Term Insurance: The Permanent Benefit
 © Life Insurance Selling, January, 2000

I never wanted to be a life insurance salesman. Shortly after I started my life insurance sales career more than 22 years ago, I watched a history channel that aired a feature about the lives of some of the famous generals after the conclusion of the War Between the States. This program focused on the Battle of Gettysburg and, in particular, Pickett's Charge. It described General Pickett as depressed and despondent for years following the war, and concluded with the fact that he became a life insurance salesman after a series of successive career failures. What a career endorsement!

What a difference a day makes, or should I say a few banking law changes! Now everybody wants in on the life insurance game.

Life insurance agents come in all shapes and sizes. Stockbrokers turn the products into investment contracts, giving us the modified endowment contract (MEC). Bankers sell life insurance, but they do not know what they are doing. Life insurance agents want to sell mutual funds and become financial planners and financial consultants. Is the agent fee based or does he have to sell a product to be compensated? And let us not forget Internet marketing, which enables some computer-literate prospects to buy products from the agent's life insurance company that the agent cannot even sell.

Who is winning at this game and how does the agent keep score? What does this have to do with selling term insurance? I want this article to be a learning experience. If anyone can refute the philosophies I will outline in my firm's approach to recommending term life insurance, please write me.

The life insurance sales business has changed remarkably in the past several years. Prospects have more outlets for buying insurance, but statistics show that fewer families own life insurance than in past years. I believe the reason is that new marketing methods present life insurance as an economically necessary and viable commodity, but forget the importance of the product's emotional aspect. My firm's philosophy is that prospects do not buy insurance, they have to have it sold to them. We consider it a joke around the office when someone asks how a certain case is progressing. and the reply is, "Mr. Prospect has not called me back." The agent must be a pleasant "pain in the backside" to succeed in this business.

I do not advocate term insurance for commissions or for a buy-term-and-invest-the-difference philosophy. I believe that term insurance is the best strategy for the prospect, the agent and for the long run in the current insurance environment.

My firm's market is almost exclusively the owners of closely held businesses, a few publicly traded companies, but mostly first- and second-generation businesses with identified next generation successors or a goal t() take the company public. In this market, life insurance needs include buy-sell opportunities, key-person needs, after-death deferred compensation needs, estate creation needs, debt protection, estate balancing concerns, and others depending on the company's age, size, ownership, and current and potential income.

I believe that my firm has done a great job if the client has more insurance to cover the risks we identified than he or she ever imagined the company would need, much less buy. I know I would be better off financially if I sold permanent whole life or universal or variable universal life insurance (VUL). With the cost-benefit ratio of these kinds of coverage, however, I question how I could expect the prospect's economics to meet my firm's funding recommendations for his needs.

My firm's approach is not particularly novel, but it accomplishes a solution to a need for our prospects and establishes a relationship that openly and confidentially leads to identifying needs for other products for many years to come. The only negative about building a relationship this way is that we may lose clients through death or an intentional or unintentional change in their business direction.

A couple of case studies probably will help. A good example is a company that consisted of three partners: a 50% active owner and two 25% less-active owners. The company was fairly new, but showed great potential in an expanding market. We funded a cross-purchase, buy-sell agreement based on a multiple of book value with term insurance, but we could sense unrest with the stockholders. Because the owners anticipated going public within four to seven years, they were concerned that a public stock value would be much larger than the current closely held value. The solution was personal term insurance, betting on the company's future value to be paid should death occur before the initial public offering.

The business subsequently went public, and the clients made a lot of money. Because they already were comfortable with maintaining sizable insurance portfolios, they used the conversion features, through my firm, to fund non-qualified deferred compensation plans in the company and to fund personally long-term estate liquidity needs. In this situation a premium tolerance would have prevented anything hut the high-volume term sale. Without the comfort level the term coverage afforded, almost automatic continuance of the program in other forms would not have seemed as natural to the client.

Another example involves the second-generation of closely held businesses whose parents already completed extensive estate planning. The second-generation prospects know they will inherit a sizable estate and that they will begin to amass their own balance sheet and associated planning risks over time through gifts before their parents deaths. The problem is cash flow for the second generation. Premium tolerances through split dollar and insurance bonuses have been achieved through their parents' program.

