“I Want to Cancel My Life Insurance Policy!”
As the touch economy wears on, some consumers have been calling their advisors with a previously unthinkable request….I WANT TO CANCEL MY LIFE INSURANCE POLICY!
SOME EXPLAIN they were laid off—or they are worrying about becoming laid off—so they want to economize now by dropping their life insurance. Others say they have retired and don’t need life insurance anymore or can’t afford it. Still others say they don’t have enough money to put into their underperforming life insurance policy to keep it in force.
Whatever the reason, the calls are raising a question for advisors: How best to respond? Several advisors contacted for this story offer some ideas below.
This is no stampede, advisors point out. Some, such as Barbara B. Norman, senior vice president, Aquesta Insurance Services, Denver, N.C., report no such inquiries at all.
But Jeffrey Wasserman, managing director and senior vice president at Oswald Specialty Life, Cleveland, Ohio, has noticed an up tick in calls to cancel during the past 24 months.
When Wasserman checks them out, however, he says he finds that “some clients really want to drop the premium due to cash flow problems, but they still want to maintain coverage.” Others are just worrying about the economy, he says. For instance, one man asked to cancel because he had heard that the insurer’s rating was being downgraded. “That insurance company maintains a Triple-A rating to this day,” Wasserman adds wryly.
Still, life insurance is often the first thing that many people think about cutting back on if there is a recession or job loss, says Jo Ann Favia, principal of Financial Solutions Midwest LLC, Villa Park, Ill. Even those who do have cash can become “very cautious,” to the point that “they don’t want to lock into any payments if they don’t have to,” she says.
It’s not that Americans don’t like or want life insurance. A 2006-2008 survey of more than 9,000 mid-American families found that people with enough life insurance to cover their debt levels and household income until retirement express “much higher levels of satisfaction with their life insurance and feelings of financial security overall,” says First Command Financial Services Inc., Fort Worth, Texas, which commissioned the survey.
Rather, people who are suffering financially want “a temporary relief valve,” says Terri Kallsen, executive vice president-strategic development at First Command. But they also want to know that, if they die during that time of struggle, they are still covered, she says.
Allan G. Hancock, president and chief executive officer of The Hancock Group, Inc., Altoona, Pa., agrees. “My experience is that 95 percent of people don’t want to lose their insurance, especially since they’ve already paid for it,” he says.
An August 2010 survey from First Command illustrates the mixed mood. Fewer than 5 percent of Americans said they changed their personal life coverage as a result of the economy, the researchers say.
Another survey, from LIMRA, provides the broader context. It shows that almost a third of American households now have no life insurance at all—down from two in 10 households six years ago—and that life insurance ownership has dropped to a 50-year low.
With unemployment near 10 percent and many Americans living paycheck to paycheck, the need for the protection that life insurance provides has never been greater, writes LIMRA president and CEO Robert Kerzner in the September 2010 InsuranceNewsNet Magazine.
What To Do
Kerzner is therefore urging the insurance industry to “reach and teach” consumers about the necessity of having adequate life insurance.
Life insurance advisors appear to be taking the same tack. “The last thing you want to do is drop life insurance due to a financial crunch,” stresses Norman.
Favia says she typically educates clients, right from the start, about the value of over funding their universal life (UL) policies (so the cash values can sustain the insurance in down markets).
Kallsen employs a financial planning approach, emphasizing the importance of ongoing risk management that takes the budget, goals and cash flow into account and that builds life insurance into that plan.
Still, “it’s a sticky wicket if the client really can’t afford the premium,” concedes Alan Meltzer, founder and principal of the Meltzer Group, Bethesda, Md. “If the person has permanent insurance, you might have to go to term insurance. If the person has poor health or is uninsurable, you might need to ask a family member to help with payments.”
The advisor needs to look at every case, individually and slowly, before deciding how to proceed, Meltzer stresses. The strategy chosen will depend on the particulars.
Here are Some Ideas from a Variety of Advisors:
If the client is laid off or worrying about the economy:
• Help clients articulate their goals.
Clients usually need help on this, Kallsen says. Then discuss risks that could undermine the goals and how life insurance helps mitigate some of the risks.
• Ask questions. For instance, ask the client the reason for the request, Meltzer says. Is it a short- or longterm problem? What is the client’s age? Health status? Other personal details? What options are available in today’s market? Tailor the solution with the answers in mind, he says.
• Listen. “Send the client the message that ‘I am with you and I understand what you are going through,’” says Hancock. “This helps the client open up, so you can get to the real issues. Sometimes it’s something completely different, such as a separation from the spouse.”
• List the tactical options. For instance, if the client has permanent life insurance with accumulated cash value, consider taking a policy loan against the cash value to pay premiums or help with shortterm financial needs, says Kallsen. If the person dies before the loan is repaid, the remaining death benefit goes to the beneficiaries. “This way, the client doesn’t risk the worst that could happen.”
