Responding To Client Needs Amid Changing Market Forces

An interesting dynamic is taking place in the life insurance industry. On the one hand, the need for life insurance coverage continues to grow among consumers. On the other, over the past 18 months, the industry has been navigating significant change and disruption, experiencing a pandemic, volatile equity markets, historically low interest rates and significant regulatory changes.

To be successful in closing the life insurance coverage gap that LIMRA and Life Happens say exists for 102 million uninsured and underinsured Americans, financial professionals need timely access to a broad portfolio of innovative solutions that help clients reach their goals and objectives amid changing market forces.

The Life Insurance Need

According to the 2021 Insurance Barometer Study conducted by LIMRA and Life Happens, only 52% of American adults own some form of life insurance coverage. That marks the lowest level of ownership to date since the two organizations began conducting the study 11 years ago.

Taking that a step further, the study finds there are roughly 73 million adults who need coverage and an additional 29 million who need more coverage, representing roughly 40% of the population with an unmet need.

The good news is that more and more consumers are recognizing the importance of life insurance, and many indicate they’re ready to take action. According to the Insurance Barometer Study, 36% of consumers said they plan to purchase life insurance within the next 12 months, representing the highest purchase intent in the survey’s history.

When examining consumer financial concerns across four categories — health expenses, living expenses, life insurance and saving goals — in 2020, life insurance surpassed living expenses to move into the third position in the financial concern hierarchy after occupying the lowest tier from 2011 to 2019. Life insurance remains in the third position in 2021, indicating that consumers are increasingly prioritizing life insurance in their financial plans.

There’s no doubt the industry is up to meeting this need with products that reflect the times we’re in, just as we’ve always adapted to ensure we continue to provide financial security to clients. If we look back over the years, we see that our industry has responded to different needs with different value propositions at different points in time.

If we go back just a decade, we can see how the industry pivoted following the sharp decline in interest rates in 2011-2012. According to LIMRA data, in 2010, the number of universal life policies sold grew 21% over 2009. Other than whole life, which grew only 2% in 2010, all other product categories had declining sales that year. Fast-forward three years to 2013, and UL sales declined 16% from 2012. Meanwhile variable universal life sales surged 12% in 2013 following declining sales in each of those prior three years.

So how will our industry respond today?

Filling The Need

The Barometer Study finds that the top two reasons consumers purchase life insurance are to cover burial or final expenses and to replace lost income of a wage earner. These reasons should come as no surprise, since death benefit protection has always been at the core of the life insurance value proposition.

Term insurance continues to provide that important protection for those more basic, shorter-term needs. Since the pandemic, as consumers have been faced with their own mortality, term demand has grown significantly, particularly among younger people.

That growth can largely be attributed to the lower cost and simplicity of term insurance but also to the ease of the term purchase experience. Term is often at the forefront of digital innovation, and that combination of cost, process and customer experience will be what differentiates term offerings in the market.

Conversely, longer-duration guaranteed protection products — especially fixed products such as guaranteed universal life — have faced pricing pressures as a result of the low interest rate environment. In recent years, protection-focused variable universal life policies have emerged as a strong alternative to traditional lifetime guarantee products such as GUL by combining the potential for market driven returns with the safety and security of a lifetime guaranteed death benefit. This trend remains true today and is expected to continue.

However, even VUL products were not immune to the low interest rate environment in 2020 when also factoring in the new reserving requirements of Principle Based Reserving. As a result, carriers are now beginning to introduce greater optionality into the VUL market.

In addition to offering 100% lifetime guarantees, VUL policies with multiple guarantee options, including shorter-duration choices for lower premiums, are emerging. This new optionality allows clients to work with their financial professional to design the policy that works best for them, whether they need protection for life or a balance of protection and cost.

While death benefit protection will always be critical to the life insurance conversation, the flexibility of life insurance to meet multiple client needs is increasing in importance as clients seek solutions that allow for holistic financial planning. When considering the four categories of financial concerns measured by the Barometer Study mentioned previously, life insurance is one of the only, if not the only, financial planning tools that can address all of them. And consumers are taking notice.

The Barometer Study shows a significant increase since 2018 in those who cite supplemental retirement income as a reason for owning life insurance, potentially creating demand for accumulation-focused VUL and indexed universal life products.

Recent regulatory changes are poised to add to the appeal of accumulation VUL and IUL products as tax-advantaged solutions that can help clients grow their retirement savings and complement traditional qualified retirement vehicles.

Both products stand to benefit from changes that were announced to sections 7702 and 7702A of the Internal Revenue Code, which determine whether a contract is treated as life insurance for income tax purposes. The 7702 and 7702A changes allow policyholders to put more cash into their policy on a tax-advantaged basis, favoring life insurance as an investment for tax-deferred accumulation.

While it will be up to each carrier how they implement these changes, the changes create new opportunities to pass additional value on to the consumer. More premium can now be paid for a given death benefit or less death benefit for a known premium under a max funded scenario.

Today, in addition to offering market-driven variable investment options, many accumulation VUL products are available with indexed accounts that provide a level of protection during market downturns. As many investors are faced with the dilemma of staying invested in the market during a time of elevated volatility like was seen in 2020, these enhancements provide clients with even greater investment flexibility to align their investment strategy with their financial objectives and risk tolerance levels.

Indexed accounts will also be key differentiators among IUL products in the market following regulatory changes that went into effect at the end of 2020 with the implementation of AG-49A, which impacts how IUL products can be illustrated.

The growing life insurance coverage gap in the U.S. impacts the financial stability of families and our society. While the events of the past 12-18 months have presented challenges, they’ve also presented opportunities. We’ve seen tried-and-true product categories reinvented, new customer value propositions created and different product concepts introduced to ensure financial professionals continue to have access to life insurance solutions that meet the broad array of financial planning and security needs of clients.

Stafford Thompson Jr. is senior vice president, life product management, Lincoln Financial Group. He may be contacted at [email protected].