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Chock Full Of 'Advice'

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Today’s advice-givers seem to be chock full of recommendations for consumers on how to cope with recession.

For example:

o Cut out the extras: stop dining out; drop gym memberships; and forego vacations.

o Target the basics: use the cheapest phone service; pull the plug on not-in-use appliances; stop/limit holiday gift giving; only buy generic foods, bundle up (phone, TV, internet); and run the dishwasher less often or not at all.

o Protect your finances: stay away from equities; avoid new financial purchases; and tap rainy day accounts as a last resort.

Then, there’s Feed the Pig, a campaign from the American Institute of Certified Public Accountants and the Ad Council. It urges adults, especially young adults, to save, save, save. (FYI: This may be working since, in December 2008, the personal savings rate rose to 3.6% of after-tax income, the highest level since May 2008, when tax rebate checks pushed it up to 4.8%, says the Commerce Department.)

When it comes to insurance, advice is all over the place, e.g., withdraw money from annuities; loan out, cash out or sell your life policies; take out high deductible and/or low-limit auto and homeowners policies; elect high-deductible health insurance (and use a health savings account too); seek reductions in long term care policy benefits; make hardship loans from 401(k)s; and/or put off certain insurance buys altogether.

Gulp. That’s my own reaction when I hear those “insurance tips.”

You see, all too often, these words of insurance advice are offered without qualifiers–namely, that there are possible consequences to policy changes that the consumer must also consider. The “experts” make the policy change solutions sound so simple that it creates an inaccurate impression of what will likely occur once the deal is done.

To be fair, some advice-givers do include admonitions to “see your financial advisor” or “consult your tax advisor.”

But that is hardly sufficient information when coming on the heels of, say, a recommendation that a person consider taking withdrawals from an annuity. Why not also mention that there could be early withdrawal penalties and tax consequences? What about the hit to long-term savings?

The danger is, without mentioning the possibly unwanted consequences to recommended insurance “solutions,” these advice-givers create expectations that the insurance business simply cannot meet.

For instance, it’s true that people can take out loans from their cash value life policies. But hello–the policy owner will be charged interest on that loan (unless the contract is a universal life with a wash-loan provision, of course). That is a contractual provision. If the policy owner thinks otherwise, the person will be in for an unpleasant surprise upon learning the score later on.

The problem is compounded by the fact that, for many consumers–perhaps most consumers–insurance continues to be a very complex subject. So, they will need to hear the cautionary words many times, in simple words, in order to absorb it.

The advice-givers should be doing this as they roll out their insurance tips for consumers. But since they rarely do that, insurance professionals, at both the advisor and provider level, need to step forward and inject some reality into the discussion.

They need to communicate, by whatever means available, that while many modern policies are flexible enough to allow for changes, making changes to insurance is not a no-brainer process.

If invited to appear on a talk show on the topic, for instance, be sure to mention that those simple-sounding tips still can have consequences–negative ones in addition to the short-term goal of, say, cutting expenses.

If contributing an article or talking to community groups, include the pros and cons of cost-saving insurance actions.

If clients ask the what-if questions, take the time to unpack the issue.

Of course, for insurance professionals, talking consequences with customers is a routine part of client service.

But what’s needed now is more than routine discussion. What’s needed is a concerted, industry-wide effort to let people know that cutting insurance back or cutting it out is not the same thing as cutting out one restaurant meal per week.

They need to be reminded that, while many modern insurance policies allow for loans, withdrawals and benefit reductions, such changes need to be thought through very carefully in order to bring maximum advantage to the policyholder.

The goal should not be to dissuade people from making policy changes. Rather, it should be to provide a balanced view of such changes, because more informed decisions will help make for better outcomes for all concerned.