Why the public's perception of hybrid products is wrong: The difference between "and" and "or"

By Vertical Vision

Vertical Vision

I think linked benefit or hybrid products may create a false sense of security. To understand why, it's time to put ourselves in the client's position and look at financial products through their eyes.

One of the products gaining a significant amount of attention right now is linked benefit or hybrid products. These are some variation on the theme of providing death benefit as well as accelerated benefit provisions for chronic and critical illness, with some also including disability coverage as part of the mix. The hook is that these products provide coverage for any number of the "what ifs" in life in one easy-to-understand package.

The question in my mind is, are these products really as easily understood by the public as we all think?

Why concern ourselves with this? Very simply, I think these products may create a false sense of security. To understand why, it's time to put ourselves in the client's position and look at financial products through their eyes. Specifically, I think back to when ROP term hit the market and all the advertising I heard on the radio and saw in print. The public perception was that these products delivered very competitive premiums and that the client would get all their premium dollars back at the end of the level period. The truth, as well all know, is that it is really a matter of competitive premiums or receiving your premiums back.

That critical difference between "and" and "or" has proven to be the difference in the product becoming widely accepted and sold versus occupying the niche product it does today. Market share does not lie, and as a percentage of the total insurance market, ROP term is a bit player.

Fast forward to today, and we have linked benefit products being marketed aggressively, and yet another public perception problem. I think the public views these products as providing death benefit and living benefits, when in reality, it is almost always a matter of death benefits or living benefits.

Quite simply, when the mechanism for providing living benefits is an acceleration of the death benefit, it has to be an "or" rather than an "and." Sure, there may be a small residual death benefit after acceleration occurs, but that will be small comfort when an insured passes after accelerating virtually all of their death benefit to cover chronic or critical illness needs during their lifetime.

Don't get me wrong, I think this type of coverage is actually a great risk management tool, particularly in the context of spiraling LTC costs. It is not, however, the Swiss army knife that it is being touted as.
So if we all see the gaping hole that this approach can leave in a risk management plan, what is the solution? At the very least, stack some term insurance on top of this type of contract. Properly structured, a term insurance contract of the appropriate duration can provide the additional liquidity that will likely be needed at the end of an extended illness that has drained the linked benefit product. It also provides the flexibility to convert some or all of the term if there is a recovery after a critical illness acceleration has occurred, essentially replacing the permanent coverage that has been lost to the acceleration.

A second alternative is to "gross up" the face amount to provide a cushion of permanent coverage that the client intends to leave intact in the event of a critical or chronic illness claim.

The bottom line is that simply because there was an actual need and subsequent claim for the critical or chronic illness coverage does not mean the need for the death benefit has magically disappeared. It is still very real, and perhaps more needed than ever after an extended illness. The good news is that by doing the right thing by the client and covering both needs via either of the above strategies, you also give yourself a raise.