Many workers who buy voluntary life insurance value it enough to continue paying for it. That perceived value should make a solid foundation upon which to build.
By Linda Koco
This article is reprinted from the January 2013 edition of InsuranceNewsNet magazine.
Flexible products and flexible planning strategies will be all the talk in 2013, as the life and annuity industry gears up for a year of many unknowns. The product frontier will feature designs made for sale in today’s hostile environment of low interest rates, high market volatility and continuing regulatory pressure, but with enough flexibility to adapt in an improving economy.
The new products with this dual-functionality won’t be glittery but they will be durable and longer-term focused. According to some market watchers, a lot of these products will debut as the year unfolds and carriers clear off their shelves to make room for post-recession compatible products.
This could open up some new opportunities for advisors, many of whom tend to gravitate to the oldies-but-goodies, such as term, whole life and traditional fixed annuities, when times are tough. This time around, advisors will have other options also.
“Flexibility in the face of change” is one of two product concepts that will be extremely important in 2013, predicts Louis Shuntick, senior vice president-advanced planning, Lincoln Benefit Life.
For example, he says, advisors should consider attaching a “liquidity rider” to a universal life (UL) product. This rider will guarantee access, upon surrender, to the greater of the UL’s contract value or amount paid in premiums. That guarantee could increase the long-term usefulness of the UL product, Shuntick says, noting “flexibility is good for serious planning.”
In general, he says, advisors need to “get away from spreadsheet selling,” where recommending the cheapest life insurance policy tends to rule the day. Instead, he says, advisors should look for products that can build substantial cash value that is accessible on favorable terms later on via flexible features.
The other important concept in 2013 will be achieving “certainty in the result,” Shuntick says. In uncertain times, products that can do this will have strong appeal.
Guaranteed universal life
Those possibilities are important for advisors to keep in mind because one very popular type of life policy is expected to lose some, if not all, of its luster in 2013. That product is guaranteed universal life (GUL), the universal life (UL) contracts that include secondary guarantees on the death benefit.
Experts predict prices for GUL will go up and availability will go down in 2013. That’s because revisions that National Association of Insurance Commissioners adopted for Actuarial Guideline 38 will take effect in January. These revisions increase the reserves carriers must hold for GUL products. As a result,
experts say, carriers will increase GUL premiums.
That change, combined with low interest rates and high capital requirements, will put a “ton of pressure” on these products, predicts Bobby Samuelson, a life insurance authority who is executive editor at The Life Product Review.
“It’s as if the legs were chopped off an Olympic jumper who was already trying to run with 50-pound weights,” he says.
In fact, he says, “I do not foresee any situation where UL pricing will go down in 2013 or sales go up.”
Mike Murphy, vice president-advanced markets, American General Life companies, predicts “some companies will even exit certain GUL products.” As for the remaining products, “these will get more expensive.”
“Some companies have financing in place for the higher reserves, so AG 38 will have less impact on GUL price and availability at those carriers,” Murphy says. “But we could see the smaller companies exit the market, because they can’t be competitive any more. There could be moratoriums on sales, too, if the companies can’t get it together (on AG 38) by Jan.1. Or maybe they will just eat the cost of the higher reserves until they can do what they need to do.”
Indexed Universal Life
GUL’s troubles do not mean that advisors will have no more UL to sell in 2013. Far from it. Many executives are predicting that a newer form of UL — indexed universal life (IUL) — will be 2013’s rising star. And, yes, they say flexibility is one of the reasons why.
“We continue to see a lot of growth in the IUL market,” says Murphy. “Even some big carriers have entered the market.” He attributes this in part to the IUL’s bottom side protection and upside potential, which are features that he says appeal to consumers.
In addition, he says, some IULs are coming out on a GUL chassis. That means the policy owner can lock in the death benefit as well has have the protection and potential of the indexed product.
Louis Slagle, sales director at Minnesota Life, agrees that a secondary guarantee in an IUL has market appeal. “People will still want secondary guarantees,” he explains.
Another reason IULs should grow and expand in 2013 is their cash accumulation potential. Simply put, “advisors are recognizing that IULs are cash value products and because of that, they will have more flexibility down the road than GULs,” Slagle says.
