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Insurance Products In 2008: A Flight To Security

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The insurance product scene in year 2008 saw 3 forms of flight–to quality, to ratings, and to guarantees. Much of this came in response to the financial meltdown. Here is how the story unfolded.

Flight to quality. Since the summer, agents have encountered a “flight to quality” among their customers, says Jim Medici, senior vice president-marketing, Senior Marketing Group, Charlotte, N.C. This has been a “critical” change, he says, noting that agents “want to present carriers that won’t present dilemmas for clients.

“Safe and conservative have become the buzzwords for life and annuities. The same goes for long term care insurance–agents want to be sure the carriers they use will be around when it comes time to pay claims,” Medici says.

Flight to ratings. People are looking at ratings of companies issuing their policies, says Greg Olsen, a partner at Lenox Advisors, New York. “They want double- or triple-A rated carriers, 150-year-old blue chip,” he says, “and they are looking at ratings by all the rating firms.”

That is especially so if consumers are buying a long term care policy and don’t expect to make a claim for 30 to 40 years, Olsen says.

“Ratings have also become extremely important in life insurance,” he continues, noting that “it used to be that people wanted AA-rated companies. Now they want AAA-rated companies.”

Many also want to buy life insurance from mutual companies that pay attractive dividends, he says. They don’t want “stock companies that have been in the news.” Some mutual carriers are responding by putting their 2009 dividend rates on their websites, he notes.

Where fixed annuities are concerned, people are looking for “reasonable” rates and “more than reasonable” company ratings, says Medici. Advisors keep asking, ‘what kinds of assets are on the books of this carrier?’” he says. “They ask because more of their customers, or customer gatekeepers like attorneys, CPAs and trust officers, are asking that.”

Olsen agrees. It’s not just advisors who are asking, he adds. “Clients are asking too–’how stable is my annuity company?’”

Agents need to bring the ratings to the attention of the client, Olsen concludes, contending that “disclosure is paramount at this time.” Agents should also check to see if their companies have reduced their dividends, he says.

Flight to guarantees. As 2008 wore on, clients started saying, ‘I can’t stand any more losses,” recalls John Rucker, president, The Rucker Company, a BGA in Dublin, Ohio. “So we saw a flight to guarantees–for instance, FIA sales went down but traditional FA sales went up.”

Because of the guarantees in whole life, customers often came to agents saying they want WL, observes Marilyn M. Tavenner, president, the Tavenner Agency, a brokerage general agency in Springfield, Ohio. But they were interested in universal life with guarantees after learning that the UL premium was lower than the WL premium, she continues.

ULs with longer guarantees do cost more than ULs with shorter guarantees, Tavenner allows. But in 2008, she says, “we could still make a case for UL with no-lapse guarantees out to age 95 or 100–provided the agent was able to sell the point that ‘you’re getting the value of permanent insurance without the cost of WL.’”

What about trends in the products themselves? The product pros saw the above themes played out in virtually all product lines and areas. Examples follow.

Annuities. In variable annuities, the dominant products were VAs with guaranteed minimum income benefit and guaranteed minimum withdrawal benefit features, says Olsen. In 2008, “clients didn’t want to invest in the stock market unless they got the belt and suspenders that these products offer,” he says.

GMIBs and GMWBs provided consumers a way to dip their toe in the market, Olsen explains. “No matter what happens, they are guaranteed” to get the stated percentage as income or withdrawals.

Also during the year, single premium immediate annuities became more popular, he says. “People wanted guarantees, consistency and predictability,” Olsen says, and SPIAs provide that. “We’re getting back to basics now. Clients are looking for return of their money, not on their money, and being paid consistently no matter what (via the SPIA) is what matters.”

Indexed products. Today, in late 2008, is a good time to buy indexed products–annuities or life policies–because the market indexes should rebound in coming years, maintains Rucker. Even fixed indexed annuities? Yes, he says, provided that the clients have liquidity. But in 2008, he notes, not everyone had liquidity–especially in the 2nd half.

Life products. In 2008, using life insurance as an asset class became increasingly important to some customers, Olsen points out.

They or their advisors might have compared earnings the client gets from bank accounts, certificates of deposit and stocks against the buildup in a life policy, he explains. With the life policy, “they saw growth, its tax preferred status, and the death benefit,” he says. “So, if they had liquidity, some figured, ‘why not use it to buy life insurance and view the insurance as a long-term vehicle for appreciation?’”

Here’s what happened with specific types of life insurance:

o Whole life. Some customers and advisors revisited WL in 2008, exploring how it can fit into their portfolio, says Olsen. “People tend to add to their portfolio the things that go up,” he reflects. “They also liked the guarantees.”

o Guaranteed UL. This had appeal, especially for people age 50+, due to its guarantees, Olsen continues, noting “it’s cheaper than WL.”

o Term life. Due to the economy, agents were selling term as a low-cost choice, Olsen says–i.e., “more protection for the least amount of dollars.” There was more interest in the annually increasing term, he adds. The idea was that, after the economy improves, perhaps 5 years from now, the customer can then stop the ART and purchase a 20-year level term policy.

o Indexed universal life. “We have been selling a fair amount of indexed universal life insurance,” says Rucker. The cases often entailed using traditional premium financing (fully collateralized loans from a local lender), not hybrid premium financing, he says.

o Current assumption UL. The carriers wanted to sell more of this product, because the reserves on it are a lot less than with the guaranteed products, says Rucker. New illustrations have come out that help make the case for this with clients, using reasonable assumptions, he notes.

o Electronic term applications. Brokers can now fill out the app online, Rucker says. The result is the apps go to the carrier in better order, and there is a better cycle time, than with manual entry. “This will become a mega trend,” he predicts.

