How to Cure Insurance Confusion

Life Insurance is confusing for the average consumer! To just say it is confusing might even be understating it. An Advisors Edge article reports that 88% of people are confused by their insurance options! When I tell advisors this stat they often joke that it’s more like 100%.

SO WHY IS LIFE INSURANCE SO CONFUSING?

“Well, it depends.” Life insurance can be very simple. You have $X in liabilities and a time horizon of Y, you need product Z. However if we ask an audience of advisors, “what is the best product to solve XYZ” every advisor worth their salt would say “Well it depends on the client's situation” and that is where things often get complicated because our clients are unique and come with a unique set of financial strengths and weaknesses.

Despite the often unfounded stigma that insurance advisors are “just” salespeople, advisors have to be well versed in a client's overall financial position as well as their future goals. They have to analyze their current assets, liabilities & human capital then project way into the future on how those levers may change over time to advise properly.

Today’s financial landscape means advisors need not only to be well versed in the diverse insurance market but also understand what coverage fits with the suite of other financial vehicles & strategies their clients may be utilizing.

Due to this complexity in the planning process, we need to employ advanced calculations often factoring in time value of money, taxation, rates of return to satisfy our compliance requirements around suitability (now and in the future). This can complicate things with hard to understand financial terms and acronyms, making it frustrating and foreign to a client.

Compounding the problem (no pun intended) is the marketing material advisors are given, often designed by an actuary, neutered by a lawyer and branded by the insurer. This forces advisors to craft their own marketing collateral to illustrate a complete picture of the market & highlight the strength of their independence on the landscape. This means advisors are tasked to translate complex illustrations from multiple carriers into concise sales presentations that communicate to people largely confused by the product.

SO WHAT CAN ADVISORS DO TO FIGHT CONFUSION?

Fortunately for today's advisor there is technology in place to help you do just that!

USE VISUAL AIDS

Presenters who use visual aids are 43% more likely to persuade their audience than those who don’t. When presenting data to your client, include a visual of the data that is easy to understand. Remember, a visual is processed by our brain 60,000 times faster so a good presentation provides your client with data as well as an easy way to understand it.

CONCEPTS

Concept selling is integral to selling life insurance or any complicated product because it helps the client relate on simpler terms or to something they understand. It can also frame insurance in a new perspective, a concept that might help a client think of their life insurance as an asset class rather than just a death benefit.

REDUCE JARGON

Jargon is “terminology that is associated with a particular field, in our case the life insurance industry. Jargon is normally employed in a particular communicative context and may not be well understood outside that context. The context is usually a particular occupation (like life insurance), but any ingroup can have jargon. The main trait that distinguishes jargon from the rest of a language is special vocabulary—including some words specific to it and often different senses or meanings of words, that outgroups would tend to take in another sense—therefore misunderstanding that communication attempt. Jargon is sometimes understood as a form of technical slang and then distinguished from the official terminology used in a particular field of activity.” Wikipedia

Ok we all know what jargon is and in the insurance world we ❤️Jargon (and acronyms) Unfortunately our clients are often not part of our ingroup and this can make the process seem even more complicated.

Let's break down some of the most popular life insurance jargon and how to make it more digestible:

INTERNAL RATE OF RETURN - IRR

What is it?

The internal rate of return (IRR) is a metric used in financial analysis to estimate the profitability of potential investments. IRR is a discount rate that makes the net present value (NPV) of all cash flows equal to zero in a discounted cash flow analysis.

How is it calculated?

When to use this

Use this when comparing apples to oranges(different pay schedules or deposits or face values). IRR is a great equalizer, I like to think about it measure of the efficiency of a financial instrument that factors in the time value of money.

How to make this easy for you to calculate and easy for your clients to understand.

We calculate the IRR for cash values and insurance benefits of any product you add to an LDA “case” saving you time. To make it easy for your clients to understand we present the information in easy-to-understand charts or tables so you can easily highlight the IRR of any given plan and prove your solution is the right one.

CAPITAL DIVIDEND ACCOUNT CREDIT -CDA CREDIT

What is it?

The capital dividend account (CDA) is a special corporate tax account that gives shareholders designated capital dividends, tax-free. This account is not recorded in the corporation's taxable accounting entries or financial statements. This is important as proceeds received from a life insurance death benefit, under which the corporation is the beneficiary.

How is it calculated

When to use this

Use this anytime you are structuring corporately owned life insurance. Although many permanent products are competitive there are many ways to get creative with product design and each carrier will have a unique ACB grind down depending on how the product was designed. This means for corporate clients the total insurance benefit might be similar but the credit to the CDA values might highly favour one solution over the other because of the impact of the ACB grind.

How to make this easy for you to calculate and easy for your clients to understand.

We calculate the CDA automatically any time we have the ACB of a product. To make it easy for your clients to understand we present the information in easy-to-understand graphs & tables so you can easily highlight the best solution for your clients.

COST PER $1000 - UNIT COST

What is it?

Cost per $1000 is a great way to break down a unit cost of life insurance. A unit cost is the total cost of one unit of a particular product or service. In our case, because life insurance benefits are generally in the hundreds of thousands to millions of dollars range our units are going to represent $1000.

How is it calculated?

