Tom Freston, the spiky-haired media mogul who helped create MTV (Music Television) and served as its president for 17 years, was quoted recently as saying, “Innovation is taking two things that already exist and putting them together in a new way.” He likely wasn’t referring to innovation in the life insurance industry, but he might as well have been.
Our industry has witnessed significant innovation of late in the form of hybrid products — particularly, life insurance coupled with built-in or available chronic illness accelerated benefit riders. Given recent product sales trends, the aging U.S. population, and the mounting costs of health care and other expenses, continued innovation in development and distribution of combination products seems essential to provide solutions for client needs. Smartly structured, affordable hybrid products may help our industry to remain relevant but also to flourish at a time when consumer wallets are strapped.
Ongoing innovation to meet the needs of American consumers and Main Street small business owners while supporting bottom-line business goals requires commitments of time and talent by both carriers and distribution partners alike to identify client needs, the gaps that exist in meeting them, and new or enhanced product features that can help fill the voids. As insurance professionals, our willingness to invest the hours and other resources necessary to understand what consumers need and how innovative, new solutions can help resolve them has the potential to impact our success and the success of our industry. But most important of all, this investment in innovation can positively impact our clients’ financial well-being.
The call for continued innovation isn’t unique to the life insurance and financial services realm; indeed it resonates across virtually all business sectors. As LIMRA President and CEO Bob Kerzner indicated last fall at the group’s annual conference, we in the life insurance arena can collectively take a message from global brands in other industries.
He said, “Think about the phone industry. Who would have thought 25 years ago that land lines would become nearly obsolete, that revenue from long-distance calls would decline sharply as people used their cell phones to call family and friends? The entire business model of that industry was changing. Could companies position themselves to become relevant in that world? Many thought, ‘AT&T is dead.’ In 1980, all of their business came from long-distance calls and land lines, but AT&T reinvented itself. Today, wireless service represents 54 percent of their revenue, and their total revenue is more than five times what it was 30 years ago.”
Kerzner, who also pointed to innovation at Disney, Coca-Cola and Domino’s, asked the conference attendees to consider whether we as an industry “can find new products that consumers want and that companies believe they can make a profit on.” He added, “We’re really beginning to see companies in our industry think differently, trying new things, looking at their business in a different way….”
That trend is reflected, I believe, in recent innovations in chronic illness accelerated benefit riders on universal life (UL) insurance. Consumer demographics, carrier and distribution partner initiatives to educate clients on the likelihood of needing care, the prohibitive expense of long-term care insurance (LTCi) coverage, and contraction in the LTCi market have all helped to drive the proliferation of chronic illness accelerated benefit riders on life insurance contracts.
What’s more, hybrid products have apparently struck a chord with consumers. Per a LIMRA news release, sales of individual life combination products grew 10 percent in 2012 – the fourth consecutive year of double-digit growth. Total new premium for life combination products reached $2.4 billion in 2012, representing 11 percent of total individual life insurance new premium. More than 86,000 combination policies were sold in 2012, an increase of 19 percent compared with the results for 2011.
While, as of this writing, the final sales numbers for 2013 are still forthcoming, the point is: the potential seems to exist for smartly structured, affordable combination products to deliver solutions that consumers believe are relevant to their needs and budgets.
But innovation doesn’t have to come only in the form of two things (in Freston’s words) put together in a new way; consumers today have access to products comprised of three components that together can help meet multiple, evolving needs: guaranteed UL combined with both a chronic illness accelerated benefit rider and a longevity rider. This type of product is designed to provide solutions whether clients live too long (outlive their assets), get sick along the way, or die too soon.
Let’s take a closer look at all three potential scenarios, as the needs in this country that are associated with them are substantial. First, regarding the possibility of living too long, the current growth in the number and proportion of older adults in the United States is unprecedented in our nation’s history, according to the CDC.
Per U.S. Census Bureau projections, the population age 65 and older is expected to reach 92 million in 2060 — more than twice as many people who were age 65+ in 2012. The older population would represent just over one in five U.S. residents by the end of 2060, up from one in seven in 2012. The increase in the number of the “oldest old” would be even more dramatic — those 85 and older are projected to more than triple from 5.9 million to 18.2 million, reaching 4.3 percent of the total population.
What’s more, for these “oldest old,” the potential of facing an income shortfall is very real. As explained in a recent Society of Actuaries newsletter article, based on a presentation at the Living to 100 Symposium in Orlando earlier this year, “Longevity risk – the risk of outliving one’s retirement savings – is probably the greatest risk facing current and future retirees in the United States. As life expectancy increases, more and more Americans will live to ages 90 and even 100, and we will need to figure out how to ensure that they will have adequate retirement incomes.”
That’s where a longevity rider on life insurance can come in, helping to provide a guaranteed stream of retirement income – but even before retirement, needs can arise for access to living benefits. Given that nearly a quarter of all Americans and two out of every three older Americans have multiple chronic conditions, according to the CDC, many can likely benefit from a life insurance policy bundled with a chronic illness accelerated benefit rider.
This type of rider isn’t long-term care insurance (LTCi); it’s classified as 101(g) under the Internal Revenue Code and therefore, no LTCi license is required in order to sell it in most states. However, a hybrid product consisting of UL with a chronic illness accelerated benefit rider can provide tax-free living benefits to help pay for assisted living, nursing home care, or virtually any type of expense (even if not related to the illness) for policy holders who meet the rider’s health impairment criteria.
But what if the challenge goes beyond chronic illness, typically defined (for purposes of the rider) to mean a severe cognitive impairment or a permanent inability to perform at least two of the six Activities of Daily Living – what if the policy holder dies sooner than anticipated? Certain types of UL contracts available today with a chronic illness rider can also generate cash as early as policy year 10, provide a 50 percent return of premium feature at year 20, and accelerated access to the death benefit beginning at age 85, using a longevity rider.
Combination life insurance products with riders for longevity as well as for chronic illness have the potential to provide appropriate, affordable solutions whether a client faces the challenge of outliving assets, getting sick along the way, or dying too soon. And when it comes to meeting consumer needs through product innovation, I would assert that taking three solutions that already exist and putting them together in a new way is better than just combining two.