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Vary-able Life

True to their name, variable life sub accounts, well ... vary in value. Here’s how to deal with consumer concerns over equity-linked products.

By Lynn Vincent

Since March 2000, when Wall Street took the genuinely ursine turn that would eventually lead to a recession, financial headlines have crackled with verbs and metaphors not used to describe equities’ performance since Black Tuesday in 1987. The markets “crum-bled,” “sank,” “plummeted” and “tanked.” Stock indexes “edged lower,” “headed south” and “nose-dived.” There was even a soundtrack to the market mayhem, as the Internet bubble “burst,” the tech sector “imploded” and the NASDAQ “crashed.”

The journalistic verb-fest hasn’t gone unnoticed by consumers. Not only have small investors become more circumspect about pumping their hard-earned cash into Wall Street, many insurance consumers are, producers say, more reluctant to purchase equity-driven variable life insurance products as well.

2001 was John Arnette’s worst year since entering the insurance industry 36 years ago. “Commissions were down; sales were down. Nobody wanted to talk. Nobody wanted to get into the market,” says Arnette, president of Arnette Financial Services in Dallas. Things are looking up now, but Arnette says his clients are still “big-time concerned” over equity-driven policies.

The path to declining values
By the late 1990s, variable products were hot. Fueled by the rise of the individual investor, the advent and growth of self-funded retirement vehicles and a roaring bull market, variable universal life (VUL) products accounted for nearly half of premium income by the year 2000. But by the second quarter of 2001, the bear market had begun to sap consumer enthusiasm. MetLife, for example, noticed an unexpected downswing in variable life sales: Its commissions were down roughly 10 percent in 2001.

The real value is the professional advisor who will start a relationship with a client and then have a stake in making sure he does the right thing.

And it isn’t just equities markets that have customers spooked. Last summer, the benefits consulting firm Cerulli Associates reported that the average value of employee 401(k) plans had shrunk from $46,740 at the end of 1999 to $41,919 at the end of 2000. A month later, the events of Sept. 11 pushed the country into a full-blown recession. Then came the Enron debacle and consumers learned that falling share prices aren’t the only thing that can torpedo retirement savings.

The chain of events has frayed Main Street investors’ financial nerves beyond anything Kathleen Gurney has seen during her 20-year practice as a financial psychologist. “The overwhelming emotion that I have sensed in consumers and investors is fright. What’s worse is they don’t know what to count on in their future,” says Gurney. By contrast, when she surveyed 14,000 investors before and after the 1987 Wall Street crash, she found minimal emotional and psychological fallout.

Variable does mean variable
Variable policyowners and prospects have also had what Rochelle Lamm calls a blinding recognition of the obvious—that variable means account values can go up and down.

“Many clients are ... realizing they don’t understand what they bought,” says Lamm, chairman and CEO of Precision Marketing Partners, LLC/The Academy of Financial Services Studies in Milwaukee. “People are ... stopping and saying, ’Hey, this stuff doesn’t always go up. My nest egg looks a lot smaller now. What is it that I’ve really invested in?’”

That sort of client reaction has caused advisors to have a reaction of their own—many salespeople headed for the bunkers and forgot a lot of the basics. After 10 years of stock market glory, says Ted Kilkuskie, chief marketing officer at Hartford in Simsbury, Conn., even experienced people got lulled into thinking that perhaps the financial-services gods had repealed the law of market cycles.

Many insurance consumers are more reluctant to purchase equity-driven variable life insurance products.

Hartford hasn’t suffered the same decline in variable sales that many other firms have. In fact, as the variable boat began to sink around the industry, the company put even more emphasis on its equities-linked products and picked up market share. Then clients noticed and began asking for more information—sort of a variable snowball effect. Today, variable products account for 82 percent of Hartford’s premium income. Kilkuskie credits the boon to two strengths: stellar fund managers like Putnam, Wellington and American, and a focus on all phases of the affluent market.

“People in that market are typically more astute,” Kilkuskie says. “They understand that VUL products should be for the long term ... and their advisors understand that.”

Selling strategies
So what’s the solution for selling variable products to moderate-income clients who don’t understand that? Or for targeting risk-averse clients such as seniors for whom long term literally means “will my money last long enough to span the term from now until I die?”

Lamm recommends a return to basics: diversification, hiring professional managers and realistic risk management. “It’s time for financial professionals to revisit clients and really reaffirm with them what their goals are and how they feel about risks.”