Cost per $1000 is an easy one to calculate, first, we need to find out how many thousands are part of the total insurance benefit (eg, $500,000 life insurance benefit has 500 thousand dollar units) once we find out how many units are in our benefit we can divide the price by the same ratio. (eg if our $500,000 of life insurance cost $500 a year the unit cost is 1$ for every $1000 of life insurance)

When to use this

You might use this to show the unit costs for different face values. For example, lots of advisors will show different face values (250k vs 750k vs 1.5M) to get a feel for a client's budget, however showing the unit cost of the insurance can help illustrate the economy behind the banded prices of life insurance.

*You could also use this to show term vs perm or the unit cost of various term lengths, however, I personally recommend using an IRR metric in that situation as it is better suited to take into account the time value of money.

PRESENT VALUE - PV

What is it?

Sometimes referred to as time value of money. Present value (PV) is the current value of a future sum of money (like an insurance benefit or CSV) given a specified rate of return. Future cash flows are discounted at the discount rate (r-value), the discount rate, the lower the present value of the future cash flows. Determining the appropriate discount rate is the key to properly valuing future cash flows. This is often used to simulate different inflation scenarios.

How is it calculated?

When to use this

Use this when illustrating the impact of inflation on scheduled premium deposits as well as future insurance benefits. We want to ensure that the amount of life insurance our clients will need in the future is adequately covered given the diminished purchasing power the benefit will provide in the future. Often advisors will use a PV calculation to highlight the power paid-up additions (PUA’s) have in the fight against inflation.

How to make this easy for you to calculate and easy for your clients to understand.

LDA makes it easy to control your discount rate to simulate the impact of inflation on your client's life insurance needs.

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If you would like to see more practical use of Present Value click here to read our blog on Inflations impact on Life Insurance

ADJUSTED COST BASIS - ACB

What is it?

Life insurance isn’t considered capital property, but it’s treated somewhat similarly when there’s a policy disposition. If the proceeds of disposition exceed the policy’s cost (eg the ACB), the resulting gain is fully included in the policyholder’s income.

ACB is also relevant where the insurance policy’s beneficiary is a private corporation. Generally, on the death of the insured, the insurance benefit is tax-free to the corporation. The excess of the death benefit over the policy’s ACB is credited to the corporation’s capital dividend account. This permits the distribution of insurance proceeds as a tax-free capital dividend to the corporation’s shareholders.

How is it calculated?

These variables represent different transactions that impact the tax value of the policy (such as policy loans, payments, etc)

This is a fairly sophisticated calculation & fortunately this value is provided to us by the insurance carrier. While it’s not all that important to be able to calculate this yourself it’s good to understand how it impacts our other insurance formulas & calculations. It’s often found on annual statements so don’t be surprised if your clients ask what this is.

When to use this

These values are automatically pulled in LDA any time you import a spreadsheet. We use the ACB to drive corporate concepts such as our asset transfer strategy as well as our CDA calculations.

NET COST OF PURE INSURANCE - NCPI

What is it?

​​NCPI represents the pure annual cost of an insurance policy, used for various tax applications.

How is it calculated?

To calculate it, the insurance company uses a formula in the regulations under the Income Tax Act. NCPI for any given policy is the product of two factors:

1. The annual mortality rate based on a specified mortality table plus
2. the net amount at risk (NAAR) under the policy.

When to use this

This is one that is more passively used in several calculations such as in IFA’s however it is provided by the insurance companies and automatically used in various calculations in LDA

Information used on ACB & NCPI was summarized from Kevin Wark at Advisor.ca

NET ESTATE BENEFIT

What is it?

Net estate benefit is the benefit to the estate after-tax, in corporate situations this could be a corporately held investment or an insurance policy however the net estate value looks at how much of that asset will be left after taxes. It's one thing to make a big pie, it's another to keep a big slice of it.

How is it calculated?

Net Estate Benefit is a closely guarded secret!

While we are only joking, it is actually hard to type. We have extensive options to control the alternative investments mix & the taxation on each unique asset class. We compare this with our net estate formula on the insurance side using the CDA account and factoring in taxation on the ACB to come up with our net estate value.

When to use this

Use this when comparing life insurance to alternative investments when you want to factor in the pre-tax and post-tax implications of each vehicle. LDA has a robust asset transfer module that lets you specify individual asset classes, their growth rate, tax rates & RDTOH to compare corporate or personally held assets versus life insurance.

How to make this easy for you to calculate and easy for your clients to understand.

In LDA we created concepts so that you could simply select the whole life or universal life product you want to illustrate from any carrier, import the product and select the concept from a drop-down menu and click "Generate Report".

Making advanced but easy to understand white-labeled concept presentations in minutes.

CONCLUSION

It's not hard to see why our clients can find life insurance confusing, but with a consistent approach that is focused on how to simplify the complexity, we can educate our clients. These insurance sales techniques will help you clearly communicate why options have been presented and will help your clients trust that you have brought the options that are best for them to the table. To make this process even easier, Life Design Analysis has all of the formulas and jargon embedded within our program, making it easy to show complex calculations and comparisons to your clients.

Sign up for our 15 day Free Trial or book a training session with Jon from our support staff to see how Life Design Analysis can help serve the best needs of your clients and improve your practice!

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