Vol 14 No 01		January 2012

Katt & Company is a national fee-only life insurance advising firm. The June 2002 Forbes magazine, and a July 16, 2003 Wall Street Journal article, name Peter Katt as one of only four nationally recognized advisors. The Forbes article states that, "…advisers are well worth the money… These savants are working for no one but you…" I enjoy writing Perspectives and columns for Journal of Financial Planning, AAII Journal, AICPA Insider and Forbes.com because the difficult act of expressing ideas in writing requires that we wrestle them to the ground to find clarity. Visit our website www.peterkatt.com.

Flexible Premiums and Diversification

I was retained by a life insurance agent, at the request of an ILIT trustee, to analyze life insurance options for two young adults, the children of a wealthy family. The trustee asked for policies with level death benefits, not increasing benefits. Two interesting issues presented themselves in reaching our recommendations.

I reviewed four options from three companies. The first question was whether to consider no lapse UL (in contrast to current assumption UL). The agent and I agreed that because of the expected long time horizon these policies will be in force that current assumption UL was a better choice. This dropped us to three choices.

The analysis of these three remaining options exposed two interesting concepts.

First, two of the options were current assumption UL and one was participating whole life. The whole life options had excellent pricing from a company with a superb history. However, participating whole life has inherent premium inflexible that makes it an awkward choice for level death benefit policies versus UL. This inflexibility comes into play if an insured's health substantially deteriorates. If it becomes quite obvious that an insured won't live to an old age, UL premiums can be adjusted to better match this updated expectation. It might even be possible to stop all premiums in this situation. This can't be done with whole life because the policy is programmed to reach endowment at 120. If premiums are missed that will upset this endowment, policy loans are taken and this reduces the death benefits. Therefore, UL is favored for level death benefit policies.

This left us with two ULs from excellent companies and we entertained the issue of diversification. For one of the insured's, the target premium differential was 12% (because of standard underwriting). Because of this modest difference we decided to buy half of each UL for diversification. The target premium differential for the other insured, however, was 42% (because of preferred underwriting), so the decision was to use only the lowest priced UL in this situation.