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September 01, 2002 at 08:00 PM
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Its true, inflation isnt the double-digit rough rider it used to be back in the 1980s.
Now, some consumers apparently think its a phantom rider, so theyre starting to rebuff suggestions that they incorporate inflation riders, options, and concepts into their insurance policies.
Marketers have a piece of advice for advisors who hear such rebuffs: Dont let it slide, they say. Even though todays inflation rates are very low, educate clients about how corrosive inflation can be.
Not everyone ignores inflation features, of course. For instance, many LTC buyers in the 50 to 70 age group are receptive to the riders, says Dale Lazzarone, owner of Lazzarone Insurance Services, Reno, Nev., and an insurance broker with New York Life. “In fact,” he says, “about 95% of my LTC clients purchase an inflation feature.”
Still, marketers agree consumers in certain market sectors and planning scenarios are starting to snub the featuresyounger people, say, who have not yet witnessed double-digit inflation in their adult lives or people who think short term.
Advisors need to be sure to broach the topic with clients, says Brad Peterson, vice president–brokerage general agency distribution at Mutual of Omaha, Omaha, Neb. “Clients need to understand the impact of their decisions, so they wont make decisions out of ignorance.”
Thats important, agrees Brad Parks, because some consumers “make a big mistake” when considering the riders. “The mistake is, they tend to think in three- to five-year planning cycles, instead of longer term.” Parks is vice president of The Hanleigh Companies, Dubuque, Iowa, and president of the Disability Income Advisor and Consumer Association.
When writing disability income insurance for professionals, for instance, agents should be sure “the planning cycle is from date of purchase until, say, date of retirement,” Parks says. Ideally, these people should be offered “to age 65″ or lifetime benefit DI plans with inflation riders attached, he says.
On the other hand, he says, for clients with short-term needs, or who prefer shorter term DI plans (which pay claims for only three to five years), inflation protection is not as important–because inflation has less time to erode values.
He cites the case of a client who did buy an inflation rider with a “to age 65″ $2,000 monthly benefit DI. Later on, the client became totally disabled, Parks says, but in the following 12 years, the mans monthly payments have risen steadilyfrom $2,000 to $5,700. “Without that rider on the DI, my client would have had a very hard time taking care of his family,” Parks says.
Inflation should be an issue for clients today, agrees producer Donald E. Bentley, “but not all understand it that way.” Thats why he, too, advocates educating clients on cost of living issues.
“The rate of inflation is not as high today as it was in the past,” allows Bentley, who is a member of Donald E. Bentley LLC, Mt. Sterling, Ky., and a producer with Jefferson-Pilot Financial. He alludes to the late 1970s and early 1980s when inflation soared into the double digits. Even though todays rates are much lower, “people need to look to and plan for the future,” he says.
A $100,000 life insurance policy written today on a 40-year-old just might end up worth no more than, say, $20,000 (in todays dollars) by the time the person dies late in life, he cautions. So the death benefit has to be structured in a way that anticipates inflation over the long term.
When working on variable universal life cases, Bentley says he favors using the increasing death benefit feature to help do the inflation planning. “We ask our clients to choose the average inflation rate they expect to see, and then we plug that into our calculations” for a suitable death benefit (Most choose the historic average, 3% to 4%.)
If a client is less educated about inflation, “then we educate them,” Bentley says. “We show them how it works on the computer. We show them the cold hard facts.”
Even the more astute clients, who do understand how inflation works, sometimes need help, with, say, understanding inflations long-term impact on heirs, Bentley says. Those clients need to understand that “if they dont plan for it, they could end up cutting their children out” of what they had planned to leave them, he says.
The fact that inflation rates have been relatively low for a span of several years can be a disincentive to purchasing inflation riders, contends Paul G. Wesling, director–DI market development and sales at Union Central Life Insurance Company, Cincinnati. He alludes to inflation riders in DI policies that increase benefits while the insured is on claim.
Statistics published recently by the U.S. Department of Labor provide telling evidence of inflations current calm: The Consumer Price Index for all Urban Consumers (CPI-U)a widely used measure of inflation–was just 1.5% higher than its July 2001 level, on an unadjusted 12-month basis. On a seasonally adjusted basis, the overall CPI-U rose just 0.1% in July, as it did in June.
While some sectors of the economy have produced steeper increaseshealth care, for instanceoverall inflation rates have been in the single-digit zone for the past several years.
