Advisor Today > > February 2001: A Whole New Life?

Cover Story: A Whole New Life?

Whole life insurance appears to have lost its star quality — but could an extended bear market restore some of its glow?

By Lynn Vincent

VH-1 — the television music channel that began life as M-TV for grownups, but devolved to resemble rock-and-roll's answer to The National Enquirer - now airs a show it calls "Where Are They Now?" It's one of those shows we channel-surfers who straddle the Baby Boomer/Gen-X fence will pause on furtively, keeping a trigger-thumb suspended over the remote control in case anyone walks into the room.

Consider this article the Where Are They Now? of life insurance. In this episode, we'll revisit the popular mid-20th-century star Whole Life, a product many say is a has-been. Whole life has been edged increasingly out of the limelight by the financial services bet on a raging (and perhaps now late) bull market, the rise of the individual investor and the corollary mantra "buy term and invest the difference." Some planners and insurers have relegated whole life to the B-team and built sweeping business models almost exclusively on the strength of variable products. But other firms still sing whole life's praises, finding new tricks for the old star - and a new, upscale generation of fans. Some even predict that if the Wall Street bull takes a long nap, whole life may stage a comeback.

The fall of whole life

A LIMRA report covering 23 years of market share data shows whole life in its heyday: In 1976, such permanent individual policies commanded a whopping 88 percent market share. But that figure slid steadily through the rest of the "Me Decade" and on through the next two, falling to just 29 percent in 1999. The nose-dive continued through last year: A LIMRA third-quarter 2000 sales summary registered year-to-date, double-digit losses for whole life premium amounts, face values and number of policies sold across 95 companies surveyed. Meanwhile, variable universal products made substantial gains, leaping about a third in premium amount and face value and logging 9 percent more policies sold than the previous year.

Blame it on the Street

Dynamic equity markets have played a key role in whole life's shrinking footprint. An 18-year sky-bound Dow has, but for a few pauses and corrections (followed by fairly quick recoveries), "encouraged people to believe in the myth of an evergreen bull market," says Curt Anderson, National Insurance Training Director at Dearborn, a Kaplan Professional Company.

The last eight years solidified the right of the individual investor to rub shoulders with Wall Street analysts. Small players received a late-90s shot in the arm with the advent of the Internet. For the financial-services world, it was as though the Enola Gay had flown over and dropped a financial-knowledge bomb on John Q. Public. Individual small investors soaked up free investment information, real-time trading data and discount brokerage fees. The furor gave birth to more than day traders; it also fueled among average investors inflated return-on-investment expectations that made low-interest products look very unattractive.

The economic buoyancy "especially affected young people who have never seen a down market and even some older people have forgotten what a down market is like," Anderson says. "This bull market was not only longer, but also more robust than others. People's (ROI) expectations are considerably higher than in the past."

That may be an understatement. As tech stocks and web enterprises combined to hatch 21-year-old millionaires overnight, regular working folks didn't think a 12 percent to 15 percent return was too much to ask. And with returns exceeding 20 percent in some cases, the modest gains offered by whole life products look comparatively anemic. Anderson says many agents and planners securing training through Dearborn report that consumer response to the single-digit returns common to whole life is something like: "Gee, why would anyone want to be involved in that?"

Equities take center stage

A 1998 LIMRA study of consumer attitudes toward life insurance revealed such thinking among younger, more affluent focus group participants. Cash value insurance of any kind is "not an area I really spend a lot of time thinking aboutÉ" said one married women whose household income topped $100,000. "I don't really think in terms of speaking to an [insurance] advisorÉ I'd rather speak to people about money that I can invest."

Comments like that - and a hard look at historical equity market realities - have caused some companies to jump on the equities bandwagon for most of the last decade. Berwyn, Pennsylvania Provident Mutual, for example, hasn't dropped whole life from its roster of products, but the sale of traditional permanent policies comprises less than 2 percent of the firm's production. Conversely, variable products with investment features keyed to play off long-term equity gains account for more than 95 percent of Provident's sales.

Provident's management focused almost exclusively on variable products in the early 1990s because they felt it was a more robust business model than one that relied heavily on fixed-income products. Says Provident Vice President of Marketing Dave Dorans, "We have attracted consumers and producers who have looked at the historical returns over the last eight, 20. . . even 50 -year period, who have seen that if your investment horizon is long enough. . . there's really no period of that length in history where the equity markets haven't outperformed the fixed-income markets." Provident still offers fixed products and producers still sell them, says Dorans, but consumers make the decision most of the time to go with the variable product.

But others hold on to whole life

That, however, hasn't been Kim D. H. Butler's experience. A Phoenix-based CFP who works with Guardian Life Insurance Company, Butler is what you might call a born-again whole life producer. In insurance since 1989, she sold no whole life for the first six years of her career. Now whole life accounts for the bulk of her production. Butler is a practitioner of the LEAP system, a wealth creation and protection program known for its innovative - and sometimes seemingly unorthodox - approaches to financial management. It was through LEAP (www.leapsystems.com) that she says she learned to deploy traditional permanent life policies as a powerful cash management and investment tool for clients.

