There’s a reason why fewer than 85% of life insurance policies actually pay out a death benefit. It’s because life insurance is a long-term asset, and the policyholder’s finances can change dramatically over time. Your clients may buy coverage with the intention of providing for their loved ones, for example. But 30 years later, that goal may be far less critical than remaining solvent through retirement. Fortunately, permanent and convertible term life insurance is flexible enough to serve either goal. And you, as the life insurance agent, are well-positioned to guide your clients to a life insurance strategy that best serves their current situation.
You can step into that advisory role with a structured and proactive conversation with your clients when they are renewing their life insurance policy. Here are six questions to ask during life insurance renewal to move your clients into the type and level of life insurance that will help them reach their financial goals.
1. Does your client need a life insurance policy?
Many people buy life insurance to replace their income for dependents, to cover their funeral costs, or to supplement retirement income. Several decades later, any one of those goals could become unnecessary or irrelevant. Perhaps the policyholder has accumulated sufficient wealth that makes the death benefit no longer necessary to ensure the financial security of loved ones upon their passing.
If the policyholder no longer needs the death benefit to provide for loved ones when they pass away, they may decide maintaining the policy is an unnecessary expense. In that case, he or she could surrender the coverage for a small cash sum, stop paying the bill and wait for the policy to lapse, or sell the life insurance in a life settlement. While all three strategies eliminate the burden of ongoing renewal premiums, the life settlement will generate the highest cash proceeds — usually two to four times the surrender value.
2. Does your client’s current policy provide the right amount of coverage?
Once you confirm your client does need ongoing life insurance coverage, you can crunch some numbers to determine how much coverage is needed going forward. This will obviously be based on the policy’s primary purpose. If the client is motivated by the death benefit, talk through who’s getting that payout and how much funding that beneficiary will require. Or, if the life insurance will provide retirement income for your client, discuss those income expectations and compare them to the size of the current policy.
It’s likely that the policy’s value won’t be exactly aligned with your client’s needs. You can rely on your expertise and what you know about your client to decide if the coverage should be modified and, if so, how to implement the change. Say your client is over-insured, you may advise them to sell it in a life settlement and buy a smaller policy. A similar thought process applies when your client is underinsured. If your client’s current coverage allows for increasing the death benefit, that might be the right move. Otherwise, you’d recommend a second policy to supplement the original one.
3. What types of life insurance coverage is your client eligible for?
If your client needs additional coverage, identify the most appropriate type of insurance for the situation as well as where to get the new policy. It might help to lead this conversation as if your renewing client is actually a new customer. That way, you’ll naturally guide the client through the options thoroughly, rather than jumping to a recommendation your client may not fully understand. You could start by refreshing your client on the differences between term life insurance and permanent life insurance.
Term Life Insurance
Term life insurance is in force for a specific timeframe, paying out a death benefit if the policyholder passes while the policy is in force. Term life could be the right option if the client only needs the death benefit and can afford the premiums for a term that’s longer than the client’s life expectancy. Also, if the client is still working, he or she may have the option to buy employee-sponsored term life insurance at a lower rate. That can save on premiums in the short-term. Ask your client to verify that the policy can be moved away from the employer upon retirement. In most cases, it can, but the premiums will probably go up once the client no longer qualifies for the employer discount. Furthermore, some term policies contain an option to be converted into a permanent policy enabling the policyholder to utilize benefits such as borrowing against its value or selling it through a life settlement.
Permanent Life Insurance
As you know, permanent life insurance will stay in force for as long as your client pays the premiums. Unlike term life, permanent coverage accumulates cash value which can be withdrawn or borrowed against, depending on the policy type. Additionally, many types of permanent life insurance can be sold through a life settlement. Permanent life insurance suits the client who might need income from the policy or who wants to secure a death benefit but isn’t sure about life expectancy.
4. How long do they want a life insurance policy for?
A detailed conversation about policy duration will also influence the choice between permanent and term life. If the point of the extra insurance is to allow loved ones to pay off a mortgage, for example, a term life policy that expires once the mortgage is mostly repaid is a suitable choice. Term life coverage also works when the client is protecting income only. At retirement, the coverage can expire because there’s no more paycheck to replace.
Permanent life insurance is appropriate when the client wants open-ended coverage, with no specific expiration. That’s likely when the client doesn’t have a lifespan expectation or has a very long lifespan expectation. Furthermore, the cash value component of permanent life insurance enables policyholders to save for retirement.
5. How much do they want to pay for premiums?
No doubt you’ve had clients explain their exact needs, and then change their minds when they realize how much the right solution will cost. If you have a proven method for managing client expectations on cost, stick with that process. If you don’t, you can either present a range of solutions with a price tag for each or, even better, get your client to communicate an exact budget before you make your recommendations. As long as you have one option that fits the budget, you can present other options that cost more. Just be prepared to explain the added value associated with the more expensive strategies.
For example, you may need to explain why term life premiums are so much lower than permanent life premiums. When you let clients know that a term policy might expire the day before they die, or that there are fewer ways to access the policy’s value while living, they just might increase their budget.
6. What benefits do they want their new policy to have?
Finally, it’s always smart to make sure your client fully understands the benefits they will (and won’t) get from a change to their life insurance coverage at renewal. You might walk through this once the client has tentatively decided on a strategy. If that strategy is, say, to renew the original permanent life insurance and supplement with a new term policy, review the differences between the old policy and the new one. You don’t want your client thinking he or she can sell a non-convertible term policy in a life settlement later, for example.
While this conversation may feel redundant, you’re not at risk of over-explaining life insurance. As a financial product, life insurance is complex enough to be easily misunderstood. And more importantly, you may end up revealing some needs your clients didn’t communicate earlier. Uncovering those additional needs now, before your client signs applications and pays premiums, spares you and your client from frustration later.As noted, selling a life insurance policy through a life settlement is a lesser known and often underlooked option that can help clients who no longer want or need their policy. If you have a client and think a life settlement might be a good fit, contact us for a free estimate and see how much the policy could be worth.