As average global temperatures increase, the insurance industry is undergoing its own form of “climate change.” In the past six months, a number of insurers – such as Standard Life Assurance Co. of Canada, the Montreal-based subsidiary of Edinburgh-based Standard Life PLC; and Kingston, Ont.-based Empire Life Insurance Co. – have raised premiums and cut options on life insurance policies and other products in an attempt to remain profitable in the low interest-rate environment.
For example, a return of premium option on life insurance is a thing of the past, while ROP on critical illness insurance and guarantees on segregated funds and guaranteed minimum withdrawal benefit products have been reduced. As a result, many financial advisors find that the range of insurance products they can offer their clients is becoming less attractive.
Asher Tward, vice president of estate planning with Toronto-based TriDelta Financial Partners Inc. used to be able to offer his clients a universal life policy with an ROP at death. That meant the client ultimately could gain more life insurance coverage at no cost to his or her estate once the policy was paid out. But with ROP no longer available, Tward says, he must work harder to find ways to make the most of a client’s estate.
“With fewer products and guarantees to work with,” he says, “coming up with individual solutions is more challenging.”
Below are some suggestions from Tward and other advisors on making the most of a shrinking insurance product shelf while meeting the needs of your clients:
– Stick to the basic coverage needs. No matter how limited the options on life and health insurance policies get, says Robert Franklin, president of Toronto-based Creative Planning Financial Group, focus on justifying the basic needs of your client regarding the product. That way, he or she will still most likely get the coverage.
“The priority is to fulfil the client’s primary need,” Franklin says, “and then start worrying about how to tack on the bells and whistles.”
Think about policies in today’s market the same way consumers think about buying cars, Franklin suggests. Once clients recognize their need for a specific type of insurance coverage, addressing the amount of coverage is the second consideration.
“The [options] on an insurance policy are like deciding between a BMW and Ford,” Franklin says. “First, you need to decide on getting a car, and then you start talking about what type of car it’s going to be.”
– Do your homework. The lowering of guarantees on insurance products should motivate advisors to do some research, Tward says.
Whether an insurance product is being used for estate planning or income replacement purposes, he says, he does his own internal rate-of-return calculations on the investment. The main comparison is between the premiums the client will be putting into the policy vs what he or she will get out of it.
“You have to go beyond offering clients what’s in the marketing brochures,” Tward says, “and find the best individual solution. Or else you are really just peddling product.”
For income replacement in particular, Tward looks at prices of life insurance products as well as their convertibility options. Does the policy allow the client to convert a term insurance policy to permanent coverage down the road? If so, how does the price of that convertibility compare among insurers?
– Try combining products. If your client is looking for a large amount of life coverage, you may need to combine multiple products to meet his or her overall protection objective, says Chris Karram, co-founder and financial advisor with Safebridge Financial Group in Toronto.
“Convertibility options are in decline,” Karram says, “so you may have to get creative and combine two separate policies in an insurance portfolio.”
For example, if your client requires $1 million of permanent life insurance but cannot afford the premiums, you may have to cover $750,000 of risk via term insurance if the immediate need is income protection while your client’s children are dependents. Then, a small amount – $100-$200 a month – can go toward a permanent insurance policy with an investment component to cover the other $250,000.
“It takes more creativity,” Karram says, “but there is always a way to get a client covered.”
– Use rising premiums as a motivator. Some insurers have increased the premiums on their life and health insurance products a number of times in the past six months – some by as much as 30%. For clients sitting on the fence about getting an insurance policy they know they need, Karram says, warn them that prices for that coverage will only rise.IE
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