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In recent years, various product developers have pushed the envelope of so-called “transformational” and “convergence” products.

What are these innovative designs? What do they have in common? And what does that commonality say about the future direction of the financial product world?

Transformational products: The industry has not yet settled on a catchall phrase to describe the increasing variety of innovative products, but “transformational products” is as good a phrase as any.

“Continuum products” would work as well.

Both terms refer to the increasing number of insurance products, both fixed and variable, that seek to address multiple insurance needs that are becoming increasingly significant as the baby boomer generation ages.

Example: Annuity contracts are available that either truly or virtually morph into either life insurance (by emphasizing the annuitys death benefit features) or that provide a special provision to address an extraordinary event (such as nursing home confinement)

An increasing number of variable annuities, for instance, feature enhanced death benefits, disability and terminal illness benefits, and companion term insurance contracts. A growing number of annuities and life policies also have begun featuring long-term care benefits.

The emergence of these products or design features, of course, has its roots in our changing demographics.

The baby boomers are aging, and, as they age, their concerns are focusing on the conflicting worries of outliving retirement savings or not leaving a legacy for heirs. Those worries are magnified by the rising costs of health care and the threats of disability or LTC needs. Hence, they are increasingly focused on maximum flexibility in payout from their financial products.

Convergence products: To date, there seem to be fewer convergence products than transformational products. But they do exist.

Such products combine elements from the banking, investing and insurance industries in a single product. An example of a convergence product would be an FDIC-insured Certificate of Deposit with its rate of return pegged to a market index.

The Gramm-Leach-Bliley Act has made these products possible. “Convergence” was originally used to describe the heretofore prohibited affiliation of banking, insurance and investment entities. Post-GLB, an insurer can own a bank, an asset manager and sponsor insurance products and mutual funds and become not just a “supermarket” but also the commissary of banking, investment and insurance products.

Although convergence products have not yet proliferated, many analysts see signs of their coming. One of the main signs is the insurance industrys renaming of its distribution networks, with the keyword “Financial” appearing with greater frequency.

Other analysts see the decline in traditional or even enhanced variable annuity sales as an impetus to both companies and producers to expand their products and services.

What do these two classes of innovative products have in common?

For one thing, their emergence forecasts and signifies the “transformation” and “convergence” of the role of the insurance producer.

Specifically, the producer selling transformational and convergence products must become a long-term financial planning provider.

On the shelves of today’s financial supermarket are expanded lines of products with differing purposes, costs, and risk levels. The producer is not just selling dessert, but may be called upon to plan the whole menu.

The producer may need to review the clients total portfolio, and make recommendations as to the overall allocation of assets. But at least as important from a suitability standpoint, the producer may need to evaluate, and help the client to evaluate, the insurance needs addressed by the transformation products.

The core purpose of these products is to hedge against three risks: longevity, morbidity, and mortality. And as investment professionals know, hedging costs money. Thus, the producer is called upon to explain the products and their features in a way that assists the client in identifying key planning elements.

Such elements include: basic retirement income needs; the risks that extraordinary events will distort those income needs; and the legacy goals.

This total picture must then be analyzed with due consideration to the particular circumstances of the client, the costs and the tax implications of the various features.

Technology can help producers to provide certain answers to the issues that clients face related to such analysis. And insurance companies will have to, and can, assist their producers in this–by providing them with appropriate Web-based tools.

Such tools are ones that enable producers to make calculations that underlie the numerous decisions confronting the client and that the producer is obliged to assure are suitable.

In the end, the thing that transformational and convergence products have most in common is suitability. Specifically, advisors and distributors in this market must put suitability on the front burner or risk harming customers and their own practices.

Joan E. Boros, Esq., is a partner in the Washington, D.C. law firm of Jorden Burt. E-mail her at jeb@wdc.jordenusa.com.


Reproduced from National Underwriter Life & Health/Financial Services Edition, December 10, 2001. Copyright 2001 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.


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