A recent study by LIMRA showed the number of individuals owning life insurance has hit a 50-year low.

As Robert Kerzner, president and CEO of LIMRA, said, “The numbers tell a grim story.”

LIMRA, Windsor, Conn., found just 44% percent of U.S. households have individual life insurance. The number of U.S. households with no life insurance coverage at all had grown to 30% of households (35 million), from 22% in 2004, the last time LIMRA undertook its study. Among households with children under age 18, 11 million have no coverage.

The question raised by the study is, is life insurance in decline? Is it ever going to get better?

In general, the ratings services seem to think it will.

Generally, the ratings services look at the industry’s financial health in terms of invested assets, cash reserves and the like, and not so much at sales. But observers note that consumers are less likely to put their bets in terms of life insurance and annuity contracts on firms with shaky finances. So ultimately, the opinion of the rating agencies have a significant impact on sales.

Fitch Ratings in early September upgraded its outlook for the U.S. life insurance sector to stable. That came two years after Fitch gave the industry a negative outlook due to unease among its researchers over the weakening in the credit and equity markets and the likely impact that could have on the industry’s capital, earnings and liquidity.

A stable outlook means Fitch expects to affirm ratings for the vast majority of life insurers over the next 12 to 18 months.

Commenting on LIMRA’s findings, Douglas Meyer, managing director of Fitch, says it makes sense for the industry’s sales to rebound from the significant stresses on the financial markets in the first half of 2009.

Policy ownership is down because a number of families felt they had to drop their policies due to other pressing financial concerns, Meyer believes.

Fitch upgraded its outlook for the industry because carriers generally performed well throughout the financial crisis in comparison to other financial institutions and went into the crisis equipped with a strong capital base, Meyer says.

“The profile of the industry is fairly stable and will continue to be so throughout the financial crisis,” Meyer says. “We felt going into the crisis the industry would be affected by the downturn, so ratings broadly would be impacted. But they were relatively limited, with downgrades of one or two notches, and that’s been case for the last two years.”

In that time, Fitch downgraded 35 of 55 companies it rates, upgrading only Lincoln Financial, Radnor, Pa., and Unum Group, Chattanooga, Tenn.

Its rating action on Lincoln National followed the company’s announcement in June that it had repurchased all of the $950 million of preferred shares issued to the U.S. Treasury under its Capital Purchase Program (CPP) in June 2009.

Fitch upgraded Unum because the company took some steps to reduce risk in its investment portfolio and because its business is concentrated in employee benefits and group life, where sales results held up well, Meyer says.

For the industry as a whole, Meyer believes individual life insurance sales in the near future will be led by traditional agent channels, independent as well as career, due to an uptick in recruiting in the past year.

“You typically see that in a downturn,” Meyer says. “Life insurers try to be more selective when there are more people looking for a job, some of whom are considering changing careers to life insurance sales.”

That increase allows companies to be more selective in hiring agents, he notes.

[In a recent announcement, New York Life Insurance Co. said it is aiming to hire more than 3,000 agents to meet an increasing consumer demand for life insurance. The company said it has seen a 47% increase in individual life insurance sales for the first six months of the year compared to 2009.]

Meyer expects in the near term Fitch will affirm life insurer ratings at current levels, while downgrades should slow.

“Downgrades could still outnumber upgrades, but both those numbers will not be changing much in next year, and the industry has performed well in the crisis,” he says.

Mayer also believes that it makes sense that the industry will experience a sales rebound from the significant stress in financial markets in the first half of 2009.

Standard & Poor’s Ratings Services, New York, announced Sept. 13 it continues to maintain a negative outlook on the U.S. life insurance industry.

S&P’s outlook on the sector has been negative since October 2008, mostly due to the effects of the economic downturn.

“We expect fewer downgrades in 2010 than 2009, but they likely will outpace upgrades, even as the industry overall repairs capital and earnings stabilize,” S&P said.

In its recent comment on second quarter earnings, Moody’s Investors Service found the financial situation for life insurers generally more favorable than in the same period a year earlier.

Moody’s downgraded the outlook on two companies a notch–Mutual of Omaha and General American Life (a subsidiary of MetLife Inc., New York).

At the same time, Moody’s raised its outlook from negative to stable for 14 companies.

Not all those companies showed the same degree of improvement, said Moody’s, New York.

For the industry as a whole, the agency said it was persuaded to improve its outlook overall when life insurance sales recovered somewhat from the record low levels of early 2009.

“Life insurance sales are starting to recover,” says Laura Bazer, vice president of Moody’s U.S. life team. “Things have improved compared to the recent really bad years, but not all weak spots are gone. Recovery has been uneven and fluffy, and not all companies will recover at the same rate.”

Although sales for the industry are still below the highs seen before 2008, there has been some growth, adds Joel Levine, Moody’s U.S. life team leader.

As of May, Moody’s had issued negative outlooks for 30% of the life carriers it follows, down from much higher levels the year before.

Nevertheless, industry sales are still below highs seen prior to the crisis, Levine says. He projects life insurance product sales will show single-digit growth in the year ahead.

Variable annuity sales in the second quarter picked up over a year earlier as well as over the first quarter as companies adjusted prices and features of their VA products, according to a recent report by Moody’s. But only a fewer issuers, such as MetLife, New York Life and Mass Mutual, were active in the VA market during the quarter, it noted.

Greg Smith, an analyst with Conning Research and Consulting, Hartford, says lapse rates have gone up for the industry.

The uptick in policy surrenders in recent years has been around 13%, he says, calling it “part of the recession.”

Loans consumers have taken against their life polices have held steady at a total of about $120 billion, Smith said.

One issue that may have been holding back life insurance sales, at least for more affluent clients, is the expected return of the estate tax, Smith points out.

Some of this uncertainly may have contributed some life insurance sales in 2009 and potentially can do so more in 2010, he says.

“In 2009, term and whole life were big sellers, and term actually had record sales,” Smith says. “There is some anecdotal evidence where some term sales were fueled by uncertainty over the estate tax. If I had an estate big enough to worry about, term would at least give me some coverage.”

If the estate tax does return, some of those term sales may be converted to whole life and universal life, Smith says.

So far this year, term has declined over last year, but universal life (UL), which had a dismal 2009, has rebounded pretty sharply, he says. He notes there also has been some recent sales strength for equity indexed UL.

“This is a unique product that can be attractive in letting the owner participate in equity returns while putting a floor under account value, so I will be interested in seeing if it grows,” Smith says. “It has been a lackluster year, perhaps, but do see some products that could be good go-forward products. “