That will be important to advisors who serve the growing pre-retirement market. “Most IULs are designed to take someone out to retirement, when it’s time to take an income stream,” explains Greg Schwabe, national marketing director, First American Insurance Underwriters.
By comparison, GULs are only for mortality protection, he says.
Samuelson of The Life Product Review says the IUL market will face its own set of challenges, however. For instance, he predicts that the number of producers who are willing to sell IUL will flat-line. “And other distributors are skeptical because they think IULs are complicated and their long-term performance is uncertain.” For those reasons, he believes the growth rates IUL has seen in recent years could begin to slow.
Even the accumulation potential of the product could cause hiccups. That’s because producers who formerly sold GUL for the death benefit will not be interested in selling IULs built for accumulation, Samuelson predicts.
But even Samuelson sees potential in the IUL market. Some carriers will start marketing new types of IULs in 2013, he explains. These are IULs designed for death benefit sales, not accumulation. The products will pay lower commissions, have lower policy charges and caps but offer more competitive premiums than accumulator IULs, he says. Their arrival will enable GUL marketers to “pivot to IUL products,” he continues, and this will help create a new IUL market.
Samuelson also predicts that a new, more flexible generation of IULs will emerge to meet market needs. These will be ULs that offer both an indexed bucket and a fixed bucket, he says. They will combine features of current assumption UL and IUL, but be sold as UL, not IUL. The carriers will position the products as being “not much different than current assumption UL, only the customer has the option of going into an indexed account in addition to the general account,” he adds.
Combo Universal Life Policies
Another UL policy that will get more attention in 2013 is the combo UL, predicts Ann Eads, vice president-carrier relations, LPL Insurance Associates. Also called hybrids, these policies combine UL insurance with long term care (LTC) protection.
There will be more such products on the market in 2013, and combo sales will grow, Eads predicts. That’s partly because there is greater awareness of the need for long term care than ever, she says. In addition, carriers offering stand-alone LTC policies have had difficulties with pricing and claims experience, and consumers’ dislike of the use-it-or-lose-it nature of the traditional LTC policies, she says. So, by comparison, the combo policies look attractive, she says, explaining that “the customer knows that the benefit will always be used—for care or at death.”
That kind of flexibility has and will have appeal, she says.
Mike Sause, president and founder, Annuity Marketing Service, sees the same thing. In fact, he says that advisors are specifically asking for combo policies, and Michael Smith, president, The Brokerage, says sales of combos are already “up, up, up.”.
Other types of combos may emerge in 2013, predicts Jerry Hartman, chairman and CEO of Insurance Network America. These might include contracts that combine UL with critical illness benefits or some other types of coverage.
Term life, whole life and variable universal life
What about the old standby life policies — term, whole life and variable life?
Term life products will face challenges, Samuelson says. “In a low rate, commoditized market, which is very competitive, price pressure is increasing and availability of product is declining. For instance, in the 30-year level term market, prices are up and availability has declined.” Some carriers have left the30-year market altogether but others may re-enter, adds Murphy of Wisconsin.
Fidelity Life is focusing on selling term life insurance in the mid-market, to households with annual incomes of $35,000 to $100,000, says Jim Harkensec, president and COO in the Chicago office. These are non-medical products where the carrier uses pharmaceutical databases, motor vehicle records and MIB reports to get the underwriting information it needs. For fraud detection during up-front screening, it checks Lexus Nexus.
A lot of companies are coming out with faster issue non-medical products, says Harkensec. “It’s an easier way to reach and underwrite in the mid-market, and to do it profitably.”
Whole life insurance will continue to have market appeal in 2013, executives say. Agents are asking for the product in particular, notes Slagle of Minnesota. LIMRA has reported that the whole life market share was 33 percent in the first six months of 2012, he notes, predicting that the strong sales will continue.
“Carriers have a great story with this product,” agrees Samuelson. But he cautions that the prolonged low interest rate environment will affect whole life sales in the long term. “Many producers are basing the sales on dividends,” he explains. “They show how the dividend rates are dramatically higher than what the market will pay. But if interest rates pop, people who are looking for gain will no longer buy those policies. And if existing products were sold on an asset, dividend-oriented basis, there could be problems with disintermediation of existing customers too.”
