The Problem With "Free" CI Accelerated Beneifts

[rousemark]

There is a "hidden" problem with the "Free" accelerated benefits for critical and chronic illness that agents seldom discuss with their clients. Life insurance is usually sold because there is going to be a need for money at death. If a person accelerates the benefit for cancer or some other CI, then the need for which the plan was purchased is no longer covered.. This can be disastrous if the plan is purchased for income replacement for the family or for a business situation such as funding a buy/sell..

The second drawback to these plans is even if you buying them to provide CI protection is you never know how much will paid for a covered event. The accelerated benefit is calculated upon how the event affects life expectancy, not the even itself. The client thinks he or she can depend upon x number of dollars being paid and that simply is not the case.

I sold these plans when I was with AGLA and while we were honest and forthcoming in our presentation, I now realize we did not spend near enough time explaining the potential disadvantages on accelerating the riders. As the Hills Street Blues Sgt. said, "Be careful out there"..

 

[pfg1]

I agree that people need to know how the acceleration actually works and it may not always make sense, especially if they have a small policy. However, I don't see it as a problem, I see it as a benefit. "Regular" insurance only pays if they die. This can potentially pay them if they have a qualifying event - and choose to accelerate some of the DB.

I've had a client go through a claim, and he and his family were very grateful they had a policy that had CI living benefits on it. He got a big check that bailed them out of some serious financial issues at that time (due to his being off work). He accelerated half of his DB, his choice.

What made you bring this up, just curious?

 

[wfs]

The potential issue is the discounting for these ABRs. Of course you need to explain it to the client, as well as the impact on the cash value. This is why I like to have a separate term policy with ABRs sitting on top of an IUL with ABRs, so in the case of a claim, make it against the low cost term insurance. Also on the AIG IUL, you can add the AAS rider, which does not have discounting of the death benefit and it provides a "known" benefit, unlike the ABRs which depend on age and severity.

Yeah, the ABRs are "free" but not really. Discounting is a good deal for the insurance company, but can be good for the client depending on their financial situation.

 

[rousemark]

I agree that people need to know how the acceleration actually works and it may not always make sense, especially if they have a small policy. However, I don't see it as a problem, I see it as a benefit. "Regular" insurance only pays if they die. This can potentially pay them if they have a qualifying event - and choose to accelerate some of the DB.

I've had a client go through a claim, and he and his family were very grateful they had a policy that had CI living benefits on it. He got a big check that bailed them out of some serious financial issues at that time (due to his being off work). He accelerated half of his DB, his choice.

What made you bring this up, just curious?

I agree it can be a benefit but it can also have disastrous results.. Heard of a case where the policy was supposed to fund a buy/ sale.. The plan was accelerated and when death occurred there wasn't enough money to implement the agreement. Now the widow and the partner are battling all the time over the direction of the business. The sad thing was they accelerated$200K and only received $106K in cash. When people see a fairly large check dangling in front of them, it is hard to resist reaching out and taking it. I was told the guy died just a couple of months after the acceleration.

Acceleration can be a great tool if the purpose for the life insurance has been met. For example, the policy was bought to guarantee the children's education, the children are now grown and the insured has a covered event.. Why not accelerate? Also might make sense if the policy was bought to help fund retirement. .

 

[rousemark]

The potential issue is the discounting for these ABRs. Of course you need to explain it to the client, as well as the impact on the cash value. This is why I like to have a separate term policy with ABRs sitting on top of an IUL with ABRs, so in the case of a claim, make it against the low cost term insurance. Also on the AIG IUL, you can add the AAS rider, which does not have discounting of the death benefit and it provides a "known" benefit, unlike the ABRs which depend on age and severity.

Yeah, the ABRs are "free" but not really. Discounting is a good deal for the insurance company, but can be good for the client depending on their financial situation.

Of course the idea situation would be a stand alone CI/LTC coverage that would not affect the death benefit but then you have considerably more premium.

 

[DI Guy]

I have a stand-alone CI quote for a 61 yr old female in California at $125,000 benefit. The premium is $1723/yr. It covers 20 named illnesses, and could pay up to 3 three times if the client has the right kind of bad luck.
How poorly does this compare to the accelerated benefit you guys are talking about?
(My office's focus is IDI/CI/LTC so i don't see much life insurance)

 

[Producer Patrick]

Heard of a case where the policy was supposed to fund a buy/ sale.. The plan was accelerated and when death occurred there wasn't enough money to implement the agreement.

this seems to indicate a problem with the plan, not the riders. if my plan is provide X dollars for an obligation, then my plan should provide those dollars. the plan in the case described should either have accounted for the potential loss of benefit or prohibited the rider claim.

wouldn't want to disparage a product for problems resulting from its misuse.

 

[rousemark]

this seems to indicate a problem with the plan, not the riders. if my plan is provide X dollars for an obligation, then my plan should provide those dollars. the plan in the case described should either have accounted for the potential loss of benefit or prohibited the rider claim.

wouldn't want to disparage a product for problems resulting from its misuse.

I am not disparaging the product just the inadequate understanding of the real results of exercising them by both agents and clients.

 

[walthamny]

If the choice is pure death benefit or having a choice AB or death benefit, I would rather have the choice and decide on the best course of action.

 

[Todd King]

If the choice is pure death benefit or having a choice AB or death benefit, I would rather have the choice and decide on the best course of action.

Sure, anyone would rather have a choice. But you better understand the consequences of that choice. If you use the rider you will reduce the death benefit. If the reason you took out the policy is strictly for burial and final expenses, then you just screwed that up by using the rider and the policy will not be used as originally intended.

In other words, did you buy it to cover death or did you buy it to cover critical illnesses? You can't have both.

I really think this is all Louis is trying to say.