Economic activity has been slowed to a trickle by hard times and the election freeze. However, wealthy seniors are impervious and continue to be a viable market. (See sidebar.)
Talking of hard times, the insurance industry has certainly learned in 2008 that traditional investment vehicles, such as stocks and real estate, are very vulnerable.
Of the stocks in the S&P 100 Average, 73 have dropped in value in 2008 (as of August 22, 2008).
And, what of the losses caused by the foreclosure crisis? Smaller businesses, which are often owned by wealthy seniors, are also very vulnerable in this climate. Total wipe-outs have been common.
With that in mind, let’s look at how life insurance stacks up. Here are 3 main points that industry professionals should keep in mind–and also relay to clients.
1) Life insurance is not vulnerable to economic swings; it’s guaranteed.
2) Even more important: since wealth protection is legitimate, insurable interest exists up to a limit of the current size of an estate.
3) Using modern tools, the value of life insurance in force can be “assessed,” taking the insured’s health and other factors into account. This turns a portfolio of life insurance into a real tangible asset for financial planning purposes, via the secondary market for life insurance (also called life settlement market).
Some thoughts on point 2: Traditionally, insurable interest has been geared to protection of dependents and business interests. But, where wealthy seniors are concerned, perhaps it can also be geared to include the client’s potential estate tax bill and even beyond that (to account for the possibility that estate assets could be lost due to market events).
So point 2 can legitimately expand the insurable interest frontier, to the ultimate benefit of the heirs of the estate. Exact rules for going beyond the estate tax bill itself would be needed. But it is in the enlightened self-interest of the life insurance industry to begin looking into establishing such rules, because this will help spur new life insurance sales.
Some thoughts on point 3: The accompanying chart shows an actual appraisal of the value of an existing life insurance policy for an 80-year-old disabled senior.
Such appraisals are done on a business-to-business basis for financial planners and advisors who are working with seniors. The first business, in this case, is a personal actuary; the second business is the financial planner or advisor.
Appraisals can be very helpful for planning purposes, because the variables can be changed to suit various scenarios. This particular assessment uses interest at 6% (but one could also use 7% or 4% or even 9%, whatever is best suited to the situation). It assumes a 60% likelihood that the insurance company will permanently keep its “current” assumptions; and a 40% likelihood that it will revert to its lower guaranteed assumptions. (Welcome to Las Vegas odds-making.)
So, here the industry is, in year 2008, with a valuable product for the wealthy seniors market–life insurance–and hopefully valuable new rules and tools than help advisors better serve this market.