We hear the major auto makers talk about this as one of the important factors in making a car buying decision. The concept is easy enough to grasp: factor in the actual purchase price, maintenance, fuel consumption and resale value of the car in question when it's time to buy that new car. This is easy enough to apply to the purchase of a life insurance contract, simply by considering the premiums as the purchase price and the cash surrender value and death benefit as the resale value.

But what about the maintenance?

Aside from paying the premiums, and perhaps rebalancing an allocation, there is not much to do in the years between the initial sale and the subsequent surrender or death claim. Or is there? What about premium offset designs? Let's use the dividends or the cash to reduce our premium outlay, right? That type of design will certainly need an annual review. There are certainly enough policies out there with a client no longer paying premiums (sometimes to their detriment, but that is another discussion), but today we drill down on a specific carrier and product feature that is rather unique.

It turns out there is a carrier that will reward you for maintaining your health while the policy is in force. Sounds wonderful, but what does the client need to do in order to document this continued good health, and what is the pay off? How much can it save them? Time to crunch some numbers!

Assumptions:

Male age 50

Preferred Nonsmoker

$1mil face amount

GUL product

Assuming that the client qualifies for all of the available discounts, the savings through year 40 (the client's age 90) is roughly $70,000! Sounds great, right? Sure does. A couple things to consider before we all jump on this as a great idea for our clients:

The IRR difference between the regular price and the max discount at year 40 is a mere 41 basis points, so from an investment performance perspective this is not that exciting. The really deep discounts start in year 35 or so, and the premium drops to $0 soon after year 40. That is a long, long time from now.

Qualifying for this discount is not as simple as showing up at the car dealership. The client has to have a physical, maintain their weight within a specified range, and send a form signed by their physician to the home office every two years in order to realize the discounts. I am not sure many clients will do that. In fact, I'm pretty sure most of them won't.

So what do I think about this feature in the real world? Nice in theory, perhaps a bit challenging in practice. The carrier sends policy owners a quarterly "Wellness Newsletter" from the Mayo Clinic on behalf of the agent as part of this rider. This automatic touch point four times a year is great from a client relations point of view, and perhaps interesting for the client. I do see a potential issue with all of the product performance discussion. This is essentially a "vanishing premium" design. Like all of its predecessors, it is not guaranteed (unless we are talking about a true paid-up Whole Life contract or Guaranteed Universal Life with a short pay, of course!). We all know how clients remember things like this: You said I could stop paying premiums by.......and I'm still paying. Where's my lawyer's card? What regulatory agency can I complain to? Why knowingly set up this scenario?

So how to use this feature? I would use it as a nice add on (it costs $100 one time in policy year one), but keep my big mouth shut about the discounts. At the end of policy year one I would encourage them to try and execute on the discount requirements. Curious about which carrier has this feature? That would be Aviva.

Give me a call to see this illustrated on your next case.