Life Insurance Clients Can’t Decide Between Par And UL? by Sun Life Financial

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Give Them an Unbiased View.

Helping a client decide on the right life insurance begins with a basic decision. If they need temporary insurance and have limited funds, the best choice is probably term insurance. If they need long-term protection or tax-deferred cash value growth, the best choice is probably participating whole life (Par) or universal life (UL).

But between Par or UL, which is best? Without knowing the client’s unique needs, the answer is “It depends.” Let’s look at the different features and consumer profiles.

Only Par offers Dividends – Par (participating) policies usually charge higher premiums, but in return allow policyholders to “participate” in the company’s growth by receiving annual tax-free dividends based on the company’s investment earnings, mortality, expenses and taxes. Typically, the longer the client holds a policy, the greater the cash value and dividend payments. These can be paid as cash or used to pay premiums, enhance the death benefit or increase the policy’s cash value.

UL policies are non-participating, so they don’t pay dividends to policyholders (these go to the company’s shareholders). Instead UL provides tax-advantaged investment options. As with dividends, the client can use these accumulating cash values to pay the cost of insurance or increase the death benefit.

UL has more Investment Options (the most notable difference) – All UL deposits, less insurance charges, can be allocated to one or a mix of many investment options including GICs and index-linked accounts. UL clients need to be comfortable choosing their own asset mix and understand that the policy’s cash value will fluctuate with market conditions.

Par policy clients generally don’t want this responsibility, and prefer a balanced portfolio whose value doesn’t fluctuate. Par products offer only one investment option – a portion of each premium is invested in the company’s portfolio of diversified assets (bonds, mortgages, equities and real estate). The returns largely determine the annual dividends, which remain constant over the time held because they’re based on book value, not market value. A Par policy’s guaranteed cash values cannot be adjusted to reflect changes in market value, and it may be difficult to separate the pure insurance component from the investment component.

For an in-depth look at PAR vs. UL, download:

An Unbiased View

Both offer Tax-Deferred Cash Value Growth – Both UL and Par policies, assuming they are tax-exempt, offer tax-deferred growth for comparable cash value amounts.

Both offer Guarantees – Virtually all UL products have guaranteed Cost of Insurance (COI) and administration charges and minimum guarantees for each investment option. Most incorporate a deposit load (percentage of premium deposit) to pay provincial premium tax, but this is rarely guaranteed because the tax rate can change.

Par products offer more guarantees including premium, death benefit and cash values. And while the Par annual dividend is variable, the cash values are not subject to market value adjustments.

UL requires more Maintenance – UL clients must manage their own policy, which can require as much effort as managing a pure investment portfolio. The task will be less daunting, however, if they choose regular monthly premium deposits (to allow dollar-cost-averaging) and a long-term investment mix (to compensate for year-to-year volatility).

By contrast, Par policies are very low maintenance. With a set premium and investment mix, Par clients don’t need to manage their own investments – the insurance company does it for them.

Both provide value, but beware numerical comparisons – Deciding whether universal life or participating life delivers better value for premiums paid may be a close call. Check the company’s product guide for an historical perspective on long-term returns, volatility and value to policyholders. But don’t bother comparing numbers on sales illustrations, because that would only work if all assumptions (premium deposits, investment mix, investment returns) were accurate and unchanging and external factors such as taxes had negligible impact. Hardly likely!

Above all, don’t let your personal bias for Par or UL stop you from recommending the best solution for a client. Gather the facts, compare the features, and make sure the benefits align with the client profile. By making the right choice up front, you will improve client satisfaction, policy persistency, and the reputation of the industry.

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