Have You Given Your Clients a Universal Life Check Up?
Universal Life is an extremely diverse product that can be used in a myriad of ways to offer customized insurance solutions to your clients. The flexibility that allows the contract to be customized to meet your client's needs also carries some pitfalls that clients should be aware of. If you are unsure if your clients are aware of some of the following features of Universal Life policies, you should consider a review of their contacts with them.
Minimum funded policies should be invested in Guaranteed or Daily Interest Accounts.
When your client pays a premium, the insurer subtracts the premium tax then deposits the balance of the premium in the fund chosen by the client. On each monthiversary, the insurer draws from the fund value an amount equal to the cost of insurance charges and administrative fees. The PAC dates (chosen by the client) and the monthiversary can be different days in the month. This leaves the deposit prior to charges and the balance of the premium afterward exposed to the volatility of the chosen investment. Most insurance carriers credit positive and negative returns to the fund value of the policy on a daily (either 365 days or 250 days per year) basis. A downturn in the market, even if it is for only a short time, could prove detrimental to a minimum funded contract. While this is quite apparent in an annual premium falling short in month 10 or 11, it can occur within the same month as the deposit in an exceptionally bad market. Minimum funded policies in guaranteed interest accounts will alleviate this risk.
Guaranteed Minimum Premiums should not be confused with Guaranteed COI.
Today's Universal Life policy offers a number of guarantees to policy holders. Cost of insurance, administration fees, minimum investment performance on GIC's and Management Expense Ratios are all guaranteed in many UL contracts. These guarantees do not mean that minimum premium is guaranteed. There are a number of factors, within the control of the client, that can cause an increase in minimum premium: Increases in Face Amount to maintain exempt status, Annual increase in YRT insurance charges, Term Rider renewals. There is one factor outside of the clients control that is frequently overlooked, Provincial Premium Tax. Transamerica Life has the only Universal Life contract currently available, which guarantees the Premium Tax. With all other contracts, an increase in Provincial Premium Tax will be directly passed to the client as an increase in minimum premium. It is important that the client understand the difference between guaranteed cost of insurance and minimum premium.
Overfunded UL and Yearly Renewable Term COI
Many Universal Life policies are sold as overfunded using YRT Cost of Insurance. This is certainly a valid way to sell the product. The risk to you is that the COI increases are not as visible to your client because of the overfunding. A downturn in the market, coupled with an increase in the YRT COI can have significant impact on your clients policy.
The Fund Value within a UL is an Investment Vehicle, Treat it Like One.
Review your client's investment allocation and performance on (at least) each policy anniversary. Re-balancing and discussing the ramifications of the rate of return with your client can help them to remember this key element. A very strong or poor investment yield can have dramatic effects on a policy with an optimizing/maximizing/minimizing feature or on a contract with the intention of becoming "paid up". Confirm whether or not you're on target for a potential leveraging scenario. What should be done about it? Revisit investment allocation and discuss potential changes in premium.
Understand and explain to your clients the Rule of 250%.
Many policies are/were previously sold on the premise of "minimum fund today, and when you have supplemental income you can use the tax-sheltering aspect of your contract". While this approach can be used, it should be done so with caution. The rule of 250% states that the Fund Value will be tested on the 10th anniversary and will look back 3 years to the 7th anniversary. The test is to confirm that the Fund Value has not grown by more that 250% (including but not limited to deposits and investment growth) in the previous 3 years. This test will then be conducted on every anniversary thereafter always looking back 3 years. This means that if your client has not over-funded his/her contract prior to the 7th policy anniversary they are risking losing the ability to shelter growth within their contract.
Remember that MER's are charged on the index
Most clients are invested in the S&P and/or TSE indices. While the performance of these indices can be tracked in your local paper, the additional MER's that the insurer charges will obviously not be reflected. MER's compounded over a year, can significantly reduce a clients return.
Leveraging Scenarios: A Mixed Blessing
Maximum funding, quick pay scenarios with the intention to draw a tax sheltered income is a valid and commonly used method of creating additional funding for your clients retirement. These cases are very complex and require an understanding of the areas where this strategy can go awry before being put into action.

Higher than anticipate growth
Because most of these cases are structured to "walk the MTAR line", investment returns that are higher than anticipated can cause some funds to be kicked out of the policy and attract tax.

Leverage Loan Approval
Most leveraging loans are subject to bank approval and may require collateral in addition to the value of the policy. The client should be aware of this prior to purchasing the policy and an alternate stategy of systematic withdrawals from the policy should be illustrated.

Fund Value vs. Cash Value
For those cases where the leveraging strategy will begin before the 10th policy anniversary, it should be noted that banks use the cash value of the policy (i.e. net of surrender fees) to calculate the loan amounts

Responsible Illustrations
According to CLHIA guidelines, bank loans should be illustrated with a 2% higher interest rate than that used to illustrate the investment. Most financial institutions will offer a maximum total loan value of 50% of the cash surrender value of the policy if the investment remains in equity accounts. Transferring the funds to guaranteed accounts will allow a maximum loan to value ration of 75% to 90% depending the bank and insurance carrier. The change to guaranteed investments should be reflected in the returns illustrated.

Universal Life is an excellent product, however, it must be reviewed on a regular basis to ensure it is performing as anticipated and still meeting the needs of the client.
 
 
 
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