The Year Ahead

The High-Level View

These positive company assessments are supported by industry statistics, but life insurance sales are not benefiting equally from the heightening demand. Because of continuing high volatility in the equity markets—plus concerns that the U.S. economy could, despite the modest economic gains, slide back into recession—observers expect that clients will continue to favor conservative investments and protection protections. Topping the list among permanent insurance products is whole life.

A November report from LIMRA, Windsor, Conn., shows that "robust whole life sales" fueled much of the 6% gain in individual life premium growth in the third quarter of 2011 and the 5% premium rise for the first nine months of the year. Whole life sales increased 10% for both the third quarter and year-to-date.

Mutual life insurance companies, which count whole life as a core product and enjoyed more than half of new whole life premiums in 2011, aren't the only manufacturers benefiting from the increased demand. LIMRA notes that publicly held companies also increased their sales by 11%. And fraternal companies, while only representing about 5% of sales, grew their whole life premium by 25%.

Faye Williamson, a senior client Manager of U.S. Client Services at LIMRA, says producers engaged in advanced markets are also seeing high interest in whole life among high net worth clients who are looking to fund business, estate wealth transfer and charitable planning objectives.

"The 40 or so member companies that serve on our Advanced Sales Committee credit much of the increased interest in whole life to the product's guarantees," says Williamson. "In these uncertain times, whole life is seen as a dependable product."

To be sure, other permanent life products are expected to sell well 2012. Universal life premium improved 3% in the third quarter and grew 6% percent year-to-date, says LIMRA.  UL enjoyed the second biggest increase in terms of absolute dollar growth (behind whole life) during the first nine months of 2011.

More attractive pricing and revamped marketing efforts contributed to the rise. Mammen Verghis, vice president of product development-individual life insurance at Prudential Financial, says the Newark, N.J.-based insurer cut premium rates on its survivorship UL products. The company also expanded promotional campaigns to audiences beyond high net worth prospects. Result: a 10%-plus rise in sales.

Other insurers are aggressively promoting indexed universal life products. Like their indexed annuity counterparts, indexed UL lets policyholders capture a percentage of market gains of a stock index, such as the S&P 500. The products also protect policyholders against market dips via a downside guarantee.

Allianz Life's Repya estimates the insurer enjoyed a 10% increase in indexed life sales in 2011 and expects a comparable rise in 2012. The company's best-seller during the year past was its LifePro+ solution, which comes with an annual reset feature that (subject to a monthly or annual cap or participation rate) locks in indexed interest received. The gain is maintained even if the index should drop below the new indexed amount.

Leon Rousso, a financial planner and principal of Leon Rousso & Associates, Ventura, Calif., adds that he expects 2012 will be a banner year for term-like indexed UL products that accrue minimal cash value at low premium cost, but that also offer a guaranteed death benefit. That combination, he says, has made the product appealing to many of his clients.

He cites as an example a mother who exchanged a 20-year-old whole life policy carrying a $200,000 death benefit and $62,000 in cash value for an indexed UL policy from Aviva USA with a $500,000 face amount. The objective: to secure with a $62,000 single premium payment a higher death benefit to fund a special needs trust for a brain-damaged child.

"Had she kept the old policy and used up the cash value, she would have diminished the death benefit to her son," says Rousso. "She felt that [the 1035 policy exchange] was a good use of the cash value. Regardless of the cash value buildup, the policy will always pay the stated death benefit. That was critical in this case."

Mixed Bag for Advanced Planning

Sources say they expect that special needs trust planning will continue apace in 2012 because the key objective underlying the planning—to provide for the future financial support of disabled individuals who cannot care for themselves—is generally a high priority in advisor-client discussions. But the same cannot be said of other wealth transfer planning goals that are more sensitive to macroeconomic and tax considerations.

Case in point:  estate planning for individuals and married couples who are no longer subject to estate tax due to the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010. Section 301 of the act sets the federal estate exemption at $5 million per person and $10 million per couple—levels that advisors say needn't concern all but their wealthiest clients.

Turning to business planning, sources disagree as to the outlook. Repya expects, as in 2011, a "small uptick" in life-insurance funded exit planning, buy-sell planning and executive compensation planning, notably for Section 162 bonus arrangements and non-qualified deferred comp plans.

However, Herb Daroff, a partner at Boston-based Baystate Financial Planning, insists that many small businesses are deferring planning because of concerns about the tepid recovery, cash flow issues, rising healthcare costs, stagnant or declining business valuations, plus a potential slowdown of the world economy stemming from Europe's sovereign debt crisis.

Common lifetime gifting techniques that use life insurance to replace assets intended for charities, adds Daroff, should be less robust than in years past. The increased estate tax exemptions are a contributing factor, but Daroff also cites current low interest rates, which makes certain techniques, including charitable remainder trusts (CRTs) and qualified personal residence trusts (QPRTs) less attractive than when rates are high.

But whether life insurance will help fund these and other financial objectives, sources caution, will hinge in some measure on how interest rates impact insurers' financial condition—and ultimately their products.

Doug French, Managing Principal of the Insurance Actuarial Advisory Services practices of Ernst & Young LLP in New York, says interest rates are likely to remain low for at least another two years. Also, rates are straining insurers' balance sheets because of contractual obligations to honor interest rate guarantees on in-force policies that exceed the prevailing market rates.

Upshot: the companies can choose from among three "unpalatable" choices: (1) take less profit; (2) cut commissions to producers; or (3) raise policy premiums.

"What insurers are likely to do is a combination of all three," says French. "But to minimize the impact on the bottom line, the companies are getting ruthless about cutting expenses by redesigning the products. All the big insurers now have product redesigns on the drawing board."

That is likely to translate to fewer or less generous guarantees on product offerings, he adds, because cash-strapped consumers won't be as willing as in years past to pay for higher premiums and benefits. Still other consumers won't be buying the products.

Especially hard hit since the onset of the 2007-2009 downturn, says French, are sales of group life products. Companies shed more than 8 million workers from their payrolls during the recession. And though businesses are rehiring, the unemployment rate (as of November) is a still high 8.6%.

There remain, however, abundant sales opportunities to serve the still gainfully employed—and not just high net worth individuals requiring business or trust planning. French points to the burgeoning number of baby boomers who need retirement planning and, respecting income tax considerations, estate planning.

Funding a Roth Conversion

Among the most promising solutions: using life insurance to maximize IRA assets intended for a surviving spouse when funding an IRA-to-Roth IRA conversion in advance of a client's death. Baystate's Daroff says the insurance can both pay income tax incurred on the conversion and replace assets needed for retirement income before converting.

In Daroff's example, $600,000 of a $1 million IRA is set aside for a surviving spouse after the IRA account holder's death. The IRA owner then buys a $400,000 life insurance policy to replace used retirement assets and cover income tax on the conversation. Thereafter, the Roth IRA will grow tax-deferred and, when income is needed, distribute account funds tax-free.

Daroff says these Roth conversions were a key driver of life insurance sales in 2011; and, absent a change in the tax code, will remain so in 2012.

"If I were to do a deathbed Roth conversion on New Year's Eve, income tax on the conversion won't come due until April 15," says Daroff. "By then, the death claim on the policy will have been settled, thus providing cash to cover the tax. But if by some miracle I'm still alive on April 15, then I can either pay the tax from another source or reverse the Roth conversion.

"The most valuable asset now in people's estates is not their home, but their retirement account," adds Daroff. "This technique lets clients preserve that asset for heirs by funding a Roth conversation using cheap dollars—life insurance premiums."