Inflation isn’t all it’s cracked up to be. Despite the steady appreciation of almost everything except computer speed and digital storage space, premiums on term life policies have actually declined over the last decade – and will continue to fall over the next 12 months, according to the Insurance Information Institute. The decreases are fantastic news to consumers and their beneficiaries, but the very changes in the marketplace that make these cut-rate premiums possible also present today’s advisor with a series of challenges.
“Premiums are less than half of what they were a decade ago,” says Dr. Steven Weisbart, an economist and life insurance expert with the III, who projects that they will undergo a further 4 percent drop in 2007.
What’s behind the declines? Ultimately, technology. First of all, death rates for the 25 to 44 year-old demographic – the heart of the market for term insurance vendors – have decreased substantially. According to the National Center for Health Statistics, 25-to-44 year-olds suffered a mortality rate of approximately 177.8 per 100,000. But by 2004, that rate had fallen to 161.8 per 100,000 – nearly a 10 percent drop in less than a decade.
How did it happen? Credit a vast combination of factors – from advances in automobile crash survivability to better drugs and medical equipment. Overall, death rates of nine of the 15 leading causes of death declined substantially over the last year – offset by increases in mortality from accidents, high blood pressure, and Alzheimer’s disease.
Most remarkably, mortality for breast cancer declined by 7.2 percent in 2003, according to a recently released study from physicians at the University of Texas.
The favorable changes in mortality extend to seniors as well: The average life expectancy at birth is currently 77.8 years – a record high. Women now have a life expectancy of some 80.1 years, again according to the National Center for Health Statistics.
Commoditization of the product
At the same time, technology has revolutionized the way insurance is sold: Web aggregators such as Intelliquote.com and ReliaQuote.com helped to turn term life insurance into a commodity, forcing insurance companies to slash premiums in an attempt to compete on price – an assertion of a ruthlessly efficient market that made sales a challenge for service-oriented insurance agents.
So how does an insurance agent add value when insurance is increasingly swapped like pork belly futures?
“Don’t sell based on product,” advises Randy Scritchfield, CFP, a life insurance agent with Montgomery Financial Group in Damascus, Md. “You build a relationship, and the product sale simply comes out of that.”
Scritchfield, who’s been a life insurance producer for 26 years, is a 22-year Million Dollar Round Table member with five TOT years to his credit – and he’s willing to cede do-it-yourselfers to the Web sites. “I divide the market into three basic segments: do-it-yourselfers, collaborators, and delegators,” explains Scritchfield. “I want to work with delegators. I will work with collaborators. I don’t work with do-it-yourselfers.”
Nevertheless, he cautions advisors not to burn bridges, because do-it-yourselfers can later become collaborators and delegators as their circumstances change.
Each of the above, of course, benefits term and permanent insurance policies alike. But term insurance premiums are particular to lapse-based pricing: Insurance companies have cashed in on the fact that relatively few term policies are actually paid.
Bob Barney, President of CompuLife Software, Inc. in Nicholasville, Ky., sees dark clouds on the horizon for many insurance agents pitching re-entry term:
“The core of the problem with re-entry, and the problem with the illustration of re-entry premiums, is the tendency for companies to illustrate re-entry premiums as though they were somehow a ‘renewal’ option,” says Barney. “That is the heart of the confusion for the client and it is where such illustrations will come back to haunt the life companies and agents who use them to sell term.”
Re-entry term, in short, is a term insurance policy with a provision that allows healthy policy owners to apply to become reunderwritten, usually in three to five years’ time, at potentially lower rates if they are healthy enough. Otherwise, they continue to pay the guaranteed rate until the end of the term, at which time the policy has either been paid or expires worthless.
Suppose the client enters into the contract confusing the terms “renewable” and “re-entry.” Re-entry term, however, does not guarantee the client the ability to purchase a new policy at the end of the term. If the client’s medical situation changes, or he simply ages enough, he may not be able to find coverage at all – a situation that can lead to disappointed and angry clients at best, and at worst, a huge potential liability problem for agents.