"In many cases, we would view whole life as more restrictive for the consumer," says Butler, who is among Guardian's top producers. "But whole life actually provides the consumer with additional investment freedom and flexibility."

New tricks for an old star

You read that right: Butler counsels her clients on how to use the "banking properties" of a traditional permanent product. Instead of being limited to the 20 or 30 investment options available in most variable policies, she points out that whole life cash values can be invested in anything the client wants to invest in - whether they are safe as blue chips or as speculative as IPOs. She also teaches clients how to use their policies as a low-interest financing tool.

Those clients are somewhat unusual for a whole-life crowd: professionals between the ages of 30 and 45 whose annual incomes top the quarter-million mark. Not exactly demographics for today's boilerplate financial conservative. "These people already have investments in the marketplace," Butler says of her affluent clients. "Their 401(k), their SEPs, [and] their brokerage accounts. Many have real estate investments as well. To me, for the younger consumer, if you look at whole life as an investment, then it's a conservative alternative if they want to use it that way, or an aggressive one if they want to borrow the cash values out and go buy IPOs. They control it and I'm wanting to put more control back on my client's side of the table, rather than the side of the insurer, the bank or the marketplace."

Butler isn't the only producer who's pouring new wine into old policies. In October, MetLife launched what may be the industry's first whole life/variable universal hybrid. (Advisor Today, October 2000) The product provides clients with the basic guarantee of a whole life policy, but also sports a variable universal "rider" that allows clients to invest in the equity markets. Dubbed the "Equity Enricher VL," the rider is issued along with Met's L-98 whole life policy.

Will a bear market make things whole?

Companies with similar strategies may find themselves in the catbird seat if equity markets tank. Following the 1987 market crash, many consumers retreated to the safety of fixed-income investments. The sale of products like fixed annuities increased dramatically through the rest of the 1980s as investors, stung by the equities' temporary collapse, were reminded that the law of market cycles had not been repealed.

The 2000 equity indices resembled nothing so much as a roller coaster; 2001 began more like "Free Fall," the Six Flags amusement ride. If Wall Street takes an extended ursine turn, will insurers see a massive consumer return to the guaranteed safety of whole life?

Dearborn's Anderson thinks so. Though he still believes the trend toward investment-controlled policies will continue in the long run, he says "a market downturn may slow, or possibly even reverse" that trend. Anderson also believes a Wall Street bear market will cause consumers to rethink their ROI expectations. Participants in seminars on ongoing management of retirement accounts "believe they can take 8 percent or 10 percent (from their accounts annually) and the market will continue to return 13 percent or 14 percent." But Anderson points to a number of recent studies that show that skimming between 5 percent and 7 percent from retirement accounts is more prudent in today's volatile market climate. "When people start to look at those kinds of returns, the return on a traditional insurance policy starts to look more attractive."

That's been the story at Northwestern Mutual. Already, market volatility has caused such pain for investors that Barry Finkelstein of Hoopis Financial Group (Northwestern's largest general agency) has found the company's whole life product to be quite attractive to clients. With an 8.8 percent rate of return, he believes consumers are beginning to see the product as a more viable insurance option than mutual fund-type investments. Cotton States Life Insurance Company last year reported 39 percent second-quarter growth in its guaranteed issue/simplified issue whole life products.
One 44-year-old LIMRA focus group participant reflected what may be a re-emerging emphasis on the separation of risk and return. She called her $200,000 whole life policy "a safe investment, as opposed to keeping the money in the stock market and letting it just be there for 20 or 30 yearsÉ" she said. "So it's a matter of risk, in terms of do you want to risk life in general and play the stock marketsÉor are you going to look at buying life insurance as minimizing risk to your family?"
For companies navigating the choppy channel between the equity markets and Alan Greenspan's next announcement on interest rates, an egalitarian view of life insurance products may provide the smoothest long-term sailing. New York Life (NYL), for example, still has faith in traditional permanent policies. Bob Hebron, a senior VP in NYL's individual life department, estimates that whole life still generates about 50 percent of first-year commissions in the firm's agent channel. Unwilling to pursue the kind of product-polarization that Kim Butler and Provident Mutual advocate, Hebron said NYL's strategy is to continue offering a full-range product line.

The more things change

The financial services marketplace has changed, he said, but what hasn't changed is consumers' need for life insurance products.

"We don't advocate one product over another, and we don't sell whole life differently from the way we sell variable-universal, survivorship or term. The way we look at it is: we sell life insurance."

Lynn Vincent is a freelance writer who is a frequent contributor to the magazine.

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