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What To Do If Clients Rebuff Inflation Riders & Options

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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.

Yet history has shown that inflation is always creeping up, says Tab Fulton, assistant vice president–product sales support at Jefferson-Pilot Financial, Greensboro, N.C. “Inflation is the invisible cost. You dont see it, but it builds up over time.”

Because of that, he counsels producers to talk about this with clients and to suggest ways clients can maintain the purchasing power of their dollars. Point out how clients can use equity investing for 10-, 20-, and 30-year periods to achieve the best returns, Fulton advises.

“If clients put their money in a CD, with inflation and taxes on the CDs gain, they are moving backward.” But if a client has a short-term need to fund, inflation is not as big a concern, he allows.

In any case, Fulton says, find a way to discuss inflation at some level. “Absolutely make them aware. Show them specifics of how inflation can hurt them over time.”

This includes recommending features such as the “automatic increase rider” in Jefferson-Pilots new Ensemble VUL policy, he says. Such riders allow owners to increase the policys specified amount annually by a set percentage. Its like an inflation bridge, says Fulton, explaining it allows owners to adjust coverage to appreciation in their assets, whether caused by inflation, improvements, acquisitions, or other forces.

And, if the clients subaccount choices seem too conservative for their age, risk tolerance and time horizon, “point out what has happened to the CPI. Show them what a dollar will buy today as compared to 15 or 20 years ago. Point out how the cost of bread has risen.”

Concern about changing attitudes regarding inflation was the very reason New York Life created a new benefit increase option rider for its LTCSelect Premier policy, says Ken Grubb, senior vice president–long term care.

This is not a fixed increased rider, though the policy has those available, too (both simple and compound). Rather, this rider keys policy benefits to growth in the CPI-Uthe index most people already use to measure inflation, Grubb says.

Every year, owners of policies having the rider receive a statement telling them how much of a benefit increase they are eligible to buy (at issue-age rates), based on the CPI.

If the CPI doesnt go up in a particular year, then no benefit increase will be offered.

If the CPI does goes up but the owners dont want the offered increaseperhaps because they believe inflation will be flat or even negative–the owner can decline the offer. In that case, the premium and benefit level stay where they are, Grubb says.

This rider addresses the emerging questions about inflation, Grubb maintains, because “it lets policyholders choose what to do once a year.” If they decline one or more offers but later change their mind, deciding they now want inflation protection, they can then take the next increase offered, he says.

“Weve been in a low inflation environment for several years, and people dont know what will happen with inflation in the future,” Grubb observes. But they do know that, if they select a fixed 5% compound inflation rider, they may end up buying too much coverage. Or if they take no inflation rider, they may not have enough. This is the uncertainty the rider addresses, he says.

The new benefit increase option rider “also helps make coverage attainable to younger people,” contends Beth Ludden, marketing vice president-LTC. Younger consumers can buy smaller amounts of coverage, which is less costly, and then add the CPI increases as they are able, she explains. “That makes it a viable purchase for the long term,” she says.

Inflation is an important issue when working with annuity clients, too, says Peterson of Mutual of Omaha.

His companys newest entry in that area is an Income Access. Its an income annuity offering not only a 3% compounded annual inflation option, but also a nursing home rider (it pays out increased benefits for five years while the insured is in a nursing home), and a “PERC” (payment enhancement risk class) method of assessing risks for clients who might otherwise seek an age-rated IA.

(The PERC feature says clients will receive a 10% bump-up in monthly payout, if they fill out a short medical questionnaire. It also lets those clients who have serious medical conditions receive an additional 10%–if they sign an authorization allowing the insurer to obtain medical information about them.)

The inflation rider is an obvious response to inflation. But the other two featuresthe nursing home rider and the PERC”provide a way for clients to meet the rising cost of living at a critical time in their lives,” Peterson says.

And, to help producers with their own increased costs associated with servicing this IA, Mutual of Omaha will pay the agent a trailer commission on every payout made to the client, he says.

“Dont give up on clients who initially push inflation features away,” urges Bentley, the Kentucky producer. “Use the numbers in their customer profile to show them the impact.” Boomers especially need to consider this, he adds, noting “it would be doing them a disservice if we did not bring it up.”

Reproduced from National Underwriter Life & Health/Financial Services Edition, September 2, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.


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