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Running for Cover

In these shaky financial times, many consumers are retreating to the safety of universal life. But who's buying all those policies?and how long will the comeback last?

By Lynn Vincent

In late 2000, insurance veteran Andrew Niedzielski interviewed for a new job. If he landed it, he’d be overseeing universal life (UL) products for Lincoln Life in Hartford, Conn. Niedzielski remembers a specific concern he had at the time: “Since the position was focused on fixed UL,” he says, “I was concerned that I might be taking on a dinosaur.”

Some dinosaur: Over the past year, Lincoln’s book of business has nearly flip-flopped, from two-thirds variable life (VL) sales in the summer of 2001 to nearly two-thirds UL sales through the first six months of 2002. Says Niedzielski: “It’s stunning how dramatically things have changed in the last year and a half.”

The dramatic resurgence in UL sales isn’t just happening at Lincoln. In 2001, UL sales industry-wide increased 17 percent over the previous year, accounting for 21 percent of new annualized premiums on individual life products, according to LIMRA. Over the first quarter of 2002, UL sales continued to climb, posting gains that were 27 percent higher than they were in the same period last year. Those numbers represent the first spike in UL sales since 1995.

The statistics raise questions: Who’s buying UL and why? How are insurers responding? And—perhaps most importantly from a planning standpoint—how long will the sales boom last?

Increased interest
In a July 2002 report, Conning Research linked the UL trend to three major factors: increased consumer interest in life insurance sparked by the events of Sept. 11; a crisis of investor confidence following recent, high-profile corporate ethical collapses; and consumer skittishness over roller-coaster equities markets.

A huge slice of American consumers are responsible for building most, if not all, of their own retirement funds. With the markets still in the tank, people are looking for less volatile alternatives for building their nest eggs. That may place UL in a great fallback position for those who can no longer afford to expose their retirement funds to market shrinkage—or to have their money lying near comatose in a standard savings account.

“Universal life can act as an ’in-between’ option for many clients,” says Mike McLaughlin, national director of life actuarial services at Ernst & Young. “It doesn’t have the huge potential upside of equities, but it also lacks the volatility of equities-linked products.”

Meanwhile, UL policyholders retain some of the flexibility of variable products, such as enhanced savings features, and midstream structural and death-benefit changes, that don’t come with individual term or traditional whole life policies. And though UL products were developed for, and work best in, economic environments in which interest rates are high or rising, George McKeon, assistant vice president at Conning Research, notes that today’s composite UL rates have stayed up while other rates are down. That has enabled carriers to keep UL rates attractive. And the fact that UL’s simplified earnings structure is easier for customers to understand may enhance its appeal in an era when consumers are increasingly wary of fine print. “Even if clients are getting a better deal on whole life, it may be hard for them to understand the deal they’re getting,” McKeon says.

With the markets still in the tank, people are looking for less volatile alternatives for building their nest eggs.

Women are lining up
So who’s getting the deal on UL insurance? Market-shy buyers, of course, many of whom are women. According to a 1999 LIMRA study, women purchase four of every 10 UL products. Len Scholl, SunLife Financial’s assistant vice president for UL, says that women accounted for 51 percent of the company’s new UL sales in 2001, an increase of 38 percent over the mid-1990s. While a number of reasons factor into the increase, he notes three big-picture reasons why women and UL make a good match: Women tend to think more conservatively about money, they want and need flexibility and they appreciate an affordable product.

“Women need flexibility because they often feel their finances are being pulled in so many directions,” says Scholl, who is based in Wellesley, Mass. “They want the flexibility to manage their money, but they also want guarantees, and are willing to pay for them.” Scholl notes that a high percentage of SunLife’s female clients opt for the double-barrel security of guaranteed lapse protection and maturity extensions.

High-net-worth appeal
Lincoln’s Niedzielski says high-net-worth clients also are retreating to the safety of UL products. He met recently with a group of people responsible for distribution through Lincoln’s wirehouse channel. Present at the meeting were representatives from major houses such as Merrill Lynch. As Lincoln’s UL leader, Niedzielski was scheduled to speak about selling universal policies, but not until after the firm’s leader for VL products addressed the group. “I remember thinking, ’What a waste of time,’” Niedzielski says. “If anyone’s still selling variable, it’s this channel.”

By the time Lincoln’s VL leader finished speaking, only five minutes of meeting time remained. So Niedzielski scrapped his original presentation and decided to simply toss out a question to the wirehouse reps as a group: “How much VL versus fixed business did you write last year, and how much did you write this year?”

