Life insurance is a critical part of many high-net-worth individuals' financial strategies. However, for some clients, the long-term financial commitment can create hesitation. This is where innovative product designs, such as skip premium life insurance, come into play. By providing clients with flexibility, skip premium designs can alleviate cash flow concerns while potentially increasing returns on their investment.

What are skip premium designs?

Skip premium designs allow clients to pause their premium payments for several years after the policy begins without sacrificing coverage. This break in payments can be a game-changer for clients with varying cash flow patterns or concerns about long-term financial commitments.

Clients who opt for skip premium designs initially make a minimal upfront payment followed by an anticipated period where no additional premiums would be due. This period, which can span several years, allows the policy to continue accumulating potential cash value, providing uninterrupted coverage and potential growth. Once the premium-free period ends, regular payments resume.

The benefits of skip premium designs

Improved cash flow management

Skip premium designs provide much-needed relief for clients with unpredictable or uneven cash flow. Entrepreneurs, for example, may experience years of strong earnings followed by periods of reinvestment or fluctuating income. The ability to skip premiums while maintaining life insurance coverage offers security to clients who might otherwise hesitate to commit to a policy.

Enhanced internal rate of return (IRR)

Skip premium designs offer an opportunity to increase the internal rate of return (IRR)－the annual growth rate that an alternative investment would have to yield to match the benefit that the life insurance policy provides. These policies may grow even when premiums are paused. When paired with features like an increasing death benefit or a return-of-premium (ROP) rider, the policy’s growth potential is amplified, making it an attractive option for clients seeking to optimize their financial portfolios.

Long-term value

Life insurance is often viewed as a long-term investment, and skip premium designs emphasize this by allowing clients to focus on long-term benefits without the immediate strain of regular premium payments. By smoothing the financial commitment over time, clients are more likely to recognize the true value of their policy, ensuring they maintain coverage throughout their lives.

Client flexibility

Whether a client’s financial goals shift over time or they face unexpected life events, the option to pause payments can keep them invested in their policy. It also allows advisors to offer more tailored, client-centric solutions.

Who is skip premium design right for?

Skip premium designs aren’t suitable for everyone, but they are particularly appealing to certain client demographics:

• Entrepreneurs: Business owners often face varying income streams, making the flexibility to skip premiums during lean years especially appealing.
• Clients with liquidity concerns: Skip premium designs can ease these concerns by reducing upfront costs and spreading out the financial commitment.
• Clients focused on long-term planning: This design benefits individuals seeking to protect their assets and families while gradually easing into their financial commitment over time.

How to present skip premium designs to clients

Presenting skip premium designs to clients requires clear communication about the short- and long-term benefits. It’s important to emphasize how these policies:

• Improve cash flow during lean years without sacrificing coverage.
• Maximize returns through strategic premium pauses, leading to increased policy value.
• Offer flexibility, providing a personalized financial planning experience.

Case study to share with clients

Client profile

John, a 45-year-old tech entrepreneur, doesn’t have a steady income stream while expanding his business. He needs life insurance but is concerned about committing to regular premium payments.

The solution

John’s advisor recommends a skip premium design, which allows him to pay a minimal upfront premium and pause further payments for five years. This gave him the flexibility to focus on his business without compromising his life insurance coverage.

The outcome

John maintained uninterrupted coverage, and his policy’s internal rate of return (IRR) increased during the premium pause. By the time payments resumed, his business had stabilized, making the process financially seamless.

Key considerations for advisors

While skip premium designs offer numerous advantages, they also come with important considerations. Advisors should evaluate:

• The length of the premium pause period and the client’s ability to resume payments in the future.
• Whether the policy’s value during the pause period will be sufficient to meet the client’s long-term objectives.

Final thoughts

Skip premium designs offer a powerful tool for life insurance advisors looking to provide flexible, high-value solutions to their clients. By incorporating these designs into your portfolio, you can help clients manage cash flow more effectively, increase the internal rate of return on their policies, and address hesitations related to long-term commitment.

Next steps

Contact us today to explore customized life insurance solutions that fit your clients' unique financial needs.