Recently, LIMRA’s 2012 Insurance Barometer Study took a look at consumer attitudes and behaviors concerning life insurance and financial services. According to the study, knowledge is one of the key factors in consumers’ decisions to purchase life insurance. While knowledge drives the purchase, lack of knowledge is a key barrier to not purchasing. In the LIMRA study, 45 percent of consumers said that understanding what is being bought and getting the proper amount of coverage were the first or second most important factors when purchasing life insurance.
Even more significantly, one-third of all consumers have delayed their decisions to purchase new or additional coverage because they didn’t know what or how much to buy, with 54 percent of those who believe they need additional coverage — a group one would assume had at least a basic understanding of life insurance — delaying their purchase for these reasons.
Fortunately, insurance professionals have a key advantage. Unlike some professions, most consumers consider life insurance agents knowledgeable, and more than half consider them trustworthy. And while direct purchasing has some acceptance with younger consumers, almost two-thirds of consumers still prefer to purchase life insurance in a face-to-face session with an experienced financial professional.
To take advantage of this opportunity, financial professionals need to have sufficient knowledge about various life insurance products. They must be able to help consumers determine which product is potentially the best match for their financial needs and then reassure consumers they are making intelligent decisions based on those needs.
What Your Peers Are Reading
The participating whole life product — and the guarantees it offers — should be on the short list for consideration when it comes to which life insurance policy many consumers should consider. This product can be ideal for both the early family formation years as well as the years spent in retirement. Participating whole life fits easily into the financial planning process by providing death benefit protection for the family along with accumulating cash value that can help to meet multiple financial needs during life.
The dividend advantage
Participating whole life products, in general, may have higher premiums than other life products, but one attractive feature is the possible payment of dividends, which could be used to reduce the premiums due on the policy. Dividends, if paid, are generated from three sources — investment earnings, mortality experience and expenses within the block of business.
- Investment earnings. Usually the largest piece of the dividend pie, these represent an average rate of return from the company’s general account portfolio.
- Mortality experience. This includes conservative design assumptions for the amount of annual death benefit claims that will be paid for the eligible whole life policies.
- Operating expenses. These include the cost of selling and maintaining the eligible whole life policies.
The annual dividend payout, if it occurs, may rise or fall depending on a company’s financial performance across these three areas. It’s important to note that customer expectations on the overall performance of a policy will be influenced by the interest rates that were projected in the policy’s illustration at the time the policy was sold. Using conservative interest rates and dividend assumptions will help to manage client expectations regarding the product’s performance over time.
When discussing the product, it’s important to understand the current low interest rate environment and its implications. These rates are reflected in many aspects of the life insurance business — including the dividend scales for whole life policies. During policy review discussions, clients often ask about the changing dividend rates for their policy. Having a bit of macroeconomic background information to share could prove to be extremely useful.
The low interest rate environment
Because investment earnings are a key driver in determining the dividend rate for a general account portfolio supporting a whole life policy and, ultimately, interest rates affect all insurance products, it’s important to understand the potential effects of prolonged low interest rates.
Overall, interest rates have been in decline for the past three decades. Since 2007, interest rates have sharply declined to historic lows. The low interest rate environment has had a notable impact on many segments of the economy, and the insurance industry is no exception. Low interest rates impact insurance companies’ investment earnings and, specifically, the performance of their general account portfolios.