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October 02, 2005 at 04:00 PM
“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.