“Seventy-thirty,” offered one rep.

Niedzielski remembers thinking, “Wow, 30 percent fixed in this channel is higher than I would have thought.” But when he made a remark to that effect, the rep said, “No, no, no. We’re selling 30 percent variable, 70 percent fixed.”

The fact that UL’s simplified earnings structure is easier for customers to understand may enhance its appeal in an era when consumers are increasingly wary of fine print.

Niedzielski was stunned. “We tend to jump to the conclusion that people who are comfortable investing in equities, even in down markets, are also comfortable in using variable products for life insurance and estate planning.” Producers are now recognizing that clients who grow wealth by investing in equities don’t necessarily have the same risk profile for their insurance planning needs.

Group-plan customers
UL may also appeal to a group of consumers who need more insurance and don’t know it—those who are enrolled in employer-provided group UL plans. While group UL policies are offered widely, lower face values and sub-blue-chip carriers may open the door for individual sales. In the wake of this year’s corporate scandals—Enron, WorldCom, Tyco, ImClone—consumers are carefully scrutinizing financial services providers. Among insurance carriers, UL providers are making the grade. Last year, A.M. Best rated nine of 11 carriers an A+ or better.

Conning’s McKeon says individual producers may be able to appeal to prospects who already participate in group UL by comparing carriers’ long-term performance, and by illustrating the value of policy options and guarantees not available in the group plan. Not that advisors should attempt to woo a client away from his or her group plan altogether. Rather they may be able to demonstrate that low-face-value group UL may make more sense as an affordable and convenient supplemental policy, rather than as a client’s main source of protection.

The middle market
Many group customers populate another fertile source of new UL clients, the so-called “middle market.” As a growing number of advisors and firms “upscale”—making fewer big sales instead of many small ones—middle-market consumers are becoming increasingly underinsured. The continuing shift upscale, Conning predicts, will create sales opportunities in under-penetrated middle-income market segments—if producers and insurers can develop cost-effective ways of reaching and servicing customers who are notoriously expensive to reach.

Effective, efficient distribution of anything but term through Internet and banking channels is still in the embryonic stage. McKeon says producers may enhance their middle-market performance by leveraging technology in other ways, such as education and customer service, freeing up time for prospecting activities.

Another note on the middle market: It’s the middle-income consumer, who, during the go-go market of the 90s, was encouraged to “buy term and invest the difference.” Many bought the term part, but did not invest. Those who did invest the difference are now likely to be looking at substantially depleted balance sheets, and may be ready to consider the safety of permanent insurance.

“While UL is not the product for everyone in that group,” a Conning report notes, “…UL can provide a base of guaranteed coverage with the potential for cash value buildup.”

Insurers respond
In response to consumer demand for UL, many carriers are tweaking existing fixed products or revamping variable products to provide UL-like guarantees. TIAA-CREF, for example, now offers a UL product with no surrender charge, making the policy flexible enough to weather changes in both equities markets and estate-tax laws. Lincoln Life has developed a UL policy that provides a death benefit guarantee plus flexibility on premium payments—breaking free of the UL standard in which death benefit guarantees are tied to rigid premium structures.

Hartford Life has been busy fitting its universal products with what Tim Fitch, senior vice president and product development chief, calls “safety nets and guard rails.”

“We have noticed that buyers and producers alike have a much greater appetite for safety and guarantees than they did even a year ago,” Fitch explains. “Clearly there are buyers who don’t have the risk tolerance for variable. Then there’s a subset of buyers who may be having sort of a knee-jerk response to the market right now. But what happens to them when the market turns? Three years from now, they’ll be kicking themselves.”

In response, Hartford strengthened premium-linked death benefit guarantees on its UL policies, and in September, launched a new UL policy that buyers can later exchange for a variable product when the stock market bounces back. In practice, the new product may work much the same way as a VL policy that allows a client to pour cash into a fixed “bucket.” But with crowds of buyers fleeing any product with “variable” in its name, Hartford’s UL-to-VL option creatively marries current-market appeal with down-line flexibility.

But to be able to offer fixed products that can change with market performance, Fitch says carriers must have an attractive VL portfolio already in place. During the 1990s, some carriers focused on VL to the near exclusion of ordinary life offerings. Those carriers, Niedzielski says, “are now in a lot of pain. Some are scrambling to gin up a fixed product.”

The moral for producers: When choosing the handful of carriers whose products you’ll keep current on, be careful to select providers with a broad range of offerings. Fitch says some producers who are diehard variable devotees, attached at the hip to variable-heavy carriers, may already be finding themselves with a limited number of options for their clients.

