Although universal life (UL) insurance can provide an effective form of permanent life insurance coverage for some clients, the product carries certain risks. There are now a growing number of frustrated policyholders who have learned the hard way that the product wasn't the right choice for them.
"People are misled into thinking that it's a guaranteed policy," says Robert Porter, insurance advisor and owner of Crusader Insurance & Financial in Mississauga, Ont.
In particular, Porter says he has encountered many distraught clients who have bought UL policies from other advisors, based on a misunderstanding of how the product works. In many cases, their policies end up collapsing after the cash component runs out and they cannot afford to pay the additional premiums to keep the policy in force.
Here are five mistakes to avoid when selling UL to ensure your clients don't end up with irreparable damage to their financial plans as a result of a policy that goes awry:
1. Failing to educate yourself
Even if the marketing materials make a UL policy seem straightforward, it's important to do your research and ensure you understand exactly how the product works, says Harold Geller, associate lawyer with law firm McBride Bond Christian LLP in Ottawa.
"I've examined on dozens of UL cases. Not once has the agent been able to tell me the basic features of the policy," Geller says. "UL policies are so complex, and the sales materials used to educate them are so simplistic, that many of the sales people don't explain the important features, and especially the risks and limitations."
2. Failing to educate your clients
Neglecting to inform clients of the risks associated with UL is likely to lead to nasty surprises down the road. If you're using illustrations to demonstrate the future performance of the product, use projections that are realistic and be sure to include scenarios in which the investments fail to perform as expected.
"Clients need to know what the worst-case scenario is," says Asher Tward, vice president of estate planning with TriDelta Financial Partners Inc. in Toronto.
Explain the risks both verbally and in writing, Geller urges.
"Be very carful in your written disclosures," he adds. "Make sure you fulfill your obligation to warn of the risks and limitations. If you do, then you cover yourself. But if they're not evident, who will believe that you ever talked about them?"
3. Focusing on making the sale
Although it can be tempting to close a sale as quickly as possible, rushing the process can lead to uninformed decisions and unsuitable purchases. Without taking the time to understand the options and the risks, a client might choose an annual renewable term (ART) policy, for example, because it has the lowest initial premium.
"It's easier to sell a non-guaranteed product because the insurer has much less risk, so the insured pays less out of the gates," says Geller.
If clients aren't aware of the extent to which ART premiums will increase over time, though, they're likely to have trouble maintaining that coverage long-term.
4. Ignoring the client's broader financial plan
Permanent life insurance such as UL should be considered as part of a client's overall financial plan, Tward recommends.
"The big mistake that people make is most advisors in the insurance world don't do thorough planning — they just sell," he says. "Unfortunately, the long-term assessment of what works best for an individual isn't factored in to those decisions."
As UL has an investment component with a variety of different options, advisors should help clients decide on the investments that are most appropriate for them and their risk tolerance, Geller says.
"That should be part of the needs analysis," he says.
5. Failing to monitor a policy after it's sold
Once a policy is in force, many advisors file it away without second thought. However, as some UL policies contain investments that fluctuate and premiums that increase over time, they should be monitored on an ongoing basis to ensure they're performing as expected.
"What can happen is the product can go offside, and then [the client] should get out of it," Geller says. "But there's nobody watching it."