Selecting the "Best" Insurance Product - 10 Questions
By Ted Polci, CLU, TEP
As advisors, dealing with many different clients on varied matters, we are regularly
asked “What is the best product?” The simple answer is “It depends”.
It would be impossible to describe in sufficient detail in this e-mail all of the
factors that go into selecting the correct product. And sometimes there is more
than one product that willfit so it becomes a matter of personal preference.
But at the risk (actually, the certainty) of oversimplifying, here are some key
- How long is the coverage required? Five or ten years, that’s easy. Fifteen or
more, we look at longer options.
- Is the insurance to be held (premiums paid by) a corporation or personally?
Pre-tax cost will be an important factor.
- Are there budget constraints limiting product selection?
- If the need disappears (eg. funding a shareholder’s agreement or for capital
gains tax and the business is sold) will there continue to be a need, or can
value be recovered in some other way (transfer to corporation, donate to
- Some contracts offer to change to joint life from single life. Will this be
useful to realize long term value?
- What are the relative IRR’s (internal rates of return) of the various
products? This is an important measure which we use to clear away the
confusion about cash values and investment accounts. If the insurance is
being purchased to be kept until death (ie. there is a “permanent” need) the
only measure of any interest/importance is “What is the IRR on the
premiums resulting in death benefits at various points in time?
- If choosing a “cash value” product, does the client have confidence in the
insurer to both invest and distribute returns on a fully discretionary basis or
would he/she prefer to self-manage on a fully transparent basis?
- How important are long term guarantees to the client with respect to
mortality charges, expenses and investment returns?
- Is “creditor proofing” of importance? Just the death benefit or more?
- Is the policy to be assigned as collateral and the premium deducted for tax
purposes? Some products are more practical for that purpose.
After 40+ years, we continue to see a great deal of confusion around product
selection. While it’s not always easy to decide, the fundamentals are straight
forward and when applied to a particular situation should be helpful.
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