A Resolution for 20xx: I Will Think Ahead
Posted at Advisors4Advisors.com on January 1, 2011
When you buy a financial product, you must think that you’re getting a good deal; otherwise, you wouldn’t buy it. But time passes and things change, and a day will come when you revisit your purchase decision. How will you figure out if your cash value life insurance policy, or your indexed annuity, or your variable annuity with a guaranteed lifetime withdrawal benefit, or your hybrid life insurance/long-term care policy is still a good deal? Do you have a plan for that?
One advantage of term insurance is that it is relatively easy to figure out if you still have a good deal. You can just qet a quote for a new policy and compare the cost with what you are paying for your existing policy.
Now suppose you add a return-of-premium feature to your term insurance. At first glance, maybe it looks like you can get a 4% after-tax rate of return over 20 years on the additional premium. But term prices, discount rates, and your need for life insurance will likely change in the future. How will you figure out if your return-of-premium term policy is still worth keeping? Instead of a simple premium comparison, you will also have to consider the value of the future refund that you will be forfeiting if you drop your policy.
So now you’ve complicated your life. Is it worth it?
Conscientious advisors have good reason to be wary of complicated products. When clients don’t really understand what they’ve gotten themselves into, they may also not understand how much work is required to offer good advice about what they own.
Product innovations seem to be outrunning the ability to make sound decisions about them. Complexity is a risk factor, so complicated products should provide greater benefits than uncomplicated ones to compensate for greater risk.