For many producers, the potential of the affluent market lies in providing accumulation or wealth management products and services. But what about more profitable risk products, life insurance in particular? Is there any potential?
Opinions differ. Some feel the market for new life insurance sales is limited. However, ample evidence suggests there are tremendous sales opportunities for life insurance if you address the right needs.
The affluent market
Different people define the affluent market in different ways, but most use some level of assets or net worth. I will define affluent households as those with $500,000 or more of investable assets. This definition describes about 7% of U.S. households.
While most of us can only dream of being in that good a financial situation, the affluent market does not describe itself as “affluent”–only 12% describe themselves that way. Affluent individuals are more apt to characterize their situation as “financially comfortable” (40% see themselves that way). This may seem inconsequential, but if you do not see yourself as affluent then you worry about protecting the wealth you have.
Life insurance ownership
One of the stronger arguments that the affluent market for life insurance is saturated is the fact that 85% of affluent households already own a life insurance policy. And only 16% of affluent households believe they need more life insurance, which is almost three times less than the general public.
The most common reasons for owning life insurance, even with the affluent, are to pay final expenses and to replace income in the event of premature death. If this is how you are selling life insurance, then the affluent market is saturated. A life insurance needs analysis on a typical affluent household will indicate the household is over-insured by $300,000 or more.
Because of their assets, affluent individuals can self-insure their income replacement needs. The average affluent household has 40 times its current income in assets. Affluent individuals have a variety of assets, but many also have modest annual incomes–36% earn less than $100,000.
Affluent households are older. Because they saved and accumulated over many years, they have considerable financial assets. In addition, most do not have dependent children at home, minimizing the need for income replacement protection. The message is clear: Do not expect those in the affluent market to be receptive to using life insurance for final expenses or income replacement.
Yes, most of the affluent market does own life insurance, but what they own is not enough to protect their assets. Much of their wealth is illiquid or targeted for retirement income. By using these assets to self-insure income replacement needs, affluent individuals limit their ability to employ the assets for other purposes.
One important use is wealth transfer. Transferring some of their wealth to family members is an important goal of the affluent. In fact, wealth transfer is one of the major reasons that affluent households own life insurance.
A major threat to wealth transfer is estate taxes. The future of federal estate taxes is uncertain, but many affluent households, particularly those with more than $1 million of financial assets, face the prospect of having to pay estate taxes upon their death or their spouse’s death.
Our analysis shows that estate taxes could considerably deplete the wealth of households with more than $1 million of financial assets. Many affluent households (over 40%) do not have an estate plan to minimize their estate tax liability. Those without an estate plan would need an additional $1.6 million of life insurance coverage, on average, to pay their estate tax liability under current law. The market for second-to-die life insurance for estate tax use is considerable and could represent over $30 billion of new premium.
In closing, when marketing to the affluent, do not try to sell life insurance in the same way you do to the general public. The affluent have different needs that require products and sales approaches that leverage financial planning objectives such as wealth transfer and charitable giving. Market life insurance as asset protection, not as death protection.