the Centers for Disease Control, these four ailments alone currently account for more than 1.4 million deaths per year. And yet it’s quite possible—if not entirely likely—that these modern-day plagues will be eradicated within our lifetimes.
When it comes to planning for life insurance, increased longevity is affecting not only the cost of insurance at the time the policies are issued, but also the ways advisors can strategize to help reduce costs and maximize benefits on in-force policies for ultra-high-net-worth individuals and families.
Immunotherapy: Changing Outcomes For Cancer Patients
One of the most significant examples of medical progress is the use of immunotherapy to treat cancer patients. Until recently, many Americans with cancer had little hope for the future. “We have nothing else to offer you” and “we are out of options” were heard more often than not, and cancer death rates were increasing every year. But according to the latest statistics from the American Cancer Society, depending on the type of cancer, death rates in the last decade have either fallen dramatically or, at the least, leveled off. While cancer remains the second leading killer in the U.S., the cancer death rate has dropped by 23% since 1991. Today, many cancer patients are hearing these welcome words from their oncologists: “You’re in remission.”
Immunotherapy is one of the most touted reasons for those outcomes. Vice President Joe Biden has called it “revolutionary.” Researcher Dr. Stanley Riddell calls it “unprecedented,” and President Obama has referred to it as a “moon shot.” What makes it so groundbreaking is its ability to trigger the immune system to seek out and destroy cancerous invaders. “Instead of using external forces, like a scalpel or radiation beams, [immunotherapy] takes advantage of the body’s own natural immune reaction against cancer,” says Dr. Steven Rosenberg, chief of surgery and tumor oncology at the National Cancer Institute. This technology doesn’t fight cancer—it helps the body fight cancer. Success stories for the treatments are everywhere these days, and one of the most high profile cases is that of former President Jimmy Carter. After discovering he had metastatic melanoma that had spread to his brain, a disease long-considered to be a death sentence, Carter received immunotherapy treatments. Since then, his cancer has disappeared and, according to multiple press reports, he is no longer being treated for the disease.
While this level of success is clearly momentous for anyone with cancer, the shift in overall longevity can also provide an unexpected benefit for certain life insurance policyholders. That benefit, particularly for ultra-wealthy individuals and families with life insurance policies, is the potential for substantially improved financial outcomes resulting not from the treatment of a specific disease, but from a powerful new approach to in-force policy management.
Managing In-Force Policies
Given the new world we live in, life insurance is going to be different. Its future will be determined by advisors’ ability to negotiate with carriers and reward policyholders for creating value during the life of their in-force policy. Here’s how:
When the profits from a specific life insurance product exceed expectations, insurance carriers keep the savings. If the pool of insured policyholders live longer than projected, the carrier takes in more premiums over a longer period of time. The payment of death benefits is delayed, and profits increase. Plus, the carrier is able to subtract monthly mortality and expense charges from the cash value portion of each existing policy for a longer period of time, which earns the carrier greater profits.
With this data, the carrier will often create a new version of the profitable product with lower pricing based on the superior mortality experience of the initial group of policyholders. Clients who get the new version benefit from the profits generated by previous policyholders.
The current policyholders don’t. And shouldn’t they? Didn’t they help create the value?
Traditionally, the only way for an early policyholder to benefit from better pricing in later products was to surrender his or her existing policy, go through underwriting again (and potentially be turned down for his or her age, decreased health or other factors), and then, if approved, repurchase the new version of the product with a new surrender charge. But this method penalized them.
Recognizing the unfairness, insurance advisors and insurers focused on the ultra-wealthy recently urged a dramatic change: They asked carriers to return a portion of the profits by reducing costs to existing policyholders without changing the policies.
The Impact of Lower Costs
For the policyholder, this approach offers significant benefits. Take one example:
In June 1997, a 65-year-old male obtained a $2 million policy that was priced for very wealthy buyers and designed to have a non-guaranteed 8% net rate of return with a premium outlay of $85,985 for 10 years. As mortality rates improved, his advisor was able to negotiate with the insurer for all insured people in the risk pool to receive numerous cost reductions, including three cost-of-insurance charge reductions.
As a result, the premium was lowered to $74,065 for 10 years—a 14% reduction totaling more than $10,000 in annual savings.
While past experience is no guarantee of future performance, the principle is the same: If the risk pool among the wealthy has experienced 53 cost decreases and no increases to date, savvy advisors can enjoy the lower initial pricing of the products, reflecting longer client life spans, and then negotiate even more favorable pricing in the future. This client advocacy delivers highly tangible value to very wealthy clients.
Delving into the Details
The management of in-force policies is complex, which is why it’s vital to work with an advisor who has the knowledge and experience to decipher the policies’ detailed expense pages. These include updated current annualized charges for policy expenses, premium loads, cost of insurance charges, cash-value-based wrap fees, etc. A qualified cost-reduction specialist will be able to provide clear examples of the original “as sold” illustrations and compare them with the current expense pages for the same insured client, with the same insurer, with new lower costs.
It’s part of the professional duty of fiduciaries, to prudently evaluate issues, including costs, and document that process. And as life insurance carriers continue to increase costs for some policies, diligent in-force policy management is vital to fulfilling that fiduciary duty. Moreover, this service is vital for providing the superior care that cements your role as a client’s trusted advisor.
Whether you take on the challenge yourself or choose to work with a skilled life insurance specialist, now is the time to take advantage of the role you can play with your healthy, long-lived wealthy clients.
David Buckwald, CFP, CLU, ChFC, CLTC, is a partner with Atlas Advisory Group LLC, an independent planning firm based in Cranford, N.J.
Steven Zeiger, CEBS, TEP is an advisor with Waxman Lawson Financial in New York. Both firms are member firms of M Financial Group.
