From the October 2008 Issue of Senior Market Advisor Magazine
It’s difficult to imagine a less exciting topic to broach with your clients than whole life insurance. The consumer finance publications have slammed the product for years, essentially branding it a rip-off. Assuming you can get past that objection, you still face the challenge of selling a product that’s, well, pretty boring.
In spite of these obstacles, whole life continues to hold its own. According to LIMRA’s U.S. Individual Life Insurance Sales Summary Report, annualized premiums for whole life increased 3 percent for 2007 over 2006. Sales dropped by 1 percent in the first quarter of 2008, but that’s still a stronger performance than term, variable life, and variable universal life.
So why is whole life holding its own? Industry insiders say it’s because the product is doing exactly what it should. It provides guaranteed lifetime- and death-benefits in an uncertain environment. Whole life owners still value the peace-of-mind that the policies provide: guaranteed premiums, cash values, and death benefit; tax-deferred cash value growth; and tax-free loans of policy values.
Whole life products have also become much more flexible over the years. Insureds can still buy a traditional policy that requires premium payments for life. But variations now range from single-premium polices through joint-and-survivor coverage to contracts that include a term component. Whole life policies have evolved, resulting in increased flexibility and appeal to senior clients.
The View from Headquarters
Scott L. Berlin, senior vice president with the Individual Life Department at New York Life, says the current economic uncertainty has increased the value of whole life policies for insureds. “In today’s economy more than ever people are recognizing the value of having assets put aside for a rainy day, and for a lot of people their life insurance contract is their primary savings vehicle,” he says. “We’ve seen an increase in the amount of loan activity and there’s a good feeling about that for us, that those policies are there and those cash values are there for our consumers when they need them.”
New York Life has had a 7 percent to 10 percent increase in its whole life portfolio sales over the last several years, Berlin estimates. In particular, sales have been stimulated by the introduction of the company’s custom whole life product in 2006. “Custom whole life allows you to choose the period over which you want to fund the death benefit protection,” says Berlin. “Let’s say you are 45 and you plan to retire at 62. You can buy a seventeen-pay custom whole life product where we tell you what the premium is for the next 17 years. You’re able to pre-fund your benefit and pre-fund the premium payments.”
Berlin says that the custom whole life has been very successful among pre-retirees, many of whom need to boost their retirement savings in a short period of time, which he defines as at least 10 years. The product has also proven popular with grandparents who purchase a policy for a grandchild. The grandparents pay the premiums as a gift, and the policy’s values grow toward future education costs. The policies can also be an effective method for wealthier clients to pass assets to future generations. “Typically in those cases you would use the grandchild as the insured,” says Berlin. “First of all, if you are starting up an insurance program for them, you want that insurance to be on their life, and then it’s something that they will own eventually. The second thing is if you are using it as a savings vehicle, the internal cost of insurance is a lot cheaper on a grandchild than it is on the grandparents. We have a concept that we market that’s called the ‘four-year-old millionaire’ where the grandparents gift the annual gift tax limitation to their grandchild (for the policy’s premiums). I don’t remember the exact numbers, but it’s like $25,000 a year for college, ages 18, 19, 20 and 21. At age 31 the grandchild can take out $100,000 toward a down payment on a house. And from ages 65 to 85 they take out $100,000 a year every year to a total of $2 million. When they die, they still pass on about a million dollars to their grandchildren.”
MassMutual has experienced solid sales growth in its whole life products, according to Craig Waddington, a vice-president and actuary in life product development with the company. He reports that sales for 2008 are up 16 percent versus 2007, a pattern that has held for the past two-and-one-half years. Growth has varied across the product line: limited-pay policy sales grew strongly during 2006 and 2007, while other products have experienced strong results in 2008.
Waddington says that the greater flexibility with today’s whole life products has contributed to their popularity. He notes that universal life policies previously had the advantage of greater flexibility over whole life; in response, MassMutual “added a ton of flexibility to our whole life products,” he says. “We allow people to increase the face amount of the policy within the same policy. By adding certain riders, you can vary your premiums the same way you can vary them on universal life. So there’s, in my opinion, very little that you can do with a universal life contract that you can’t do with today’s whole life contract.”
Older clients value the contracts’ tax-deferral for their supplemental retirement savings, Waddington says, and that benefit changes clients’ perceptions of how they can use the contracts. Instead of trying to determine the smallest amount needed to fund a policy, insureds are asking how much they can get into the tax-sheltered contracts.
Whole life sales are up 12.4 percent through July, 2008 at Northwestern Mutual, according to Meridee Maynard, senior vice president for Life Products. She attributes at least part of the growth to the company’s high dividends.
“Northwestern Mutual’s portfolio is basically 8 percent fixed, 20 percent in equity,” she says. “We have a 7.5 percent dividend interest rate right now on unborrowed, permanent insurance. We have not set our dividend yet for next year, but while dividends aren’t guaranteed, we have paid a dividend to our policy owners every year since 1872. I think that dividend interest rate right now in today’s environment is very appealing.”
The Field’s Perspective
Robert “RB” Brown, an insurance agent in Frankfort, Ky., estimates that 60 percent of his life insurance book of business is in some form of whole life coverage. He says that the product’s sales have been steady, due in large measure to the industry’s restructuring of the products over the years to make the contracts more competitive with other risk-free alternatives.
Brown uses several approaches when presenting whole life to clients. As a whole life policy holder, he points to the benefits he has derived personally from his coverage. “I purchased a sizeable whole life policy in 1982,” he says.
“Every year I have received the dividend that was promised and every year I have received the cash value increment that was promised. It has helped me through good times and bad times economically and financially. The cash values helped me put both kids through college, and they each graduated without any student debt. It has sustained me after a beachfront condominium I had purchased for investment purposes in 2004 was destroyed by Hurricane Ivan. I’ve never gotten a 1099 and I’ve received a fair rate of return. I can have the money anytime I want it without having to ask somebody’s permission; I can pay it back as I feel like it.”
Prospective buyers recognize that other forms of life insurance are substantially less expensive than whole life in the early years. Brown addresses that concern in a common-sense manner. He tells buyers that every life insurance contract terminates at some date, so the real issue is how the insurance company will structure the premiums’ timing. Specifically, the insurer needs to price premiums in a manner that hedges against uncertain investment returns and will fulfill its contractual pledges over insureds’ increasing life spans. By explaining the whole life premium schedule that way, Brown says, most clients and prospects grasp the underlying logic.
Jim Tollerton, owner of Professional Benefits Inc. in Sarasota, Fla. and Chair of the Society of Financial Services Professionals’ Risk Management professional interest section, has found that prospective buyers today are more receptive to the idea of whole life than they were 20 years ago. At that time, he notes, interest rates and investment performance were significantly higher than they have been recently; that made whole life’s returns in the 3 percent to 5 percent range look rather anemic. Things have changed. “Interest rates are now significantly reduced, we’ve got the uncertainty of the market, and again, you come around to the reality that there are 70 million-plus baby boomers that are staring down the barrel of retirement,” notes Tollerton. “All of a sudden the reality of riding through market fluctuations is not as attractive as it was twenty or twenty five years ago when you could wait out a market cycle. “
Stable costs, guaranteed values, tax advantages, and insurance protection: although whole life lacks the sex appeal of other financial products, that’s still an attractive package of benefits for your clients.