The Family Market: Where Opportunity Lives

NEW ORLEANS – Canadian agent Wade Baldwin has a healthy respect for the big case life insurance market but he said he prefers going after the family and small-business markets.

That’s “where opportunity lives—with hard-working average North Americans who are at risk if they are unable to work and support their families,” he said in a presentation here at the annual meeting of the Million Dollar Round Table.

He pointed to critical illness insurance and mortgage/creditor life insurance as examples of the strategies he has built to achieve success in this market. He discussed many other strategies, but all of them focus on the needs of families and small businesses.

“You hear stories about advisors who wrote up ‘the really big case,’ the one with million-dollar benefits and big premiums and commissions,” said Baldwin, who is president of Baldwin & Associates Financial Services, Calgary, Alberta.

But the reality is, those cases are “few and far between and they don’t represent the typical client,” he said.

By comparison, middle income households in the U.S. and Canada represent more than a quarter of those nations’ respective populations. “That’s a segment size that appeals to me,” he said. It is also “a very underserviced market,” and “it’s done me well,” he said.

A 17-year MDRT member with three Court of the Table honors, Baldwin said he writes roughly 100 and 250 cases a year. Most of the coverage he writes is for life and critical illness insurance on Western Canadians in their late 20s through their 70s, with an average annual household income range of $80,000 to $150,000. The cases generate an average premium of $1,500 and $1,800.

Critical illness insurance idea

One strategy he uses in this market entails critical illness insurance. Already a big seller in Canada, this type of insurance is getting increasing attention in the United States as more carriers enter the market with critical illness riders of various types. The coverage pays a lump sum in event the insured is diagnosed with one of the critical illnesses specified in the policy.

Baldwin’s focuses on the “shared ownership” approach to the coverage. This entails the business and the insured individual having separate ownership of two components within the critical illness policy. These are for use by multiple business owners or the key people whom the business clients want to retain, Baldwin said.

Example: Assume the insurance benefit is $250,000 for a critical illness insurance policy on a key employee, Baldwin said. The policy is owned and paid for by the company. This protects the company with a tax-free benefit if that key person suffers a critical illness, he said. The company can bring in somebody to fill the role while this key person is getting treatment and going through recovery.

In such a situation, the critical illness insurance benefit covers the cost of replacing the employee. This means the company has insurable interest should this key person be diagnosed with a critical illness named in the policy.

“The company can help this employee out with the critical illness benefit if it chooses to, but any amount paid to the employee from the benefit would be taxed once it’s in the hands of the employee,” Baldwin said.

The concept becomes interesting, from an insurance standpoint, if the policy includes a return of premium on cancellation (ROPC) rider. This benefit is owned and paid for by the individual or key person insured by the base plan.

“Why would the key person want to do this…to own and pay for this portion of the policy?” Baldwin asked.

Because, he answered, if the key person doesn’t get sick in the 15 years it takes the ROPC rider to mature, the key person, as the individual owner of that feature, can cancel that entire policy with the permission of the policy owner. When that happens, all the money the key person has paid for his portion of the ROPC, as well as all the money the company has paid for the base policy is returned back to the insured person.

“This works really well to keep those key people in your client’s corporation for a period of 15 years,” Baldwin said.

Term versus mortgage insurance idea

Term insurance is a great way to market against mortgage insurance (and creditor insurance) in the family market, Baldwin said.

Banks typically offer insurance to customers who come in to arrange a mortgage on a house or secure a line of credit, he explained. But insurance agents “need to counsel clients to politely refuse the bank’s offer and talk to us about term insurance” instead, he said.

The reason is that the bank’s mortgage insurance covers the amount of the mortgage for a specific period of time. He gave an example of a policy with an initial coverage amount of $100,000. As years go by, the mortgage value declines, for instance to $50,000. However, the monthly premium for the insurance may be subject to increases, he said.

Then, if one of the insureds dies and the bank pays out on the mortgage insurance, the payout would be only $50,000. Even if both insured parties die, the mortgage policy would still pay out only $50,000, he said.

By comparison, an agent can offer the clients two individual term life insurance policies, “in some cases, for less than what it would cost for a first-to-die declining death benefit, underwritten to death.”

In that case, if one person dies, the benefit paid out is on the initial amount of $100,000, not the declining benefit (in this case, the remaining $50,000 mortgage). “And if both die, it would be counted twice, again on the original amount, not whatever is remaining on the outstanding mortgage,” he said.

In addition, he said, the monthly term premiums are guaranteed to remain the same throughout the life of the policy.

The term life policy approach is also advantageous for clients who renew their mortgages every few years, or who sell one home and buy another, Baldwin pointed out. “If they need new coverage on the new mortgage and their health situation has changed, their premiums may increase dramatically or they may no longer be insurable. But if they had purchased a 30-year term policy at the beginning, it’s not an issue.”

InsuranceNewsNet Editor-at-Large Linda Koco, MBA, specializes in life insurance, annuities and income planning. Linda can be reached at [email protected].

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