“When in doubt, the courts favor consumers over manufacturers,” says Barney. “Salespeople rarely fare well in those conditions.”
What’s more, if the customer remains healthy and insurable, ALL term insurance allows for re-entry if premiums fall – simply by replacing the term insurance policy. The guarantee, argues Barney, is worthless – it promises the customer something he already has.
Barney’s advice: Don’t even muddy the waters by mentioning “re-entry.” A number of your clients will think “renewable,” no matter how carefully you explain it. And they will blame you and your company for the confusion. Scritchfield agrees – he doesn’t sell re-entry these days either.
Term life and the needs of seniors
When people are in their 20s, 30s and 40s, they frequently have children relying heavily on their income. But once their children have graduated from college, one of the chief reasons for temporary coverage – the need to finance a college education for their children – vanishes.
As clients enter their 50s, however, their incomes frequently increase, while the number of dependents decreases. The home mortgage may be largely paid down, as well, which reduces the availability of the home mortgage tax deduction. Finding ways to defer taxes may become more relevant during this period of life, writes Peter Katt, an independent fee-only tax advisor and writer, and frequent critic of the insurance industry.
So when is term insurance appropriate for seniors? Suzanne Sargent, vice president of BSI, Inc., an insurance brokerage and consulting company and an industry veteran of nearly three decades, believes that term insurance may be appropriate for older clients who need to accelerate retirement saving – especially where they can do so on a tax-advantaged basis in retirement accounts and qualified plans and by taking advantage of catch-up provisions. In some cases, the savings in premiums for term insurance can be productively employed for retirement savings – the essence of ‘Buy Term and Invest the Difference.”
She has also seen return-of-premium term used where clients plan to use any premiums returned at the end of the term to pay down a home mortgage or otherwise reduce debt. If the elderly clients are business owners and are passing the family business or farm on to the next generation, they may wish to take out a term policy on their heirs: The need for such insurance generally is not permanent, but the death benefit can help policy owner/beneficiaries deal with the disruption.
Lastly, a term insurance policy may make sense for grandparents who wish to fund education for their grandchildren – a need which naturally expires once those children graduate from college.
Naturally, most insurance companies are reluctant to issue policies to the elderly. But if your client is in exceptional health, both Scritchfield and Sargent have had success getting clients underwritten on policies extending into their 80s. Be prepared for disappointment, though, adds Sargent. “It’s tough to get.”
In recent years, term insurance vendors attempted to convince regulators to introduce a separate “term only” insurance license allowing some agents to sell term insurance exclusively. The new licenses would be much easier to obtain than existing insurance licenses – either without an exam, or with a simplified test.
Supporters, including the National Conference of Insurance Legislators and Rep. Shirley Bower, D-La., argued that existing insurance licensees were underserving low-income and minority communities. Life insurance agents, relying on commissions from permanent insurance policies for their livelihood, were focusing their efforts on the affluent, while low-income populations went underserved.
The measure was opposed by a number of financial planners organizations, including the National Association of Insurance and Financial Advisors, and was finally condemned by the National Association of Insurance Commissioners Market Regulation and Consumer Affairs Committee.
The reason? NAIFA President C. Robert Brown argued that even working- and middle-class customers ought to understand the full gamut of insurance products available to them.
“A fully licensed life insurance agent can help find a solution that best suits that individual’s needs and circumstances,” wrote Brown in a statement. “An agent licensed to sell just one product can’t. Consumers deserve better.”
The downside, of course, is that fully licensed insurance agents who rely largely on permanent product commissions for their livelihood will focus their efforts on the affluent – potentially leaving working families underinsured, even with term insurance. Ultimately, term life insurance licensing efforts were defeated in Mississippi, Illinois, and Alabama. With Congress in the hands of Democrats starting next year, however, we may see more such measures before state insurance commissioners in the months and years to come.