Thursday, November 10, 2016

The Life Insurance Coverage Gap: How Single Premium Life (SPL) Insurance Can Help

In 2015 there was a life insurance gap in our country that exceeded $16 trillion dollars. The “life insurance gap” is what the need is of American households less the life insurance coverage already in place. Back in 1960, 70% of U.S. adults owned life insurance, whether it was individual life insurance or through a group plan usually found at their jobs.  In recent years, this number has fallen to only 59% of American adults that have either an individual plan or group plan. Even more startling, only 36% of U.S. adults have individual life insurance policies versus 59% back in 1960. The fact that since 1960, American families have evolved to dual income households, the percentage of adults having life insurance should have increased, not decreased! In other words, if two people in the family are getting income, both of those income earners should have life insurance.

There are five key reasons cited by consumers for not having life insurance or adequate life insurance:
  1. Affordability: In a study published by Prudential in 2013, 74% of consumers said that concerns about affordability prevented them from purchasing life insurance.
  2. Cost: Related to the above, consumers consistently overestimate the cost of life insurance. In the 2015 Insurance Barometer Study, 80 percent of consumers misjudge the price for term life insurance, with Millennials overestimating the cost by 213%, and Gen Xers overestimating the cost by 119%.
  3. Confusing: In that same Prudential study, 50% said that life insurance is too complicated to purchase.
  4. Underestimating the Need: Consumers in the Prudential study felt that they were adequately covered. Furthermore, they felt that high face amounts are excessive, especially at death benefits above $250k. A majority of the consumers felt overall that death benefits of two to three times their annual income would be sufficient. This is backed up by the fact that the median household income in America is around $50,000/yr. and the median life insurance policy has a death benefit of $115,000.
  5. Misperception about the Limited Role of Life Insurance: 63% of consumers in the Prudential study claimed they bought life insurance merely for funeral costs and final expenses. 
The confusion and misperceptions around life insurance create a perfect opportunity for SPL to help fill the coverage gap. Affordability should not be an issue with SPL because the target age group for SPL is 60-85 years of age. These folks likely already have money that they are merely looking to pass on to the next generation. Of course, if the client has “lazy money” in CDs, money markets, etc., the affordability issue can be easily overcome. Furthermore, SPL is a very simple product to understand. If the client puts $100,000 into the policy, the death benefit will immediately be $200k, for example. Note: the death benefit can be anywhere from 15% to 200% higher than the premium the client puts in based off the age of the insured. And by the way, the death benefit would be WITHOUT TAXES.
Learn more in the full white paper "SPL: Bridging the Gap from Annuities to Life Insurance," by Charlie Gipple, CLU, ChFC. It provides case examples, addresses costs and how you can find success in explaining these products to clients. 
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Questions or Need Case Assistance: Contact the Partners Advantage Brokerage Team at 888-251-5525, Ext. 700.

For financial professional use only. Not for use with consumers.

This material is intended for educational purposes only and is not intended to serve as the basis for any investment or purchasing decision. Insurance and annuity products: Are not deposits. Are not guaranteed by a bank or its affiliates. May decrease in value. Are not insured by the FDIC or any other federal government agency. This information is written in connection with the promotion or marketing of the matters addressed in this material. The information cannot be used or relied upon for the purpose of avoiding IRS penalties. These materials are not intended to provide tax, accounting or legal advice. As with all matters of a tax or legal nature, your clients should consult their own tax or legal counsel for advice. Pursuant to IRS Circular 230, Partners Advantage Insurance Services and their representatives do not give tax or legal advice and cannot be used to avoid tax penalties or to promote, market, or recommend any tax plan or arrangement. Encourage your clients to consult their tax advisor or attorney. The information contained in this article is not intended to serve as tax or legal advice and is not intended to provide financial or legal advice and does not address individual circumstances. Encourage your clients to consult their tax advisor or attorney. The information contained in this article is not intended to serve as tax or legal advice and is not intended to provide financial or legal advice and does not address individual circumstances. Both loans and withdrawals from a permanent life insurance policy may be subject to penalties and fees and, along with any accrued loan interest, will reduce the policy’s account value and death benefit. Assuming a policy is not a modified endowment contract (MEC), withdrawals are taxed only to the extent that they exceed the policy owner’s cost basis in the policy and usually loans are free from current federal taxation. A policy loan could result in tax consequences if the policy lapses or is surrendered while a loan is outstanding. Distributions from MECs are subject to federal income tax to the extent of the gain in the policy and taxable distributions are subject to a 10% additional tax prior to age 59½, with certain exceptions. These characters are fictional and are not actual customers. Your own decisions should be made in light of your own financial situations. This hypothetical examples used are for illustrative purposes only, is no guarantee of return or future performance, and does not depict the actual performance of a specific product or its investment options. In order to provide a recommendation to a client about the liquidation of a securities product, including those within an IRA, 401(k) or other retirement plan, to purchase a fixed or variable annuity or for other similar purposes, you must hold the proper securities registration and be currently affiliated with a broker/dealer or registered investment adviser. If you are unsure whether or not the information you are providing to a client represents general guidance or a specific to liquidate a security, please contact the individual state securities department in the states in which you conduct business. Indexed Universal Life is not a stock market investment and does not directly participate in any stock or equity investments. Market Indices do not include dividends paid on the underlying stocks, and therefore do not reflect the total return of the underlying stocks; a market-indexed insurance product is not comparable to a direct investment in the equity markets. Clients who purchase IUL are not directly investing in a stock market index.