Never Receive A Premium Increase Letter Again

Never Receive A Premium Increase Letter Again

Every producer has seen one: A notice from the carrier that a client’s life insurance premiums are increasing.

Experienced agents have undoubtedly talked their clients through the increase successfully, helping them reach the decision to either increase their premiums, or accept the reduced face amount that their planned premium will support.

The problem, of course, is that that client is likely to receive the same letter the following year, and probably the year after that if economists are to be believed.

How many times can even the best agent convince their client to stay the course and accept a second, third or even fourth round of the same conversation: Pay more, or accept less?

What if there was a way to make sure your clients never receive a letter like this again?

There is a way, but it may take a bit of a strategy change.

First, however, we need to understand why these letters are so ubiquitous currently, and why they’re likely to be an annual event for the next few years.

the reason behind the letter

The reason for the letters is simple – investment returns over the last four to five years have been far below the assumed portfolio rates for just about every insurance carrier.  Unfortunately for our clients, that translates into lower crediting and dividend rates. No carrier has been immune to this.

This issue only affects projected performance on a subset of life insurance products.

Perhaps the most heavily impacted are blended whole life contracts, for the simple reason of the way they are structured.  The decreased dividend scale results in less permanent insurance being purchased each year. The problem accelerates as term costs rise each year, and the fact that the term insurance represents a much higher percentage of the total face than the original design adds more fuel to the fire.

Blending in term insurance to lower premiums can be a great strategy. Problems arise, however, when despite the most eloquent, complete and accurate explanation possible by the producer at the time of sale, the client’s selective memory kicks in upon receipt of the premium increase notice.

A client’s thinking might be ‘I bought whole life. My premiums are supposed to be level. I already think I pay too much for this insurance, and now they want more?’

why it will happen again next year

Jeff Gundlach at www.learnbonds.com does a great job of talking through the macroeconomic issues that are likely to keep interest rates and treasury yields low for a number of years. Insurance company economists we talk to think interest rates won’t normalize until 2016.

Tack on an extra 12 months for a rise in rates to begin to impact in force policies and we have three to four more years of sub-par investment performance, low declared and dividend rates, and, you guessed it, the potential for a premium increase notice each year.

So what’s the solution?

Replace the coverage.

I know that’s a dirty word in some insurance circles, but continuing to fund a contract that was purchased based on a set of  economic conditions that are far, far from today’s reality is akin to burying your head in the sand.

Unless the client is willing to start funding the existing contract based on an interest or dividend rate that is 100 basis points below today’s rates, they’ll grow tired of the annual increases. If you don’t have a solution, the next producer they talk to will, and there goes your client, along with their IRA rollover and any other products you have on the books with them.

One last point: It’s probably a good idea to sell a product that is going to be a bit more resistant to economic cycles. They’re out there.

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