One simple risk-assessment exercise is to write the numbers 1 through 10 on a piece of paper—10 means you could lose all your money;1 means no risk to the principal. Lamm suggests, “Tell the client, ’Put your finger on the number that describes how you feel about your money. Now let’s make sure the investments we used inside the variable product still fit your risk profiles.’”

Today advisors have to be teachers. They must also protect clients from themselves so they don’t yank all their money out, pour too much in or engage in ill-advised—and usually behind-the-curve—attempts to buy low and sell high. “Go back and reeducate them,” Lamm says. “Continue to give them advice and counsel.”

Of course, there is a limit to revisiting and re-educating clients. One of John Arnette’s clients had racked up $1.6 million in cash value in an old, paid-up life insurance policy with a stock company. The fund was earning only about 2 percent, so Arnette moved the money into a variable annuity early in 2000.
“Should we dollar-cost average?” Arnette asked the client.

“Nah, just dump it in there,” said the client, who was worth $13 million.

Then came the March 2000 mini-crash. A temporary downturn? Maybe, they decided, and stood firm. But by May, the annuity stock funds the client had chosen were taking a serious beating and Arnette sensed a very large bear pitching a tent on Wall Street. So he moved the money into cash and real estate.
His client was furious. “Put me back in the market!” he ordered.

“Should we dollar-cost average?” Arnette asked.

“Nah, just dump it in there.”

But the market didn’t turn and the digit counter continued to fall on the client’s cash value. Arnette repeatedly called and tried to persuade the client to move his money. By summer 2001, seven figures had become six, and by autumn he had lost $770,000.

In November, he called Arnette: He was ready to move the money.

Third-party administrators
Increasingly, Arnette uses third-party administrators to manage clients’ variable sub accounts. Clients love this approach and it helps sell VUL products.

Some advisors say using such account managers saps clients’ profits by loading the policy down with fees; Arnette takes a different view. The administrator he recommends charges 2.5 percent or $500 to manage a client’s sub accounts.

The firm logged a 4.17 percent loss during the hellish market ride of 2001, while the sub accounts Arnette managed personally lost about the same as the Dow—15 percent to 23 percent, depending on the risk profile of the funds involved.

“Would you have paid 2.5 percent last year for a net loss of about 4 percent?” Arnette asks. “I would’ve.”

Variables with guarantees
Although many clients are willing to move money within their variable products to hedge against today’s volatile equities markets, many are becoming more risk averse. For those clients, particularly seniors, now is a good time to emphasize the security features of variable products such as guaranteed death benefits and rebalancing, as well as products that protect the principal.

“There’s a greater appetite for guarantees now,” says Joe Jordan, senior vice president for marketing and sales at MetLife Financial Services in New Jersey. “Guarantees weren’t so hip in 1999 when everything you touched went up ... but it’s good sometimes to have variable products with fixed qualities,” he adds.

MetLife launched one such product four years ago—a hybrid whole/variable life policy. It offers a stock fund as an option for investing policy dividends. “The real problem first-time investors had was seeing their principal go down,” Jordan says. But with only dividends streaming into equities markets, the policy investment feature was “like playing with the house money,” he adds. “Even if the value of the stock fund dropped, you could still say, ’See Mrs. McGillicutty, your $50,000 [principal] is still there.’”

Educating clients and managing expectations
Mrs. McGillicutty’s conservatism ought to carry over into advisors’ approach to client education and expectation management, Jordan says. During the 1960s and 1970s, advisors used illustrations to show clients how dividends accumulated to make fixed products grow. When variable products arrived, the illustrations remained. Then soaring equities markets began to inflate projections: During the Wall Street boom of the 1990s, illustrating a potential 12-percent growth curve seemed conservative.

Variable policyowners and prospects have had a blinding recognition of the obvious—that variable means account values can go up and down.

“Twelve percent isn’t out of the realm of possibility, but it ain’t no straight line either,” says Jordan. The problem is, a product will never behave the way it illustrates. And no matter how many times you try to ratchet down a client’s expectations with sober warnings that an 8 percent or 9 percent return is, historically, more likely, high-return illustrations are what the client will remember—and hold you accountable for.

“Too many of our people were brought up in a transactional era,” Jordan adds. “They undervalue themselves as behaviorists and overvalue the products.” Whether selling whole, variable or even term life insurance, the real value, says Jordan, is the professional advisor who will start a relationship with a client and then have a stake in making sure he does the right thing.

Lynn Vincent is a frequent contributor to Advisor Today.


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