We’ve come a long way from our old vanilla & chocolate world (Whole Life & Term that is)
by Brooks TingleMr. Tingle is Senior Vice President, Marketing and Strategy for John Hancock Insurance. In addition to leading all of John Hancock’s insurance marketing activities, Mt. Tingle is charged with developing and implementing John Hancock’s market expansion strategy. Connect with him by e-mail: [email protected].
The insurance industry, like other business segments, goes through product cycles as market conditions shift and consumer needs change.
A look at the past – particularly focusing on economic and social changes and the corresponding evolution of universal life (UL) – can give us insight into what the life insurance industry needs to offer today to provide a new level of value for clients.
History of Industry Product Cycles
In the 1970s, Term and Whole Life were the only products available. At the end of the decade interest rates started to skyrocket and peaked in the early eighties.
Then, as interest rates rose to historically high levels consumers were experiencing inflation and increasing taxes, and looking for savings vehicles apart from life insurance. Many who did have whole life insurance policies were borrowing from their policies more frequently. Additionally, more married women were joining the labor market with a corresponding increase in household incomes, creating a greater need for income protection products.
The fact that incomes were increasing also drew attention to the tax advantages of life insurance. The industry responded to these pressures and demands with the introduction of current assumption universal life (UL) products – positioned as an affordable alternative to Whole Life. At its peak in 1987, UL represented just over 40% of life insurance sales.1
The equity market boom of the 1990s led to the next product cycle, with variable universal life (VUL), which allowed the policy’s cash value to be directed to a number of equity funds with greater return potential and risk. VUL life sales reached their highest level in 2000, just as the dot.com boom peaked.2
The decline of the stock market and interest rates in subsequent years left many producers and clients disappointed with the performance of their life insurance policies relative to their original expectations. This accelerated the product transition toward UL no-lapse guarantee products (guaranteed UL), which promised both producers and clients that they would not be faced with a need to increase premiums to maintain coverage, no matter what happened in the investment or external environment.
As the first decade of the 21st century progressed, however, some shortcomings of guaranteed UL products become apparent, including:
- Little flexibility to make adjustments to premiums in the future
- Limited cash value potential should customer needs change
- Minimal upside potential in the event interest rates rise in the future
Where We Are Today
In today’s economic environment, Americans are dealing with the effects of an extended period of low interest rates with the need to save for retirement.
In fact, while Americans worry about having enough money for retirement, only 53% of the workforce participates in or contributes to a retirement plan, according to the U.S. Bureau of Labor Statistics.3
Another challenge families have is saving for college funding. By 2031, the expected cost for a four-year, private education could jump to more than $292,000 – and as high as $530,000.4 Carriers have responded by re-designing current assumption universal life product options to provide an attractive alternative to guaranteed UL for many clients.
These products are marketable in a low interest rate environment by offering the policyholder value, flexibility, liquidity and protection suitable for the investment environment. For instance, when compared with guaranteed UL, these newer current assumption UL products typically offer lower premiums, more cash value upon surrender and upside potential – should crediting rates rise, the price of the policy can decline.
Over the past couple of years, indexed UL products have also been steadily gaining broader market acceptance. With equity market volatility in recent years driving consumers to focus more on safety and protecting wealth, and low interest rates making it hard to grow wealth, indexed UL products can offer downside protection but with the potential for growth linked to the performance of an underlying index.
As a result, today’s universal life products can be used strategically as an integral part of a financial plan. Consumers can choose from a broad range of policies that can add value for a wide range of customers with very different needs, and over varying economic cycles. A well-designed policy can offer:
- A legacy to leave for loved ones
- Cash value that can be used for supplemental retirement income, college funding, etc.5
- Riders that offer long-term care coverage, disability income and/or accelerated access to the death benefit in case of a terminal illness
Looking to the Future
Although the industry has developed products suitable for today’s economic needs and challenges, the demand for life insurance has been trending downward. Only 44% of U.S. households have individual life insurance,6 even though 80% of Americans say that life insurance is something most people need.7
It’s clear that we have to continue to evolve to ensure that life insurance remains relevant to consumers and that they follow through and purchase the coverage they need. If there is one thing that the history of life insurance tell us, it’s that the industry must constantly evolve to remain relevant in the eyes of consumers.
1. LIMRA’s Individual Life Sales Survey and LIMRA estimates. 2. LIMRA’s Individual Life Sales Survey and LIMRA estimates. 3, United States Department of Labor, Bureau of Statistics. Table 1. Retirement benefits: (1) Access, participation, and take-up rates, (2) National Compensation Survey, March 2014. 4. Forbes, College Costs Could Total as Much as $334,000 in Four Years. 1/31/2015. 5. Loans and withdrawals will reduce the death benefit, cash surrender value, and may cause the policy to lapse. Lapse or surrender of a policy with a loan may cause the recognition of taxable income. Policies classified as modified endowment contracts may be subject to tax when a loan or withdrawal is made. A federal tax penalty of 10% may also apply if the loan or withdrawal is taken prior to age 59 1/2. 6. LIMRA, Facts About Life, 2013 7. Life Happens, What You Need to Know About Life Insurance, 2014