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Tomorrow’s Client

Selling to the young is a challenging task at best. Find out what it takes to make it worth your while

By Lynn Vincent

A young Southern California couple, we’ll call them Jack and Cindy, had been married for a year when they decided they ought to look into life insurance. It was a typical time for a couple at their stage of life to do so: Jack, 23, and Cindy, 26, had just had their first child. So they set up an appointment with an advisor from a major insurer. Two meetings, two lengthy applications, and two medical exams later, Jack and Cindy, who earned a combined $40,000 annually, were the owners of two $100,000 variable-appreciable life policies.

529 plans, which allow investors to save pretax money for their children’s education, may help advisors get a foot in the door.

But less than a year later, they cancelled the policies because they couldn’t afford them and opted for affordable group life through their employers. The advisor, who made the mistake of putting short-term profits ahead of building a long-term relationship, lost two clients.

Jack and Cindy’s story illustrates the problem some advisors face when serving the 40-and-younger market-what we call “tomorrow’s client.” Most people in that age group don’t make enough money to afford products that will yield a profit to advisors. And though Jack and Cindy were concerned about dying and leaving their new baby with no financial support, many young prospects expect-as the young have for millennia-to live forever.

That’s why the 40-and-younger market poses for advisors a series of conundrums: How do you sell life insurance to someone who isn’t worried about dying? How do you sell financial services to people who can’t afford them? And even if you could answer those two questions, how do you make it profitable to do so?

For some advisors, the answer is simple: You don’t.

Byron Udell, founder and CEO of Wheeling, Ill.-based term insurance giant AccuQuote, says that market segment is rarely worth his while. Though he is convinced that younger prospects need a range of insurance products-a good term policy at the very least-he isn’t sure that most advisors can convince young people of that fact. “People don’t do what they need to do; they do want they want to do. When young people say, ’I’m not worried about tomorrow,’ believe them. No amount of salesmanship will turn people who don’t care about tomorrow into people who do care about tomorrow,” he says.

Difficult but worthwhile
However, while other advisors agree that the 40-and-younger segment is a slippery crowd, they also say it’s one that’s worthwhile. Bob MacDonald, president of CTW Consulting, LLC, in Minneapolis, calls this group “an undernourished market,” and warns producers against the temptation to pass it by.

“There is a tendency to gravitate to the over-50 market. It’s so much easier to focus on someone who can write a check for $50,000 to buy an annuity than to focus on someone who can spend $75 a month on a couple of term policies,” MacDonald says. “But you’re shortchanging your future by ignoring younger clients. If you don’t capture that market when they’re young, you’re going to have a difficult time capturing it when you get older.”

Still, how to reach and serve that market best is a thorny problem, MacDonald admits. “What makes the question of how to serve younger clients a good question is that there is no obvious answer,” he says.

Where to start
Understanding younger clients’ thinking may be a good place to begin. According to Generations as Markets, a 2003 Insurance Advisory Board (IAB) report, industry experts say financial services companies must develop effective segmentation models to determine clients’ present and future product needs. The 40-and-younger market bridges two cultural generations that sociologists (and marketing experts) have dubbed Generation X and Generation Y. The youngest prospects, Generation Y, were born between 1982 and 2002. The 53 million Gen-Xers were born between 1965 and 1978. The youngest members of Generation X fall into the market segment we’re describing here.

How do consumers who are 40-and-younger think? Well, Generation Y identifies with Bill Clinton as the first U.S. president to serve while they were old enough to be politically aware. They remember the Kosovo War, The Truman Show, and the “Smoking Kills” anti-tobacco campaign. Generation Y has a more civic-minded outlook than Generation X. Though they are aware of long-term financial needs, a high percentage also face bankruptcy and loan repayment. On the upside, though, they boast $600 billion in annual spending power.

The 40-and-younger problem boils down to the fact that the needs of young clients have changed, but products to meet those new needs have not.

