“You’ll need to decide how much your peace of mind is worth.”
For all I knew, this could have been an insurance product discussion, so I tuned in.
It turns out that Bob was talking with John, who was wondering about whether to purchase a 3-year warranty on a new tech product for the family.
Their exchange echoes conversations going on in hundreds of insurance offices across the country in the past 2 years. It also brings various issues about insurance guarantees into sharp focus.
You see, Bob is a programmer. He doesn’t buy tech warranties, because he feels confident he can resolve any problems his equipment presents. But John is a small business owner and a self-described tech-user, not a tech-pro. He says he would not know how to fix the item and he worries that it would cost him a bundle to get help.
Bob’s response was spot-on: “If you buy the warranty, you’ll probably be happier. If something goes wrong, you’ll know what to do and where to call.” But, he added judiciously, “no one can decide this for you but yourself.”
Insurance consumers have to make the same kind of decision. The proliferation of guarantee and return-of-premium (ROP) features has expanded guarantee options to levels unheard of even 5 years ago (see NU, Sept. 25, 2006). So now, clients need to decide whether those features are worth their cost. And advisors need to learn how to facilitate the pro-and-con analysis.
Make no mistake, insurance guarantees do have a cost. That is so when the features are offered in extra-cost riders–for instance, with variable annuity living benefit guarantees and long term care return-of-premium guarantees. It is also the case when guarantees are built into policies (like fixed annuities)–because such contracts typically cost more or have lower returns than comparable policies without the embedded guarantees.
But not having guarantees has a cost, too. This comes in the form of potential future frustration and expense, as per John’s concerns.
This is not always a simple point for advisors to convey. Yes, they always can say something similar to what Bob told John, with the appropriate financial twist. But the advisor faces greater liability for the recommendation and communication than does a friend talking with a friend.
Also, insurance guarantees are ripe for inaccurate portrayal. That’s because today’s guarantees vary in length, terms, conditions, and proportion. It seems no two are alike.
For instance, one ROP guarantee might return the entire premium paid, less claims or withdrawals, in 15 years, while another may return only a portion of the premium or may do so at a different time. Another ROP might require investment in certain accounts while still another may have no such stipulation.
It would not be hard to imagine an advisor speaking about a certain ROP guarantee when another ROP is actually in the product, or speaking about one version of a ROP when the current contract has another version or a choice of versions.
It also would not be hard to imagine a customer getting confused about what is guaranteed and what is not. Nor would it be hard to imagine a client’s “perfect memory” about the feature suddenly differing sharply from what is stated in the contract.
Agreed, a financial professional who is conversant with insurance will be able to dissect the guarantees and do proper client education regarding them. Other advisors have access to marketing organizations, insurers and broker-dealers that do the due diligence for them. In those cases, the guarantees should be well positioned and sold.
But those lacking technical background or access to expertise would be wise to get an education on insurance guarantees before offering them. Also:
? Assess the client’s comfort level with guarantees along with goals, needs and objectives. Some clients may not want or need a guarantee, due to their own investment expertise or life situation.
? Keep full disclosure top of mind when offering guarantees. A “present it and forget it” exchange is fraught with risk–that the client may indeed forget it, and at the most inopportune time. A better approach is to “present it, explain it, and get the customer sign-off.”
? Leave the customer feeling good about taking the guarantee (or not, should that be the decision). Saying something like “this guarantee is good to have if you don’t know anything about insurance or if you have a lot of uncertainty” hardly qualifies as affirmative. Better: “By selecting this guarantee, you are choosing to ensure your peace of mind.”
What Bob said is true, that only the customer can decide if a guarantee is worth the cost. But where insurance guarantees are concerned, input from a skilled and trusted advisor is essential.