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Retirement Planning > Retirement Investing

Exploit The Protection Side Of The Retirement Need

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The first baby boomers have reached their 60th birthday. Coincident with this, they are thinking more and more about retirement and post-retirement concerns.

The resulting 20-year-plus wave of retiring boomers will lead to huge opportunities for financial services providers and advisory professionals.

Insurance companies certainly have an interest in this ultra-large market segment, from the perspective of either retaining assets that boomers have been accumulating or getting their fair share of assets that boomers have accumulated elsewhere (and there certainly are more of those).

Where insurers have an undisputed competitive advantage is not in accumulation vehicles but in protection vehicles. Therefore, it seems maximum advantage will occur when and where insurers exploit the protection side of the retirement need.

This advantage can occur in different ways and at different times.

Consider term insurance. These offerings frequently are used to provide life insurance coverage for mortgages directly or indirectly. One popular coverage feature of today’s term life policies is a return of premium (ROP) feature, which provides that all premiums paid by the buyer will be returned at the end of the term period (typically, 15 to 30 years). ROP is an extremely attractive payment that very frequently occurs around retirement age. Such a payment need not, and perhaps should not, be viewed as part of a retirement plan. However, there is no question that when paid at this time, it is an attractive supplement to an insured’s financial situation.

One insurer now has added an additional financial amount payable. That is, both the basic ROP amount and the extra amount are received as an annuity over a payout period–with interest. Because much of the payment results from basis, the tax impact is likely to be very modest.

Critical illness insurance combined with long term care insurance can be another protection design appropriate for the retirement market. Here, the pre-retirement need for CI coverage is combined with the post-retirement need for LTC protection.

Major new designs, and those on the drawing board, already exploit the advantages of buying protection coverages during pre-retirement periods. However, one huge advantage not yet exploited very well is the guarantee of insurability. The combination designs can help. By providing a needed current coverage (CI) with insurability for LTC (a clearly needed post-retirement coverage), insurers can maintain client relationships for extended periods.

These combined benefit packages also address a critical problem for many people–i.e., the financial paralysis that results from bewilderment over the complexity involved in meeting pre- and post-retirement financial needs. The combined benefits approach makes things simpler.

[Note: There is some tension here between flexibility and ease of sale. A major issue involves the amounts of CI and LTC coverage to be provided by unit of coverage (equivalently, by $100 of premium). If there are many choices, the flexibility may play well in advanced markets where buyer and agent are relatively sophisticated and financially astute. But in other markets, as well as in distribution organizations servicing such markets, that flexibility won't work. Better to supply fewer choices, ranging from say a bare-bones offering to something richer though more costly, and be understandable to buyer and producer. In other words, the products may be inherently similar, but the marketing and positioning will not be.]

Another area of intense activity today is the combination of annuities with LTC features. This is not surprising, given that insurers want to hold on to deferred annuity assets as long as possible. The annuity can either remain in deferred status or be in payout form. In any case, the basic idea is to provide enhanced values when the insured becomes chronically ill. This addresses two important client needs in one understandable package and makes the client’s analysis process simpler and shorter, and the sale sooner.

The combination provides a major persistency incentive to annuity holders. If managed properly, this can result in more stable profit streams to companies. (In my view, underwriting on these annuity/LTC designs is out of the question. The annuity sale is transactional in nature, so a major design objective is to make sure anti-selection does not occur or is limited.)

In conclusion, consider offering protection coverages to the boomer population. These cannot be matched by non-insurers. By addressing critical buyer needs, they position you for increased revenue growth.


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