Because Generation Y clients are positive, confident, sociable, moral and more spiritual than the two generations that preceded them, they may be the most receptive to “emotive” marketing, according to IAB. “Insurance and financial products are a tough sale since they’re emotional, intangible and can be complex,” says Maura Schreier-Fleming, author of Real-World Selling for Out-of-This-World Results. “Add to it that you’re talking about people’s lives and incomes-some very personal issues. The salesperson has to be addressing the needs that the young client has and not getting too far ahead.” If retirement isn’t yet a concern for your young prospect, maybe saving for a house is. Focus on that, Schreier says.

Meanwhile, Generation X households remember Ronald Reagan as president, the “Just Say No” anti-drug campaign, and the birth of the Fox TV network. The average Gen-X household pulls in $40,200 annually and, according to IAB, will increase in importance to the financial services industry as it generates higher salaries and piles up personal assets.

Think high-tech
Since Gen-Xers pride themselves on “technoliteracy,” many industry experts recommend that advisors commit to technology-not as a novelty or a value-added item, but as a routine way of doing business. It’s not that this market segment will buy all their insurance products and services on the Web; however, they will most definitely use the Internet to research and compare financial purchases.

A 2000 Neuwirth Research poll of investors found that nearly two-thirds of investors under age 44 who have a financial advisor, investment assets of $50,000 and who use the internet at least monthly, wanted to be able to communicate with their advisor by email. Forty-three percent said they would welcome email alerts with investment news and tips.

The good old days
With most advisors today targeting 50-something empty-nesters who are ready to sock five or six figures away in an annuity, it may come as something of a surprise that 20- and 30-somethings were once the bread-and-butter of life insurance. Bob MacDonald, who has been in the life insurance business for 40 years, remembers those good old days. “Back then,” he says, “the 40-and-under market was the best market to be working in.”

People then got married younger, had children at a younger age, died at a younger age and held to the tradition that buying life insurance was a fundamental financial purchase. “People then were conditioned that life insurance was a required purchase, like homeowners’ or fire insurance-and a lot of life coverage was sold on college campuses. The college campus market was as big then as selling burial policies to senior citizens is today,” MacDonald says.

Further, as recently as the ’60s and ’70s, many young people still thought of their lives as somewhat of a prewritten, four-act play:

• Act One: Graduate from high school, then maybe college.
• Act Two: Get a job, get married, have kids.
• Act Three: Work 40 years for the same company, retire, get gold watch.
• Act Four: Die.

The risk then was that you would die before finishing Act Three, leaving your family destitute. “The risk for clients now is that they will live and have nothing,” MacDonald explains. “Now you must say to the client, ‘You’re probably going to live, and you need to buy this product or you are not going to live well.’”

Another problem: Three decades ago, products that appealed to young clients also appealed to insurance companies and agents because selling them was more profitable than it is today. “You could sell term insurance and make it worth your while,” MacDonald says. “Today the cost of term is about 20 percent of what it was. It’s hard to make a profit.”

New strategies
For many agents, the 40-and-younger problem boils down to the fact that the needs of young clients have changed, but products to meet those new needs have not. Although straight life insurance products may not appeal to a group that is not worried about dying, they may appeal on other grounds.

“When I talk to people in that generation, the thing that shocks them the most is the amount of taxes they’ll pay both during and after their work years,” MacDonald says. He suggests emphasizing the tax-deferred nature of such products as variable universal life (VUL). Also, 529 education-savings plans, which allow investors to save pretax money for their children’s education, may help advisors get a foot in the 40-and-under door.

“That kind of program, where the client is accumulating funds with a tax advantage, that’s more of a ‘living’ benefit. That’s the type of product you need to crack this market,” MacDonald says.

Another possibility: long-term care and disability income insurance. Remember the old life-insurance sales saw: Back the hearse up to the door? “Now you’ve got to back the nursing home bus up to the door,” MacDonald says. “You have to focus on products that fit the new paradigm.”

If retirement isn’t yet a concern for your young prospect, maybe saving for a house is.