• Evaluate the current need. If the client still needs insurance and if the contract is a UL, explore taking out a policy loan or dropping the premium payments for a while, Norman suggests. If it’s a term policy, look at dropping the face amount rather than canceling the policy.
• Could the parents help out? Sometimes parents are willing to pay the premium for an adult child who has been laid off, especially if grandchildren are involved, Norman says.
• Consider a minimally funded UL with a lifetime guaranteed death benefit. “This is for those who want to cut costs now,” Favia says. A maximum funded UL with a no-lapse guarantee would be much better, she says, “but if the client resists, work with the person to ensure that the client stays covered.”
• Downsize. If a permanent policy has cash value, explore changing it to a reduced paid-up status so the client no longer has to pay premiums, Wasserman suggests. If it’s a term policy, consider reducing the face amount so the premium is less expensive.
If the client is at or in retirement:
• Listen and understand. “Don’t view the request to cancel as a personal rejection,” advises Hancock. “Instead, find out why the client purchased the policy in the first place, and ask what has changed.”
• Put the facts down on paper. Include policy details, original need, current situation, health, medications, finances and so on, says Hancock. “When clients see the list, they often say ‘I need to keep this insurance after all,’” he says.
• Discuss surviving spouse issues. Favia says she talks with couples about what would happen if one spouse dies. “Ask, how will your spouse be able to manage financially? What if there is a recession at that time?” Remind them that the survivor will have only one Social Security check coming in, adds Hancock. Then discuss how life insurance on the first to die will help replace the missing amount and/or pay for long-term care, he says.
• Discuss longevity. Point out that the client could live 30 more years and discuss the cash flow needs for that, says Kallsen. Point out how different products will address those needs in the short, medium and long term. When clients see life insurance is in the long-term bucket, she says, “they generally don’t worry too much about it anymore.”
• Exchange a policy having cash value for an annuity. This eliminates future premium payments, and it puts the cash value into a true savings vehicle, Wasserman says. The tax-free exchange can work for clients who don’t need the cash, he adds.
• Use the client’s existing assets. For instance, suggest that the client take withdrawals from their individual retirement account and use the money to pay part, or all, of the life insurance premium, Hancock says. The withdrawals will be subject to income taxes but the life proceeds will not, he adds.
• Take out a policy loan. The money from the loan on a permanent policy is income-tax free; the client never has to pay back more than the interest; and the client can be sure that there will still be some death benefit left for heirs, Kallsen says.
• Do a “mathematical solve.” That is, suggest that the client seek a loan from the local bank to pay the premiums, says Meltzer, noting that an 85-year old client did this successfully. “Banks generally don’t mind making such loans because they’re a sure thing. It’s also better for the client to pay those premiums than to lapse or borrow on the policy.”
• Consider a life settlement. Selling the policy may be an option for clients age 70+ who no longer need the policy, says Wasserman. One 82-year-old client who wanted to minimize cash flow sold half of her $5 million UL policy, he recalls. That left $2.5 million for her heirs, and she no longer had to make premium payments.
If the client is concerned about underperforming contracts:
• Consider term life insurance. This is a less expensive option for a particular time frame, points out Kallsen. “It does not build cash value and has no option for loans,” she allows, “but to have some insurance is better than to have none.”
• Drop the face amount. This reduces the premium, Hancock says. “Most people don’t know they can do that, but a well-trained advisor does,” adds Kallsen.
• Run the numbers. A 59-year-old woman was upset that her UL policy was not paid up in 20 years, as originally projected, recalls Norman, who says she did not sell the original contract. The client wanted to replace the UL with term insurance, so Norman ran the numbers. She says she found it would cost $200 a month for a $50,000, 10-year term policy that would build no cash value, whereas the original $50,000 UL was costing only $95 a month. The client decided to keep the UL, Norman says.
• Exchange an older UL for a new one. If an insurable client has an underperforming UL, consider exchanging it to a new one with a secondary guarantee for life, suggests Hancock. “If the older policy was issued in the 1990s, before rate classifications expanded, standard-rated clients might be able to qualify for the new policy at today’s lower cost ultra rates,” adds Meltzer.
• Treat the life insurance as an asset class. “Educate clients that they need to review and audit their life policy performance as they do other asset classes,” Wasserman says. Sometimes, the audits reveal that a policy is underperforming and that the client may do better with a different carrier or by remodeling the existing policy, he says.
There are always a few people who want to cancel, even after discussing the pros, cons and options, Hancock concludes.
His advice? “As long as they understand the ramifications, go ahead and help them get it done. Be a decent person, and don’t argue. You want them to come back when times are better.”
Talking about this “is not the most comforting conversation to have,” concedes Wasserman. “But when a client wants a review or to consider other options, we do help them.”
In general, he says, dropping a life policy is “only for someone who is at the end of the road, with no place to go.”
Linda Koco, MBA, specializes in writing about life insurance, annuities and income planning. Her e-mail address is Linda.Koco@innfeedback.com.