There was a time not long ago when the life and annuity (L&A) industry had another moniker. It was known as “the life and health (L&H) insurance industry.” The words still hold sway in some quarters, but they are no longer in general parlance as they once were.
This shift may seem of little consequence to industry newcomers who never thought much about the business being L&H. They may think the business has always referred to itself as L&A, with health insurance as a separate entity. However, they would be wrong.
Ten or 15 years ago, almost everyone used the term “L&H” term to describe this side of the industry. L&H encompassed life, health, annuities, long-term care, disability, accident and many other types of coverage. But significant, perhaps profound, changes have occurred since then, spawning a transition that is still going on today. It’s as if the “L&A” business is moving along one set of tracks, and the health insurance business is moving along another set, with crossovers at key points, such as retirement. Here is a look at how this is playing out.
One of the tributaries of this change stems from the health insurance sector. This sector increasingly is being viewed as an industry unto itself.
Health insurance is still part of the insurance industry, and insurance producers still sell health coverage. But those who specialize in individual life insurance and annuities often view health insurance as a specialty.
As a result, many life and annuity professionals are just as likely to partner up with health insurance professionals to handle their agencies’ health insurance business as they are to write the business themselves.
This shift is hard to miss. Business cards, e-signatures, websites and introductions for life and annuity professionals frequently use life and annuity specialist descriptors. In another era, many would have said “life and health.”
This change has occurred at the group insurance level as well. Early signs began to surface during the 2001 recession when employers began revamping their group insurance programs to achieve cost savings. Some placed group health on its own track and group life on another. In response, brokers downplayed their “group life and health” combined offerings, and started presenting new combos —group life and disability, for example.
As the baby boom generation moved closer to retirement, many did another refresh, with the focus on group life and retirement benefits. Group L&H programs did not vanish, but they took their place on a list of many “benefit offerings,” both group and voluntary, sold in the workplace.
Evidence of this change can be seen in the annual financial reports that carriers file with the National Association of Insurance Commissioners (NAIC). Most health carriers now submit reports on forms designed for the health insurance industry, said Terence Martin, head of life, annuity and health research for Conning.
It used to be that they reported on the same forms (called “blue books”) that the life carriers used, Martin said. Some health insurers do still use the blue books for reporting certain business, he added, but the trend is definitely in the other direction.
Role of the ACA
The arrival of the Affordable Care Act (ACA) has nudged along the shift in thinking about lines of business, according to Sheryl Moore, president and CEO of Wink Inc.
ACA is the legislation that changed the playing field for health insurance, seeking to make the coverage affordable and accessible to all. The transition has had rough sailing, and it is still a sore point among ACA opponents.
“Health insurance has become so complicated that agents really have to be experts to sell it,” Moore told InsuranceNewsNet. As a result, agencies that previously dealt with health insurance on a limited basis have gravitated more toward life and annuities, their specialties, which also require a lot of expertise.
Meanwhile, Moore said that she has noticed that “some — but not all — agents” who previously sold a lot of health insurance have begun selling more life and annuities, post-ACA. So the health insurance law is still reconfiguring market alignments. The industry nomenclature is reflecting that.
The other major trend impacting this realignment is retirement. With the fast-approaching retirement of the baby boomers, the industry has pushed ever harder to develop products and services to meet this generation’s retirement needs.
For health insurance, Medicare and Medicare supplement dominate this segment of the market, with the health carriers running the supplemental books and health agents often facilitating signups, transfers and so-on. No big changes there.
Where retirement income is concerned, though, the L&A language and focus really have flowered. Especially after the 2008 recession, the retirement wing of the industry has concentrated on launching products and strategies to help people create income streams for their later years. Annuities and life insurance have figured prominently in this.
Life insurance is still sold for death benefit protection, said Mike Vaughan, assistant vice president-individual products and solutions, at Nationwide. But death benefit is no longer the only focus.
Over the years, the industry has shaped its life insurance products — particularly its cash value building policies — to meet the diverse needs for supplemental funds during the retirement years. In that sense, they join annuities as tools that help fashion personalized retirement income solutions.
At Nationwide, the preference has been to use accumulation-type life policies for the nonqualified part of an “insurance-based retirement plan” (IBRP) or “life insurance retirement plan” (LIRP), Vaughan said. These can be variable universal life contracts, index universal life or traditional universal life. The “income” is created through policy withdrawals and policy loans, and the policyowner pays taxes only if pulling out more than the basis, Vaughan said.
If the owner never uses those features — for example, to generate retirement income or to pay long-term care expenses — the policy will pay out as a death benefit to the beneficiary.
It is versatility which has brought life insurance into greater use for retirement planning, alongside annuities which, by nature, are retirement products, he indicated.
Selling life and annuities
Brendan C. Walsh, president of Catalyst Solutions Group, Birmingham, Mich., pointed out that life and annuity products usually aren’t sold together — that is, not at the same time.
There are exceptions, such as when a client buys a single premium immediate annuity and then uses the annuity payouts to fund cash value life insurance, Walsh told InsuranceNewsNet. But if a client needs both life insurance and annuity products, the more typical approach is to present the products separately, because “this avoids confusing the client.”
On the other hand, presenting life insurance in the context of retirement planning definitely works, Walsh said, “especially for people in my generation (Generation X, born between 1965 and 1978), because we have no pensions, there are questions about Social Security, and clients are limited in the amount they can put into their 401(k)s.”
Cash value life insurance is a very tax-efficient place for Gen Xers to put some of their retirement money, he said. The money grows tax-deferred and, when retirement arrives, the clients can make withdrawals up to basis and then take policy loans on a tax-favored basis after that.
Before making any recommendations at all, Walsh said that before he makes any recommendation at all, he goes through the client’s assets — the 401(k), individual retirement accounts, brokerage accounts, annuities, etc. — and assesses the person’s situation and needs. He may present life insurance for death benefit as well as future retirement income needs.
Life insurance in the context of retirement planning does appeal to Gen X, he emphasized. He recounted how one Gen X client, in his mid-30s, decided to fund a permanent life policy over 10 years, with the intention of using the assets for supplemental retirement income after “30 years of tax-free compounded interest.”
That’s the opportunity, Walsh surmised. “It’s the young successful clients. They are the HENRYs — the High Earning but Not Rich Yet clients. They need to save for retirement.”
The Insurance Information Institute (III), in its online insurance handbook, has depicted the industry’s profile very accurately — no small feat given the changes that have been afoot and the overlap that exists.
The life/health sector “consists mainly of life insurance and annuity products,” the III handbook said. As for the health insurance sector, the handbook said that, “Most private health insurance is written by insurers whose main business is health insurance. However, L/H and property/casualty insurers also write this coverage.”
Among themselves, most industry professionals can deal with the nuances, whether someone uses L&A or L&H as a point of reference. But when speaking with the general public and with clients, clarity about scope and direction would seem to make sense. This is clearly a business in transition.
InsuranceNewsNet Editor-at-Large Linda Koco, MBA, specializes in life insurance, annuities and income planning. Linda can be reached at [email protected].
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