The upside of selling to the young
Why spend all this energy trying to sell life insurance to a low-profit client segment that one expert calls “the young invincible?” Well, consider the story of the advisor who started out selling term insurance to dental and medical students at the University of Southern California. He spent years on this tiny niche, and it paid off: While class after class of freshly minted doctors and dentists grabbed their sheepskins, then hung out their shingles, this advisor was steadily building a long-term client base of literally hundreds. If he had waited until they were established in their careers, he might never have been able to start successful relationships with them.

That’s another upside of tomorrow’s client, Shreier-Fleming explains. “The younger market differs in that they might not have a preferred advisor already selected,” she says. “There’s opportunity to create a new business relationship that’s unencumbered by loyalty to someone else.”

The emerging affluent
Although one drawback about 35-and-younger prospects is that they can’t afford products that will be profitable to the advisors who sell them, not all of tomorrow’s clients are short on discretionary cash. Hartford, based in Simsbury, Conn., has created a program for reaching the “emerging affluent.” Hartford Senior Vice President and Director of Individual Life Distribution Mike Kalen defines that segment, generally, as a dual-income married couple, 25 to 40 years old, with $75,000 or more in annual household income.

“This is a very important feeder market for brokers and intermediaries,” Kalen says. “The emerging affluent are attractive prospects. More and more as they move toward wealth management, producers need to provide investment advice as well as life insurance needs. Our approach is to make it easier for brokers to do business, and with new pricing, make it more affordable for this market segment.”

Hartford surveyed this group’s behavior with respect to buying and managing life insurance, and released its findings in April 2003:

  • 78.3 percent of the emerging affluent purchased life insurance primarily for protection for their families. 9.3 percent secured coverage for estate planning or wealth transfer.
  • 7.5 percent bought life insurance for retirement planning, while another 4.3 percent bought it for business planning.
  • More respondents owned term life (37.3 percent) than permanent coverage (24.8 percent); the remaining one-third owned policies of both types.

More than 38 percent of the emerging affluent did not review their life insurance coverage after a major life event, such as the birth or adoption of a child, marriage or divorce, buying a home, college graduation or completion of a child’s education. More than two-thirds said they did not review their coverage annually, and 6.8 percent said they have never reviewed their coverage.

While that may seem like fruit that is ripe for picking, there’s a problem. More than two-thirds of those surveyed also said they are comfortable with reviewing their insurance as infrequently as they do. Still, Hartford is making inroads into this market with a three-stage program called “Stag Foundation Life.” The program progresses from guaranteed 10- and 20-year term life policies–emphasizing the temporary nature of this type of coverage–to two types of VUL.

Make it quick and easy
Part of the program’s appeal to both producers and clients is its short-form application. “Sales for our brokers are not large,” Kalen admits. “But if you can make it easy for [brokers], they will approach 40-and-younger clients for this need that a lot of other companies are not approaching them for.”

Kalen agrees that this kind of insurance, sold over the kitchen table with a full application, is not profitable. But he points out that many of the reps Hartford deals with are getting involved in both insurance and investments. “This makes the insurance portion of the sale simple for the rep-a half-hour or less.” In addition to the short-form application, Hartford has reduced underwriting requirements, including some of the medical testing.

Hartford’s proprietary program aside, Kalen emphasizes that any program that producers use to approach consumers who are 40 years old and younger must be easy and understandable, a statement borne out by the firm’s finding that four in 10 survey respondents reported difficulty in understanding their policies. “Simplifying and streamlining everything makes it easier to reach that market,” Kalen says.

Another tip: Though no one has yet figured out how to get young people to realize they’re not going to live forever, younger clients do recognize the lily pad nature of today’s job market. “Talk to young families about portability,” Kalen says. “They know they’re not going to work all their lives for one company. Portability of personal, individual life insurance coverage is very important,” and can help 40-and-younger clients recognize the need for coverage other than that provided by their employers. Advisors would do well to point out affordable ways to build an individual insurance program that supplements a client’s employee benefits–and protects them between jobs.

Kalen believes the 40-and-younger market is worthwhile as it “gives producers the ability to build their business with people who are going to grow with them over time,” he says.

Lynn Vincent is a frequent contributor to Advisor Today.

Hear straight from the source what these young clients and prospects want and expect from an advisor by reading “The Client of the Future.

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