In our nearly 40 years in the life insurance industry, hard economic conditions and down stock markets have occurred more than once. But todays problems, as faced by the life insurance industry, seem to make the others pale by comparison.
Some suggestions on remedies follow below. But first, lets review the problems the life industry is facing.
Despite the recent apparent turnaround in the stock market, consumers seem reluctant to get back into the market with variable annuities and variable life policies.
At the same time, insurers are in a difficult condition with their traditional products. Reduced investment yields make it difficult for them to compete with other types of financial instruments. In addition, recent reductions in the tax rates applicable to capital gains and corporate dividends make the tax advantages of life insurance products, particularly annuities, seem to be less appealing.
Although the life insurance industry is attempting to obtain parity between the tax treatment of deferred annuities and capital gains, it is not yet clear how successful this attempt will be. If successful, deferred annuities may again be a more appealing savings vehicle. If not, product innovation directed toward life income guarantees in the pre-retirement market, and toward immediate annuities in the post retirement market, may well be the salvation of the annuity segment of the life insurance industry.
The federal government is also making the sale of corporate owned life insurance more difficult. This is occurring both with respect to products that benefit executives (e.g., split-dollar plans) and to more direct investment schemes. Meanwhile, the industry has had to suffer through discussions about “janitor insurance” by publications that do not really understand the uses of life insurance in a corporate environment.
Thus, after years of selling tax-deferrals, the business may be forced to concentrate on the old-fashioned notion of insuring human life values! As novel as that concept may be, the industry must also look to product innovations if its life products are to have appeal, even for this market.
So, what can the business do, insofar as product innovations are concerned, to get more consumer interest in life insurance?
Traditional life insurance has stood the test of time, in up markets and in times of economic turmoil. Yet the average consumers perception is that the product is stodgy and too inflexible to meet “modern” needs.
While it is true that sophisticated investors still use the product for estate planning purposes, the huge middle market has not responded to the traditional insurance sale. This lack of interest is likely due, in large part, to the industrys failure to promote the flexibility of the product and the products ability to be used for multiple purposes.
But what other financial product provides the flexibility and multiple obtainable in a life insurance policy? This includes the full spectrum of life policies, from pure term life through more sophisticated products insuring multiple lives. These products enable consumers to provide for financial security through a variety of different ages and life cycles.
Young Americans starting their financial lives can purchase term coverages that provide pure protection during the years when this protection is all they can afford. Yet, these same coverages can be converted into permanent insurance, and most insurers will permit the policies to be changed into new modes of coverage as the consumers financial needs change.
Despite this infinite flexibility, few consumers really understand the products. Moreover, some life policies appear to be “hard-wired”that is, without the guarantee that coverages can change as the policyowners life cycle and financial needs change.
Even worse, many life insurance producers and home offices fail to explain adequately how life insurance can be modified to meet changed needs over a lifetime.
Perhaps the current crisis in the life insurance industry can be resolved by a combination of new product design with new training techniques.
The new product designs can build in guaranteed flexibility, to permit change as policyowners face changes in their financial needs. At the same time, the industry can train producers to stress that these life insurance products can be modified as financial needs change.
A major problem in the life insurance industry is the huge numbers of “orphan” policyowners. These are people whose continuing needs are not being met by producers.
A major element in the life insurance sale has always been the continuing provision of up-to-date information that will enable policyowners to understand their options. When producers leave the business or no longer service the clients they originally sold, this information flow breaks down. As a result, policyowners fail to recognize that they have the ability to modify their policies as conditions change.
A number of insurers have taken steps that have effectively met the needs of these orphan policyowners. Yet, the overall industry has a long way to go in this area.
New, more flexible products that guarantee the ability to make modifications coupled with new training techniques and the provision of service to orphan policyowners could go a long way toward resolving the current crisis in the life insurance industry.
Norse N. Blazzard, JD, CLU, and Judith A. Hasenauer, JD, CLU, are attorneys in the Ft. Lauderdale, Fla., office of Blazzard, Grodd & Hasenauer, P.C. You can e-mail them at Norse.Blazzard@BGHPC.com.
Reproduced from National Underwriter Life & Health/Financial Services Edition, July 21, 2003. Copyright 2003 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.