An Offer You Can Certainly Refuse

3102An Offer You Can Certainly Refuse

Anthony J. Ogorek | ED.D., CFP®

Who doesn’t want lower insurance premiums? Seems like a simple question to answer; but is it the right question to ask? Not always. The reason we pay insurance premiums is to lay the risk of a certain event, whether it be a house fire, car accident, or premature death or disability off of you, and on to an insurance company. The more risk you take, the lower your premium should be and vice versa.

 

The question that should be foremost in the minds of consumers is, are you being adequately compensated for the level of risk that you have agreed to retain?  This is not an academic question. Many of our clients who own long term care policies are regularly being pitched premium reduction offers. Are the companies making these offers because they overcharged policyholders when they sold the policies, or they did not charge enough premium to cover their costs, and are now looking to cut their losses?

 

Here’s an actual example of a pitch a client of ours forwarded to us. Insured is 80 years old. For 18 years he has paid annual premiums of $3,516 in order to secure $114,000 per year in nursing home care reimbursement costs for as long as he lives. This is an exceedingly generous contract – so generous in fact, that the company no longer offers a lifetime benefit at any cost.

 

So what’s the pitch? According to the policy, our client pays for the first 30 days of nursing home care, and the insurance company picks up the cost thereafter. The company is offering to reduce the annual premium by 7% or $245 per year. In return, our client has to agree to pay the daily benefit of $312 for an additional 60 days.

 

So here is the deal – in the event our client requires long term care, he will have to shell out an additional $18,720 before the insurance company picks up the tab. His breakeven on this deal is 76 years! But the deal is even worse than that. When he goes on claim, the company will waive all future premiums. So there would be no opportunity to recoup the $18,720 additional cost he agreed to assume to save 7% on his premiums.

 

Insurance companies are like casinos in that THEY set the odds. Obviously both need to make a profit to remain in business. However, in this example, the insurance company is clearly trying to hoodwink the policyholder. Why would they make such a ridiculous pitch? They know that people who focus exclusively on price, are an easy mark for a sucker’s deal. As they say, there is no such thing as a free lunch.

OWM provides financial planning, investment management, and retirement coaching to affluent individuals, business owners, and families.