What's the best type of life insurance? That question has been been debated for decades. In the 1980s, universal life products were considered the best. In the 1990s, it was variable universal life products, and in the 2000s, it was guaranteed universal life products. Now, indexed universal life and whole life products are most often recommended. So, which is it? None of the above actually.
Instead, thanks to new Department of Labor regulations, we have a new way to define and discuss the best type of life insurance — a best interest contract that can be applied to life insurance.
In an industry that seems to rival the military for acronyms (e.g., BOLI, COLI, CHOLI, DOLI, EOLI, STOLI, TOLI, etc.), I suggest a new acronym: BICOLI (pronounced bic-o-lee) to identify best interest contracts of life insurance and those life insurance products offering rates and terms and features and benefits that serve clients' best interests.
'HIGHLY SUBJECTIVE'Opponents of the DOL rule argue that defining clients' best interests is highly subjective and open to interpretation. However, because the DOL chose to define it in the context of prudence, the term has a very specific meaning based on about 200 years of case law, legislation and regulation.
While the DOL rule doesn't include life insurance, applying the BIC concept to life insurance gives advisers the opportunity to discuss the difference between prudently advising clients about their life insurance versus selling products designed to appear attractive during certain periods.
Ask clients and prospects: Does your life insurance qualify as BICOLI? Ask centers of influence and referral sources: Do their clients own or are being presented a BICOLI policy?The process for identifying a best interest contract of life insurance is broadly defined by the Uniform Prudent Investor Act adopted as the law of the land in most states.
A BICOLI policy is one where internal costs are appropriate, where expected performance is reasonable, and where reasonable care, skill and caution are exercised. Recognizing a BICOLI policy involves objectively measuring internal expenses against peer-group alternatives, evaluating performance expectations relative to historical performance of invested assets underlying policy cash values, and avoiding illustration comparisons now considered misleading, fundamentally inappropriate, and unreliable by financial, insurance and banking industry authorities.
OBJECTIVE AND SIMPLEObjectively measuring internal policy expenses is as simple as com- paring cost of insurance charges, fixed administration expenses, cash-value-based wrap fees, and premium loads against representative industry benchmarks for average policy expenses.
With as much as an 80% variance between best-available rates and terms and worst-available rates and terms, a BICOLI policy will have expenses that are 30% to 40% less than benchmark averages.
Evaluating performance expectations is similar to that for most other financial assets. For instance, best practice standards give us an acronym to remember that a reason- able RATE of return is most influenced by: Risk tolerances of the client, Asset class preferences, the Time horizon and Expected outcomes. A BICOLI policy has cash values allocated according to the clients' risk tolerance and illustrates a rate of return consistent with actual historical performance of invested assets underlying policy cash values.
BASIS FOR DECISIONSInstead of making decisions based on the questionable practice of com- paring illustrations, a BICOLI is identified by searching for the rates and terms and features and benefits that best meet the clients' needs, goals and objectives over time, to include but not be limited to 1) financial strength and claims paying ability of the insurer; 2) cost competitive- ness of the product; 3) stability of the insurer's pricing representations; 4) accessibility of cash value; and 5) actual historical performance of invested assets underlying cash values.
It's time for a new type of life insurance — a best interest contract of life insurance. So tell your centers of influence and referral sources how to recognize a BICOLI. And as you're helping clients and prospects, ask if their life insurance qualifies as a BICOLI.
Barry D. Flagg is the founder of Veralytic Inc., an online publisher of life insurance pricing and performance research, and product suitability ratings. Follow him on Twitter @BarryDFlagg.