Gas Pump Pain Means Clients Cling to Policies

By Linda Koco
Contributing Editor, InsuranceNewsNet

March 9, 2011 -- Are today’s rising gas prices affecting insurance decision-making in the advisor’s office? In some cases, yes.

Gas price increases are affecting how people think, and that has an impact on what they do with their money, says Dan Cotter, director of risk management at Rehmann Financial, Cleveland, and a former co-owner of a private energy company.

Specifically, he says, “people are getting more conservative with their money, especially the retirees.”

The rising prices for gas, along with food, are triggering in clients a desire to keep what insurance they already have and/or to obtain new products with guarantees, he continues.

“Some are telling me straight out, that ‘I want to be sure I’m protected’ or ‘I want some guarantees with this.’ ”

This trend did not start just this week, when regular-grade gasoline prices in his area jumped to $3.45 a gallon, Cotter allows.  It’s been building up over the long recession, especially the past two years. But now that prices are up substantially, clients have started voicing fears about inflation — “that it will eat into their retirement money,” he says.

These observations track with a recent comment by Liz Ann Sonders, senior vice president and chief investment strategist for Charles Schwab & Co., Inc. In a report posted online in late February, Sonders writes that consumers tend to ignore gradual increases in energy prices, but they “react more to sharp changes in prices.”

Sonders was not writing about insurance, but her point fits what some advisors are noticing in their practices.

Today’s recent gas price increases are definitely noticeable, if not sharp. On March 7, the national average price for retail regular gasoline was $3.52 a gallon, up from 77 cents a year ago, according to the federal Energy Information Administration (EIA). That is the fifth week in a row for increases.

EIA terms the climb “significant,” and projects that hikes will likely continue through the spring, reaching an average of $3.70 a gallon during the peak driving season of April through September. Some observers have predicted $4 or even $5 a gallon at some point this year.

California has the highest average gas price right now, according to EIA figures. On March 7, the average gas price there was $3.87 a gallon for regular, up 83 cents from a year ago. “You definitely see the impact in the spending habits,” comments Paul M. League, founding principal of League Financial & Insurance Services and a planner in Palm Desert, Calif. However, League says he has not yet noticed a pronounced effect on decisions made by his financial planning clients.

Cotter, who does see some effects, works primarily in the large case market. Most clients are high net worth (HNW), but some are low net worth (LNW) relatives or associates of the HNW clients. He sees changes across the board.

One impact on planning is that clients increasingly are sticking with older, guarantee-rich policies. These include whole life (WL) policies, universal life policies with secondary guarantees, and hybrid policies, such as whole life with long term care riders. The policy guarantees address client fears about outliving their assets, he says, and clients want the guaranteed death benefit to be there to leave a legacy.

He sees a similar trend regarding variable annuities (VAs). Clients don’t want to cash out of older VAs that include features that lock in growth in income payouts for 20 years or so, he says. The newer versions of such contracts have lower guarantees. Clients who know about that are glad they have the older contracts. “Preservation of the older contracts is very high right now,” he says.</p>

Another trend he is noting is regret. Some clients are regretting their past decisions involving guarantee-rich products, Cotter says. For instance, he says one client just this week voiced regret that he surrendered an older WL policy seven years ago. “He can’t buy a contract like today,” Cotter explains. “He wishes he still had the old one.”

In hard times, Cotter concludes, “people tend to view the good, mature old-style life and disability policies as Cadillacs.”

Linda Koco, MBA, is a contributing editor to InsuranceNewsNet, specializing in life insurance, annuities and income planning. Linda can be reached at [email protected].

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