UL policyholders retain some of the flexibility of variable products, such as enhanced savings features, and midstream structural and death-benefit changes, that don’t come with individual term or traditional whole life policies.

How long?
Where is the UL market going and how long will the comeback last? That depends on the equities markets. Even a reappearance of a Wall Street bull might not inspire widespread, long-term investor confidence. Even as more consumers have recognized their own responsibility for retirement planning, many have also seen their 401(k)s wither horribly over the past two years. Even a long-term market recovery may not convince consumers, who have already been forced to relearn the principle of asset diversification, that variable products are the right choice for their insurance protection. They may stick with UL.

Still, producers must guard against undue optimism over sustained growth in the UL market. Conning’s research shows a lengthy trend in lagging UL ownership in mainstream and high-net-worth households. In addition, only one in four U.S. households (and just 14 percent of high-net-worth households) said they planned to buy insurance during the next 12 months. “Lower indications of current ownership, combined with lower expectations of the likelihood to purchase, do not bode well for future UL product sales,” Conning’s UL report states. In addition, it notes that aggregate fixed-income yields are close to their lowest levels in the past two decades, “putting pressure on companies to lower the credited rates on UL products. While the guarantee of a fixed, albeit low, interest rate may appear attractive now, Conning does not expect this attitude to continue when performance of equities markets improves.”

The big question is: When will equities performance improve? Even if Wall Street should right itself tomorrow and begin a protracted climb into the stratosphere, Main Street investors might remain on the sidelines. Meanwhile, their need for long-term insurance coverage remains.

Ernst & Young’s Mike McLaughlin believes there’s a bit of “chasing” afoot in the UL market—consumers “chasing” the relative safety of fixed universal products now, as they chased high-flying variable returns just two years ago. That could mean a significant amount of time left for producers to make inroads in the UL market.

Lynn Vincent is a frequent contributor to Advisor Today.

Sales Tips: They’re Universal

How long will the UL sales boom last? Len Scholl, SunLife Financial’s assistant vice president for UL, believes evolving features such as guaranteed lapse protection, will help stoke consumer interest in universal products for some time to come. With that in mind, we asked advisors and sales trainers to share their tips for selling more UL—and other—insurance products during turbulent financial times.

1. Keep it simple
Brian Peterson, a senior insurance consultant with TIAA-CREF Advisor Services, urges producers to remember that even educated, affluent clients appreciate simple explanations for complex financial products. “Generally life insurance is just one piece of a bigger financial plan, so when each piece gets more complicated, the plan as a whole gets harder for the client to understand,” Peterson says. “That doesn’t mean only using term insurance because it is simple. It means communicating complicated life insurance concepts on the client level, and helping them fully understand the product features, costs and benefits.”

2. Shrink think
Financial consultant Susan G. Zimmerman says producers can be more successful if they understand consumers’ internal conflicts regarding life insurance—and insurance advisors. First, life insurance forces people to think about, and plan for their own deaths. Second, life insurance products are many, varied, and sometimes seem to conflict with each other. Finally, advisors can create conflict when they sell and advise by pigeonholing—narrowing clients’ focus on products the advisors favor, and criticizing those they don’t.

Zimmerman, who is also a family therapist and author of The Power in Your Money Personality, suggests producers practice what she calls “shrink think”— thinking like a therapist. “Point out these conflicts to clients before a solution is ever presented. Ask to what extent they want to look at life insurance, what they have heard about different types of insurance, and whether they believe they’ve been ’burned’ with one type or another.” Then, Zimmerman says, listen carefully to a client’s priorities, biases and historical preferences. Help him understand his conflicts so he can make informed choices, and be prepared with firm reasoning when another advisor comes in to try and change his mind.

3. The high road
Patti Branco, president and founder of Management & Training Solutions in Southern California, says producers should remember what they’re selling: security. Explanations of riders, guarantees and cash-value accumulation are necessary. But the real lure of insurance products, Branco says, is “the comfort of knowing the family is protected, the insurance company is strong and retirement needs are being addressed at the same time.” She reiterates a sales axiom producers can lose sight of in the technical minutiae: “Remember to sell the benefits over the features … what this product will do for the client.”

Branco also reminds producers that their most important sales tool is their reputation. “Always take the high road, the one less traveled,” says Branco, who conducts leadership and sales training for major financial service firms nationwide, including Morgan Stanley and Allstate. “You will have all the business you ever dreamed about. Integrity, combined with professionalism, is a magnet.”

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