Should clients have adjustable insurance policies?

Adjustable insurance policies should offer value to consumers beyond simply addressing the desire to sign up for a new policy when premiums drop.

An adjustable policy is unlikely to save clients money if its premiums today are much higher than other policies on the market, says Byren Innes, PwC’s senior strategic advisor, Financial Services Consulting and Deals.

Premiums would have to go down dramatically in future to compensate. In that case, waiting until rates rise and premiums drop to buy a new policy would be a better bet. But if an adjustable policy is fairly priced, he says, it should beat buying a new policy later on.

Further, a client who buys adjustable insurance today will always have premiums based on her age at time of purchase. Someone who signs up for a new policy when premiums drop in future will be older when her payments are calculated, he notes. While the difference in premiums would be slight, adjustable would have the advantage.

The price of cancelling existing policies may deter some customers, but as time passes, the force of these penalties fades and in some cases disappears, says Innes.

The benefits of many whole life policies, such as cash values, aren’t activated until between the second and fifth years of a plan. Universal life plans have surrender charges for early cancellations. But the more years the policy is in force, the fewer people these deterrents will affect, he notes.

Burned by the plans in the past, some advisors will be more reluctant to embrace adjustable policies than consumers, adds John McKay, executive VP and actuary at PPI Advisory.

Many advisors who saw those premiums go up years ago are still practicing, he says, but a new generation of consumers is in the market. It’s a matter of re-educating advisors, he says. “We’re now in a very different environment […] Really, interest rates only have one way to go, and that’s up.”

Advisors may also feel they’re doing themselves a disservice by promoting adjustable insurance, as the policies preclude the possibility of re-signing clients when the interest rate changes. But advisors shouldn’t think that way.

A higher interest rate will bring other opportunities for sales as inflation erodes policies’ face values, says Jason Pereira, advisor at Bennett March. “They’re probably going to need more insurance anyways, and another policy,” he explains.

Advisors shouldn’t feel entitled to signing commissions, adds Innes. “To say that the advisor is losing out, I have a hard time buying that. He’s missing out on a windfall, but the windfall wasn’t his in the first place,” he says.

And, he adds, it’s early times. “There will be better and better versions of these coming out, more innovation, and more accountability to the consumer.” Read more: INSURANCE COMPANIES LOOK TO THWART RE-SIGNING RUSH<