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Sales Up, Recruits Down, Prospects Mixed

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The year 2004 was a decidedly mixed one for the life insurance business. The industry saw a number of positive trends, including gains in the sale of universal life and a rise in corporate-owned life insurance for nonqualified deferred compensation and supplemental executive retirement plans.

But insurance companies continued to suffer from a decline in new and experienced producers. Congressional passage of lifetime savings accounts and permanent repeal of the estate tax also could crimp life policy sales significantly, advisors warn.

Robust sales in 2004 gave the industry reason to cheer. A third quarter report on U.S. individual life insurance sales from LIMRA International, Windsor, Conn., shows a 6% rise in annualized premiums during the quarter. The gain contributed to a 9% increase for the first 9 months of 2004 when compared to the same period of 2003.

Fueling most of the growth was sales of universal life insurance. UL revenue, which was up 12% during the third quarter and 20% for the year, now accounts for the largest share (37%) of individual, permanent life policy sales, a rise of 2% over the year-ago period. Underpinning ULs dominance is the increasing popularity of long-term, secondary guarantees, the report noted.

While variable life and variable universal life products collectively enjoyed a rise of 2% for the first 9 months of 2004 (7% if one variable underwriter is excluded), whole life annual premiums declined 2% for the quarter and the 9-month period. The products slide in market share during the past decade reflects, in part, the diminishing number of its chief backers, dividend-paying mutual life insurance companies.

But Elaine Tumicki, a corporate vice president of product research at LIMRA, says there always will be a place for the product.

“Whole life policies continue to be used in 412(i) pension plans for small companies because of 412(i)s guarantee requirements,” says Tumicki. “But given the IRS scrutiny of these plans during the past year, their fortunes will ebb and flow with the regulatory environment.”

The same applies to survivorship (or second-to-die) policies. While survivorship premiums posted 22% and 16% gains for the third quarter and first 9 months of 2004, respectively, Tumicki cautions against long-term optimism. The reason: the prospect of permanent repeal of the estate tax, which would render survivorship death benefits unnecessary to pay for it.

But even if the estate tax were permanently repealed, Tumicki says second-to-die policies may still be needed to cover capital gains taxes at death. The Economic Growth and Tax Relief Reconciliation Act of 2001, which gradually phases out the estate tax before sunsetting in 2011, also repealed the step-up in basis rule for property received from a decedent whose death occurs after 2009. EGTRRA thus transformed the estate tax into an income tax payable by estate beneficiaries when property is sold.

Permanent repeal of the estate tax, however, should not be expected if organizations representing the insurance community have anything to say about the matter. Prominent among them is the National Association of Insurance and Financial Advisors, Falls Church, Va. NAIFA, with 65,000-plus members nationwide, advocates estate tax “reform,” which might entail, for example, elimination of the estate tax for individuals whose income or assets fall below a certain threshold.

NAIFA is engaged in other lobbying efforts. Topping the list: preventing congressional enactment of a bill allowing for Lifetime Savings Accounts. As now envisioned by the Bush administration, the proposal would permit individuals to deposit up to $5,000 per year tax-free into an LSA account. They also could withdraw the money at any time, tax-free and without penalty.

“These accounts will entice people into short-term savings, killing permanent life insurance and probably annuities as well,” says NAIFA CEO David Woods. “Who wouldnt buy term [insurance] and invest the difference in a lifetime savings account? There is as yet no legislation, but were certainly making our concerns known.”

A long-term goal of NAIFA, making life insurance premiums tax-deductible, would aid in incenting more middle income people to obtain life insurance, Woods claims. If this market segment continues to be underservedan estimated one-third of American households lack a life policy or dont have enough coveragethen Congress might be tempted to withdraw the vehicles tax benefits. Woods adds that Wall Street, because of its focus on short-term profits, shares part of the blame for the current situation.

“If Wall Street continues to focus on companies 90-day performance, then CEOs of [insurance] stock companies are very much limited in their ability to make long-term investments,” he says. “But if Wall Street begins to be concerned about long-term shareholder value, then I have great hope the industry will begin to solve the middle market problem.”

