There seems to be almost a panicked rush to provide investment guarantees to non-insurance financial instruments.
The selected investments to which guaranteed minimum income benefits, guaranteed minimum withdrawal benefits and guaranteed minimum death benefits are being attached range from mutual funds to bank accounts to separate investment accounts for individuals.
These guarantees certainly provide a valuable insurance element to non-insurance types of investment and savings instruments. They also provide an entr?e for insurers to additional forms of revenue from investments that might otherwise not be available to the insurance industry.
While coalescence in the financial services industry is good for the various industry segments and the consuming public, the timing of separating insurance guarantees from the investment element inherent in life insurance and annuities may not be in the life insurance industry’s best long-term interests.
Entering the home office of a life insurance company provides impressive reminders of the grandeur that was built on the strength of investments garnered from the cash values of its products. While forms of temporary life insurance provide a valuable alternative to consumers, they rarely provide the economic power to sustain this industry, let alone its grand home office buildings and legions of employees.
Temporary insurance does have a place, but only as a stepping stone toward permanent coverage.
Likewise, if the GMIBs, GMWBs and GMDBs with mutual funds and bank certificates of deposit convince consumers of the long-term benefits of insurance guarantees as a step to ownership of products that build the investment base of the insurance industry, they will have a place in the business.
But if these guarantees for mutual funds and CDs merely detract from the long-term growth of life insurance industry investments, it is a matter of concern. That is, if the insurance industry is but building other elements of the financial service industry at a cost to itself, perhaps this is short-sighted.
The financial press and media pundits love to criticize life insurance products as too expensive in relation to the value they provide. Therefore, these observers will probably love the new “detached” guarantees–particularly if the relative overall costs are lower than would be the case if they were purchased in connection with a life insurance policy or annuity.
Yet, there is risk that the average consumer purchasing these guarantees with their mutual funds, CDs or other investment accounts will confuse the investment guarantees with real life insurance.
As a result, the current dismal marketplace for “real” life insurance may get worse and there may be a diminution in sales of annuities–all to the detriment of the life insurance industry.
There is no doubt that life insurance and annuities are more expensive than pure investment products. Yet, there is no substitute for “real” insurance in the form of cash value life insurance and annuities.
It is amusing to see advertisements for automobiles, once thought of as “luxury” class, now being sold for the same price as basic transportation. Why would anyone pay $100,000 or more for a luxury automobile when they can get the same brand for $25,000?
While the purchase of an investment product with a GMIB, GMWB or GMDB attached does not offer the same protection of a life insurance policy or an annuity, is it not possible that consumers will think them identical? It is obvious that the $100,000 automobile and the $25,000 automobile are not the same, even though bearing the same name; yet, in the minds of the consumer, the cheaper form of transportation has cheapened the more expensive one.
It is likely that “the horse has already left the barn” insofar as this issue is concerned. Still, there should be some consideration regarding the long-term effect these “detached” guarantees will have on the life insurance industry.
It is by no means clear to us what all the tax, regulatory and marketing implications of the sale of these “detached” guarantees will be. However, as nature abhors a vacuum, regulators and taxing authorities abhor any financial product without regulatory oversight and possible taxation.
We shall watch with great interest as the market for these guarantees develops to see whether they have provided a benefit to the life insurance industry or have merely cheapened the “brand” for the traditional cash value products that have traditionally provided the power of our industry.
Norse N. Blazzard, JD, CLU, and Judith A. Hasenauer, JD, CLU, are attorneys in the Pompano Beach, Fla. office of Blazzard & Hasenauer, P.C. Their email address is: [email protected]