Variable universal life (VUL) sales will stay flat in the independent distribution channel, predicts Slagle of Minnesota. “I don’t think that people are ready to go back yet to selling or buying the product. But I am seeing some carriers adding options to their VUL policies, such as indexing, more fixed options, more bond portfolios, and exchange traded funds for diversification and stability.”
Samuelson predicts that the strongest carriers in the VUL market will start bringing out products that pay levelized commissions — ”no heaped commission at all.” That will allow the products to deliver more value to the customer, he contends. In addition, the investment options will include dynamically hedged subaccounts. “These new designs will be game-changers,” he predicts.
Flexibility — the emerging buzz word for the double-jointed products in 2013 — is also important in the fixed annuity world.
“It used to be that the longer the guarantee interest rate period in a traditional fixed annuity, the better,” explains Gary Dworkin, president, DAI Associates. “But that is not constructive when credited rates are in the range of 2 percent to 3 percent.”
His advice to advisors is to look for interest rates with some sense of future flexibility. And that would include an annuity with an upside.
He points to bonused fixed annuities and indexed annuities (IAs) as examples .The bonused products pay a bonus into contracts that have been in force for a specified number of years (such as 10 years), and the IAs pay a guaranteed interest rate at today’s rates plus the potential for more (via indexed-linked interest crediting).
Such products will become increasingly important in 2013, he predicts. “They give customers a good rate for the current environment, plus the opportunity to earn more without having to change out of the policy into a higher earning contract in the event that interest rates spike later on.”
IAs, in particular, will fare well in 2013, according toGreg Schwabe of Massachusetts.
“There will be a spike in the IA market, because people are looking for higher yields with a fixed floor,” he predicts. The lower caps on the contracts sold during the low interest rate environment could be a concern during a rising rate environment, he allows. But even if the crediting rate goes up to the policy cap, “the interest will still be where most fixed annuity rates will be at that time,” he speculates.
“IAs will carry the fixed annuity industry during the year,” agrees Brendon Kelly, vice president-annuity operation, Ash Brokerage. This will especially be the case when carriers begin debuting accumulation-focused indexed annuities, he predicts.
The accumulation IAs will appeal to clients who don’t want to buy annuities for income purposes, he says.
In recent years, Kelly explains, IAs have focused a lot on having living benefits features such as the guaranteed minimum income benefit. That’s not a problem when the client buys the contract for lifetime income, but it does pose problems if a client buys the IA for gain and then sees interest rates go up high (beyond the cap), he says.
The problem comes because the policies require the client to stay with the carrier and product so they can take the income, Kelly says. If the buyer wants gain, not income, that could trigger suitability and compliance concerns down the road, he says.
When carriers start filling the void with accumulation-focused IAs, advisors will be able to offer the products for a fixed period — perhaps five or seven years — and then, when market conditions change, take the indexed gains and roll the policy value into something else, he says.
The products might include restrictions on withdrawal privileges – say, for nursing home confinement and perhaps on 10 percent penalty-free withdrawals -- and commissions would go lower as a result, Kelly concedes. But the products will appeal to advisors who are “starved for indexed products for accumulation rather than income purposes.”
Speaking of income, some experts predict that traditional income annuities — the single premium income annuities or SPIAs — will become more important in 2013. As will fixed annuities that have minimum guaranteed income riders, says Michael Pinkans, senior vice president-marketing, Zenith Marketing Group.
“Even though many carriers have cut back on features in the annuities, everything is relative,” Pinkans adds. “These products are still a good deal for the right customer.”
Another income annuity that will increase in 2013 is the deferred income annuity (DIA), says Jim Dobler, national sales manager for CANNEX Financial Exchanges, a firm that specializes in providing SPIA services. He is referring to the longevity annuities, which clients typically many years before taking income, perhaps not even until deep into retirement.
There are six DIAs on the market, Dobler says. “Within the next 12 to 18 months, we expect most SPIA carriers will offer the products. If they gain traction, we expect variable annuity and fixed indexed carriers will follow in three to five years.”
With interest rates so low now, he points out, “there is little risk to the consumer between the time of purchase and the time of utilization, and very little risk to the carrier. Most of the companies will be investing with very safe guaranteed products, and they really don’t need to hedge.”