That may be awhile coming and not only because of Wall Streets shortsightedness. A separate report from LIMRA on U.S. agency recruiting trends found that 34 life insurers recruited 14,700 agents (large firms accounting for 80% of the total) during the first half of 2004, a slight decline from same period in 2003. Agency-building recruiting dipped 2% from the year-ago period. And large companies contracted approximately 6,800 inexperienced recruits, a 14% decline from 2003.

“Agent recruiting and retention continues to be a challenge for many companies,” says Margaret Honan, a distribution research analyst at LIMRA. Citing budgetary restraints and competition for experienced agents as factors contributing to the downward trend, Honan nonetheless notes that “some companies are successfully recruiting and retaining agents.”

Their success may partly be due to flexible compensation packages. Bruce Wing, a senior vice president of life insurance distribution at Jackson National Life, Denver, Colo., says this is key to attracting talented and independent financial advisors.

JNL itself kicked off this year with trail-based compensation designs on two VUL products that substitute tiered commissions for the traditional lump-sum (or front-loaded) payout. The benefits for clients are reduced cash-surrender charges and the ability to secure “zero net-cost loans” earlier in the life of the contract.

“Increasingly, advisors want to be paid trail-based compensation based on assets under management, rather than heaped [front-loaded] comp with large surrender charges,” says Wing. “Life insurance has lagged behind the annuities business with this and other innovations. Now, were endeavoring to close that gap.”

Such flexible compensation designs might prove valuable not only in serving mid-market consumers, but also business owners desiring supplemental executive retirement plans. Market penetration of this space, according to a new study released this month by Clark Consulting, Los Angeles, Calif., is on the upswing.

Titled “Executive BenefitsA Survey of Current Trends,” the report reveals that 83% of respondents at Fortune 1000 and large private companies adopted a SERP to provide executive benefits exceeding amounts limited by qualified plan restrictions. Clark Consulting attributes the high percentage (the figure is a 12% gain over the 71% recorded in 2003) to the declining use of equity split-dollar life insurance plans and stock option plans.

Fifty-two percent of survey respondents informally fund their SERP, a figure holding steady from last year, and 64% of this number fund the SERP with corporate-owned life insurance. Thats up from 61% in 2003, though down from 68% and 69%, respectively, in 2002 and 2001.

COLIs dominant market share in 2004 far surpasses the next three most popular funding mechanisms: mutual funds (15% of SERPs); company stock (10%); and managed portfolios (5%). Corporate annuities, corporate assets and bonds/bond funds each accounts for another 2% of SERPs.

Corporate- and trust-owned life insurance similarly predominate as funding vehicles in nonqualified deferred compensation plans. This year, COLI and TOLI collectively accounted for 61% of such plans, up from 55% in 2003, though down from 65% in 2002 and 2001. Ninety-four percent of Clarks respondents offer a nonqualified plan, a 1% gain from 2003 and an 8% rise from 2002.

“The rising prevalence of nonqualified deferred comp plans results from an increased demand for low-cost corporate plans with the power to recruit, retain and reward a select group of management or highly compensated employees,” says Les Brockhurst, president of Clark Consultings Executive Benefits Practice. “Also, clients now are using the plans very much like 401(k)s, as theyre insisting on the same kind of recordkeeping and platforms for both plans.”

Seventy-seven percent of Clarks respondents indicated their deferred comp plans allow short-term or in-service distributions, up from 75% last year. The provision, says Brockhurst, tends to increase plan participation among younger executives who have short-term obligations, such as college costs for children.

Deferred comp and SERP plans are, however, due for changes that will impact amounts deferred after Dec. 31. The new IRC Section 409A, which Congress passed on Oct. 22, provides that distributions only may be made at certain times or upon certain events specified in the legislation.

These include: separation from service (no sooner than 6 months after separation of service for key employees); death; disability (as defined in legislation); unforeseeable financial emergency; a future date specified at the time of deferral; or a change in control (as defined in Treasury regulations).

Reproduced from National Underwriter Edition, December 16, 2004. Copyright 2004 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.