My firm's logical solution again included an abundance of term insurance owned by a trust, which can be collapsed without loss of equity values when future planning dictates. The coverage's conversion feature preserves health eligibility, which is not a problem now but which was a concern in earlier planning with the parents. A 15-year, $10 million term plan for about $5,000 makes for easy, practical sales. We offer the second generations emotional risk protection on a basis they can afford and put them, and us, in a position to know how to solve future risk-related planning issues. We already had good clients and further enhanced that and subsequent relationships.

More basic, bread-and-butter kinds of sales occur among friends, neighbors. or church and civic club acquaintances. We use the same philosophy: Are the prospects better served to have too much coverage or not enough? Prospects often have asked our opinions after a relative or acquaintance has recommended a VUL product, option B death benefit, that projects 12% earnings to be used for family security in the event of death and as an education and retirement savings vehicle. Talk about one-stop shopping!

Our philosophy starts with drop-dead planning. We quickly point out that the face amount proposed by the other side, as a function of cost, would not financially allow the prospect to afford to be dead long -- if he wanted his family cared for adequately. To oversimplify, we expand the death benefit by a multiple of five to 10 ($100,000 becomes $1 million). After solving in greater magnitude the prospect's drop-dead issues, which includes covering the spouse, we suggest he or she keep 90 to 180 days' living expenses in liquid investments. We then tell him further savings should be tax favored with retirement in mind, with options to use or access for education without large penalties. This approach usually gets us into an examination of the company-sponsored Section 401(k) program, which may be a new prospect, or a Roth or education individual retirement account (IRA), depending on financial resources.

This philosophy works for my firm. After trying to diagram and explain ledger numbers and long-term costs for years, we found that the least stressful close is "ok!" This response usually follows the question most prospects ask: "What do you think about me buying a large term insurance policy?"

Term insurance is everywhere. Buy term insurance, and you can earn frequent flyer points. Prospects can buy term insurance through a notice in their bank statements, check out the Internet, watch for guaranteed issue and open enrollment offers at work, and become drawn to the wonderfully misleading newspaper and television "celebrity" offers. With all these offers, the truth is that few prospects will purchase term insurance on their own and never will purchase as much as they should. This is where the agent enters the picture.

No matter how the agent tries to illustrate or explain life insurance, it is an intangible product. It is difficult to give life insurance a test drive, and there usually is not a way to let a prospect handle the goods. I like the term insurance tool because it is a way to say to the prospect, just like the polished sales people say: 'Try it; you'll like it!" Face amounts of $500,000, $1 million, $5 million, $10 million and maybe more are ridiculously inexpensive for the right prospects. They often never considered these face amounts, did not know the coverage was this inexpensive, and were unaware of future options.

Now the emotional factors of love, fear, and ego take over. After a client becomes accustomed to having large face amounts of life insurance in force and listing the insurance on his or her financial statement or personal assets inventory, he seldom wants to give it up. How many veterans does the agent know who still own their $10,000 National Service Life Insurance (NSLI) contract? Volume of coverage seldom decreases for our clients.

They age, however, and often trade their health for wealth. With my firm's help, they begin to crystallize their objectives, and their experiences let them more clearly define their wants. At these later stages, with the term insurance protecting them earlier and with high-quality conversion privileges, who is in the best position to implement permanent strategies?

My attitude toward being in the life insurance business has changed. The life insurance agent's career has a lot of thankless moments; it is a lot like being the family photographer on a vacation. Everyone is annoyed when the photographer interrupts their activities for that pose, but they all want to see the photos when they are developed. I never have seen an accountant or attorney deliver a check that enables the successor child to buy the business from siblings or that provides cash for Mom to maintain her lifestyle without having to make business decisions about which she is uninformed, or worse, to depend on her children to keep her on payroll. I also never have had anyone say that taxable life insurance funds are too much!

A word of caution: Do not use this approach if you do not plan on staying in the business, if your life insurance company has less than a 50-50 chance of outliving your client, or if you do not plan to service your clients in the future. My firm does not have all the answers, but there aren't many situations for which we don't have something to offer!