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Living Benefits: Key To The Life Insurance Future

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A Sept. 6, 2005, report from National Underwriter’s Online News Service noted this living benefit development: New York has issued accelerated benefits rules mostly pertaining to accelerating a death benefit for long term care needs.

The news was brief, but the ramifications will be huge for the industry.

For years, some insurers have offered living benefit riders on life insurance contracts that paid out for terminal, chronic and sometimes even critical illness. Generally these riders cost nothing to add to the contract; as a result, a discounted death benefit is available, on a tax-favored basis, to pay for living benefit needs.

But New York and some other states have been holdouts on allowing all of these benefits to be available. Many insurance companies have been perplexed by these states not allowing what appears to be a tremendous living benefit for insureds.

Now, a major state has shifted position. That is an important milestone.

Meanwhile, product development has been continuing in this area. A few insurers have features that go a step further than basic acceleration: The companies provide additional cost riders that don’t discount the death benefit for chronic and/or critical illness protection. Generally, these riders pay 2% of the death benefit per month for 50 months for qualified expenses.

Some insurers even offer more riders that would provide additional benefits after the initial death benefit is exhausted.

While these riders are not a replacement for stand-alone-type coverage, they can provide a tremendous benefit for customers who just can’t afford buying stand-alone coverage for every possible type of illness. The riders also provide another reason to think twice about surrendering or selling an existing life insurance contract.

A recent study from LIMRA International, Windsor, Conn., “Life and Long-Term Care Insurance Combination Products,” includes opinions from companies on why consumers find these plans appealing. They are enlightening:

o Convenience.

o 2-for-1 option for life and LTC insurance.

o Win-win result. Win if you don’t need LTC (via death benefit). Win if you do need LTC (via LTC coverage).

o Someone will receive a payout–unlike traditional LTC insurance, which could be purchased but never used.

o Eliminates “use it or lose it” objection common to traditional LTC sales.

The trend really makes sense. By offering more “living benefit”-type riders, companies increase the ways customers can see value for themselves (and not just for their beneficiaries) of buying a life policy.

Of course, we’d all like to think that Americans are completely altruistic and would never put their needs above another loved one. But in reality, life insurance remains a tough sell. Overall, individuals remain grossly underinsured, yet industry sales are not increasing significantly.

In such an environment, any rider that can provide living benefits to the insured will certainly help sell the contract.

Also, the insurance industry is currently unsure about what to do with the expanding life settlement business. Given that, the more the industry can offer the customer as far as usable benefits are concerned, the less likely the customer will be to sell the policy off to a third party.

For the past few years, the insurance industry has been focused on transaction-oriented sales, which typically do not focus on usable benefits. For example, the number one selling life insurance contract has been universal life with no-lapse guarantee riders, sold based on price. In most cases, these sales are nothing more than barebones term-to-100 coverage. There are times when such coverage is needed, especially if a contract is being held in an irrevocable life insurance trust and cash values will never be important. But the notion that term-like premiums equate to “inexpensive” is not really the case in these contracts.

The point being, experienced producers recognize that “you get what you pay for” with insurance. This has been difficult to get customers to understand.

But the more benefits that can be added to a life insurance policy–benefits that can perhaps really benefit the insureds during their lifetime–the more successful the producer will be at instilling that message, and certainly, the happier the customer will be with the coverage. That should be key to the life insurance future.

Michael S. Pinkans, CFA, CFP, CLU, ChFC, is a registered representative and investment advisor with Equity Services Inc. and vice president of sales and promotion at National Life Insurance Company, Montpelier, Vt. His e-mail address is [email protected].


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