Agents Find Hard-Hit Clients View Replacement As Viable Option

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For years, the term replacement has had a negative connotation, often associated with agents who churned policies to generate new commissions. Consequently, regulators have made it increasingly difficult for agents to replace an old life insurance contract with a new one.

But many successful veteran agents in the field today are finding there are instances where their clients situation has changed so much that replacement should be presented as a viable option.

Indeed, clients often bring up replacing a policy themselves. With continued downturns in the markets and low interest rates, many policyowners have changed their mind about their risk tolerance regarding their insurance portfolio.

Instead of a cash-rich permanent insurance policy, many policyowners now own a life policy with diminished returns that requires immediate attention. A lot of these policyowners are “fearful that its going to run out [of cash value],” says Joseph T. Molony, a member of the Northwestern Mutual Financial Network in Lancaster, Pa.

“We do what we can to salvage what they have and supplement it with new coverage,” he adds.

One option Molony has taken with some of these policies is to “beef up” the premium to a level where it will sustain coverage for the clients lifetime.

But even if it comes down to a replacement, Molony explains that in these situations, “it may cost more in the short run, but in the long run youll be better off.”

Increasing premium payments may not always be an option for those who purchased variable life policies during the height of the market. These clients have lost a lot of the cash value in their policies and now they want to know “what to do next,” says Bob Nelson, vice president of Grace-Mayer Insurance Agency, Omaha, Neb.

Some clients Nelson has met with have expressed the desire to get out of their variable life contract and get into something with more guarantees. “They said their appetite has changed,” he adds.

One of the problems is the fact that life insurance is, in theory, a product you own for your entire life–but how can someone whos 30 years old know what he or she will need by the time they turn 65, notes Nelson.

“Sometimes what they bought 10 years ago doesnt match what they want, or they need, as history has taken turns they didnt anticipate,” he says.

In these situations, Nelson reviews all the options available and educates his clients on the pros and cons of each option. “I believe you have a mandated obligation to help that client, and if it involves a replacement, you do it within the law,” he says.

The replacement regulations were put into place as a guideline for agent behavior, Nelson explains. Its extremely important for agents to provide full disclosure on all the options available before their client decides to replace a policy. Even though there are rules to be followed, the ultimate decision to replace is up to the client. “There are choices to be made here and rules are not meant to inhibit clients from making informed decisions,” he says.

“The rules give you certain responsibilities to follow, they also provide documentation that the client understands, and they also provide an alert to the company being replaced,” adds Michael O. Brooks, president of Brooks Financial, Timonium, Md.

Brooks visits with his clients on an annual basis and every year does a complete analysis of all their insurance coverage. “We evaluate what the insurance is there for, what function its serving, whats important to [our client] about it, and whether there is anything in the market that we should be considering,” he says.

Brooks explains that reviewing clients policies is a constant, continuous process. In addition to considering changes in customers needs and wants, he also considers whether there have been any issues with the carrier and the performance of the product. “This is a dynamic product today; its not static. And the carriers and vendors that service this product are dynamic, not static,” he says.

On some occasions, Brooks comes across a policy that was sold to his client as a minimum funded plan or as a vanishing premium policy. In some instances, these may need to be replaced.

But many times Brooks will advise clients to put these policies in a “cryogenic state.” This strategy involves lowering the face amount of the policy to a point where the current cash value will sustain the contract for the life of the insured, using guaranteed interest assumptions. Then assuming there are no health concerns, Brooks secures additional coverage on a guaranteed basis.

When an individual has had some changes in his health, replacement is not an option. The worst type of situation Brooks has encountered is that of a new client who has had some recent health changes, and the only in-force policy in the portfolio is an underfunded universal life policy.

“You just feel for these people,” he says.

Then the strategy becomes one of shifting assets around the estate to find money to fund this existing policy.


Reproduced from National Underwriter Edition, February 17, 2003. Copyright 2003 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.