Soon, there will be electronic delivery of policies, too, Rucker adds. Agents will like that, he continues, because “why should they drive 30 miles to deliver a term policy, just to make a $30 commission?”

That appeals to younger agents, agrees Tavenner. That’s because younger producers often sell term insurance to clients needing low-cost premiums, so their commissions are low. The electronic services help reduce their costs, she says.

Long term care insurance. The coverage became more of a mainstream financial planning tool in 2008, says Olsen. Before the last 2 months of the year, his firm saw “brisk sales of the product.” Much of this was purchased at the workplace–influenced, he thinks, by the voluntary market discounts and also, in New York, by the state’s 20% tax credit.

“Customers were saying, ‘with that 20% credit, it’s worth it to me,’” he recalls.

The fastest movers were less expensive LTC policies (having, say, a 3-year benefit period and no or modest inflation features), but some clients did choose more expensive policies (with, say, lifetime benefits and 5% compound inflation protection), Olsen adds.

Rates for basic LTCs went up by only about 5% from 2007, he points out, while rates for some of the more comprehensive plans rose by 50% or more. (He says some carriers raised rates on older LTCs, too–e.g., on policies purchased in the 1990s, the increases were 16% to 20% or more.)

Health insurance. “I saw a lot of customers taking out high-deductible policies with Health Savings Account products in 2008,” says Michael Dysart, president of Health Care Solutions, San Diego, Calif. The buyers tended to be ages 35+–they liked that HSA plans can save them up to $300 a month in health premiums. Many took that savings and used it to buy a ROP term policy, he observes.

“The downside is that, with most HSA plans, only the wellness benefits are covered up to the deductible; and the deductible is high. But the upside is the plans are affordable.”

But then, HSA plan deductibles may not be seen as all that high anymore. A new report from Mercer, a unit of Marsh & McLennan Companies Inc., New York, says that the $1,100 minimum deductible for HSA-compatible health plans in 2008 was almost comparable with the typical individual group preferred provider organization plan deductible of about $1,000.

Altogether, health coverage costs in 2008 averaged $7,815 for PPO plans, $7,768 for health maintenance organization plans, and $6,207 for health account plans, Mercer says. The average cost for all covered employees increased about 6.3% between 2007 and 2008.

Key riders. Several riders turned heads in 2008, too. Not surprisingly, they reflect the themes of guarantees and long-term certainty. Examples:

o Guaranteed minimum income benefit riders on variable annuities were significant in 2008, says Medici.

o Return of premium term riders continued to be popular in 2008, says Dysart of California. The 25-30 year ROPs did best, he adds, because the cost-per-thousand is cheaper than on shorter term ROPs. At his firm, 25% to 35% of term premium had ROP riders in 2008, he says, much of it written on ages 35-50.

ROP buyers were small business people, parents looking for college funding alternatives, and people seeking products for buy-sell agreements, Dysart says. Some favored ROPs that allow loans, he notes, and some liked term policies with ROP that allow conversion to UL at the original rate class. But the main attraction, he says, “was that they can get their money back.”

o LTC riders on UL policies. This is a new concept, says Dysart, noting that only about half of 1% of clients currently have it. But more and more insurers will be coming out with it, he predicts, because “it’s a have your cake and eat it too kind of product.”

For instance, he says, clients might buy a $250,000 UL, with a no-lapse guarantee to age 121 and a $5,000 a month rider for LTC, assisted living or home care (pays on an indemnity basis, after 90 days). “Some people don’t buy stand-alone LTC insurance because they think they won’t ever use it or can’t afford it,” he explains, “but they’ll pay for the LTC rider” attached to a low cash value UL (to help keep the cost down).

Distribution. Fewer trained agents have been coming to do business with BGAs, because the big insurance companies are not recruiting or training agents any more, points out Tavenner. This has been going on for a while, she allows, “but we’re feeling it now.” The result, she says, is that BGAs have become very competitive in efforts to garner trained agents–by offering service and support in ways that earn trust.

Meanwhile, Tavenner says, insurance marketing organizations have begun joining one another, making for even larger organizations. This is giving members access to multiple life insurers without having to guarantee production levels, she says. And that, she says, is impacting distribution of products.

Innovation. Despite the challenges of the 2008 meltdown, some carriers kept on innovating. Near year end, for instance, AXA Equitable Life Insurance Company, New York, rolled out a patent-pending enhancement to its Accumulator VA products. The feature lets VA owners “shift” from having a GMIB benefit to having a GMIB benefit for life at age 85.

Meanwhile, on the term insurance front, Protective Life Insurance Company, Birmingham, Ala., unveiled a “term income provider” policy. This lets owners pay 7% to 39% less for term coverage if they agree to have the issuer pay the death benefit as an income stream, not a lump sum.

The financial crisis of 2008 has a silver lining for advisors, sums up Olsen. “What a great opportunity this is to establish trust with clients, by providing the right product that makes a difference in their lives.”


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