The carriers will start distributing DIAs first through producers in the insurance industry, Dobler predicts. “If it takes off there, they will branch out to bank and broker/dealer channels.”
But, says CANNEX Chief Executive Officer Lowell Aronoff, advisors need to learn how to use the product in the client’s income portfolio. For instance, learn how to use the product in combination with systematic withdrawal, and get comfortable with the idea of advising clients to lock in money for a certain period and then take distribution.
Traditional fixed annuities and MYGAs:
As for traditional fixed annuities (FAs) and multi-year guaranteed annuities (MYGAs), “these won’t make a comeback until interest rates increase significantly,” says Kelly of Indiana. The perceived value in today’s market is that the credited rates are just too low.
Interest rates on these products will likely continue to be very low next year, adds Schwabe of Massachusetts. “Even so, if the alternate option is a CD or a bank savings account, the FA is still a good option if the customer doesn’t need the money for three to four years or for the length of the surrender charge period. That’s because these products don’t have a downside, and even if interest rates go up, the bank products will still lag behind.”
Some FAs offer bailout provisions, points out Dworkin of New Hampshire. These features allow annuity owners to switch out of a contract with no surrender penalty if interest rates should rise by a certain percentage. The industry has not talked much about these provisions in recent years, but they do provide future flexibility for the client, so advisors might want to consider them, he says. ”If the issuing company is strong and the feature is efficient and competitive, it could be a good thing for the client.”
Flexibility will be showing up in the variable annuity (VA) marketplace, too. Some carriers are coming out with new living benefit riders where the withdrawal percentage is variable, according to John McCarthy, product manager-advisor software in Morningstar’s insurance solutions business.
That is, the carrier issues the contract with the rider that shows a withdrawal percentage range of, say, 4 percent to 8 percent. The exact percentage won’t be fixed until the policyholder decides to take withdrawal, McCarthy says.
In the future, he adds, “I wouldn’t be surprised to see carriers tie different elements of the living benefit to the interest rates. These could include not only the withdrawal percentage, but also the annual step up in the benefit basis, or the actual rider fee, which is based on the VIX (the Volatility Index).”
Such designs make it easier for carriers to manage their risk, he notes. In addition, existing and future customers will benefit “when the carrier can effectively manage risk to meet its guarantees.”
A number of carriers are also designing VAs for use by registered investment advisors (RIAs), the security firms that work on a fee-only basis. This is a largely untapped channel but the carriers see it as an opportunity going forward, McCarthy says.
Morningstar’s database shows 61 such products are already active, up from 34 last year. Nineteen of the products do not offer living benefit guarantees at all. And the 42 that do offer living benefits have fewer subaccounts, say 50 or so, and they feature lowered pricing, a design feature that McCarthy says is intended to attract RIAs.
A few fee-based VAs are adding more and more “alternative investment options” to their subaccount offerings. The contracts typically do not offer living benefit features. Instead, they focus on how alternative investments can help RIAs to diversify subaccounts with non-correlated assets as well as to increase tax efficiency. Some annuity watchers think more VAs will include these subaccounts in 2013, especially if they drop the living benefit riders.
Because of low interest rate conditions, VA carriers can’t offer as generous a living benefit guarantees as they would like, McCarthy points out. So curtailing the features, setting limits on how much living benefit business to accept, and even dropping the feature are all possibilities for 2013.
If interest rates go up, however, “it will be a new ballgame,” predicts Dobler. “The carriers will start ratcheting up their step-up provisions and withdrawal percentages and start ratcheting down their fees.”
A WORD TO ADVISORS
All of the above is a lot to digest, for industry veterans or rookies. That means advisors will need to make time to get up to speed on products and product thinking for 2013, say experts. Regarding flexibility, for instance, new approaches to flexibility could become a barrier to sales if advisors can’t understand how the features work, says McCarthy of Illinois.
Sometimes less is more. But where grappling with 2013’s insurance products is concerned, more probably needs to be met with more — more time, more study, more analysis.
Linda Koco, MBA, is a contributing editor to InsuranceNewsNet, specializing in life insurance, annuities and income planning. Linda can be reached at firstname.lastname@example.org.
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