Q: Are the cash values in a no-load/low-load product that much higher than those in a commission policy?

Yes. There is a substantial difference starting in the first year if you compare "surrender" values and not "account" values, as the surrender value represents real money. In some cases, a commission policy will show no cash surrender value in the first year, whereas the no-load policy may show a cash value of 70% to over 90% of the premium payment. Keep in mind that there are no surrender charges in a true no-load policy.

Q: What do you mean by true no-load/low-load policy?

There are a number of companies that refer to a product as a no-load policy/low-load but the term is misleading. For example, some companied have lowered the asset management fee of the sub-accounts, which is commendable, but doesn't qualify as a no-load/low-load policy as we all know the term to mean. Other company's have lowered commission on a product, but still maintain all the other high loads. These do not qualify as a no-load/low-load policy either.

Q: Why are high first year surrender values so important?

There are several reasons:
  1. It generally is the surrender values that will perpetuate a policy if premiums are skipped (which is supposed to be one of the benefits of a flexible premium, cash-value dependent policy style). If the surrender value is -0- , or less than that which is needed to cover the cost of continuance, the policy will lapse.
  2. UL and VUL were initially designed to provide a combination of death benefit (based on current costs) and a liquid asset in a tax-wrapped product. Since no one, advisor or client, can state with absolute certainty that nothing will change after the first policy anniversary, we feel it is important for the client to have maximum control and liquidity should anything change in the near-term future. Control and flexibility are always directly related to the degree of liquidity in the policy. A policy that has a lien (surrender charge) against the asset restricts liquidity and therefore restricts control and flexibility.

Q: This may be true, but life insurance is a long term planning vehicle, not a short term investment.

That is what we all hope for, but reality indicates something else. First, statistics point to the fact that a very high percentage of policies lapse/terminate before ten years (almost 50% after 5 years). These lapses are due to a number of various reasons, but the fact is that such lapses take place during the surrender charge period of the policy, costing the client money. Second, there is the use of variable life and survivorship policies as a wealth accumulation tool due to the tax-sheltered wrap they provide. As a tax advantaged investment tool, access to cash values in short to intermediate time frames constitute the need for higher liquidity up front, even if the planning objective may be longer term.

Q: What does premium flexibility mean?

Commission policies have a target premium, which is often the minimum required premium to place the policy in force. This target premium represents the fully loaded amount that pays the maximum commission. As the no-load/low-load product does not pay the planner/advisor any sales commission, the range of premium is expanded to the downside. For example, a $1 Million survivorship policy on a male, aged 65 and a female, aged 62 can be purchased for under $800 in the first year. Compare that to a minimum premium of a commission policy (which would be in the thousands of dollars).

Q: Are you against advisors receiving commissions, or using commission policies?

No. Although we believe and can substantiate our feelings that the no-load/low-load UL and VUL policy is superior, we also believe that it is up to the consumer to make that choice. As long as there is full disclosure without omission to the client, let them choose. They may feel more comfortable with the traditional arrangement of commissions. However, our experience is that in 92% of the presentations made, the consumer has selected the fee-based no-load/low-load policy. In addition, there are some policy styles which are not yet available in a no-load/low-load version, but may fit the needs of the client. The real point is this: The advisor is not a true fiduciary unless he/she provides the client with a full choice of policy style options, regardless of the compensation model.