#108 | Accumulation Products – Post 3
Selling life insurance for its accumulation performance is an imperiled proposition, if for no other reason than our industry’s established track record of over-illustrating and under-delivering. If we strip the performance part out of the story, we’re still left with the idea of life insurance as a tax advantaged wrapper and as a tool for capital preservation, which is best embodied in traditional UL and Whole Life products. In a rising rate environment, capital preservation in fixed income is a real benefit that makes life insurance a worthy part of a client’s portfolio. But, fortunately, that’s not all we have. We can still sell life insurance for life insurance. Everyone has liabilities that arise from an untimely death and there simply is no substitute for life insurance. The future of our industry is not competing with asset managers, it’s mortality and morbidity risk solutions that only an insurance company can create. There is, and will always be, a role for high-end life insurance advisors in that trade – which is why I remain optimistic about our industry and our future.
If that last post somewhat disturbed you then, well, it worked. TIAA Intelligent VUL represents a view of accumulation life insurance products that stands in stark contrast to the rest of the industry. It is better defined by what it lacks – surrender charges, extra premium loads, high-cost fund options, base per-thousand charges and indexed account option – than by what it has. It’s a reductionist approach to accumulation life insurance.
And the simple fact is that TIAA Intelligent VUL is the best life insurance product we have to offer for accumulation if the rubric is the same as what other, non-insurance financial professionals use to gauge investments. It’s the approach that a financial advisor who just wants the life insurance wrapper and nothing else would choose. Which, of course, begs the question of why a financial advisor wouldn’t want all of the other things that usually come along for the ride with a retail life insurance product, particularly the magical crediting mechanism in Indexed UL products. I would argue that they don’t want it because they fundamentally don’t believe in it, and for good reason. Just look at our track record. Vanishing premium Whole Life? Universal Life in the 1980s illustrated at 14%? Variable UL in the 1990s illustrated at 12%? And now, what, this Indexed UL thing illustrated at more than 7%?
Remember that for the entire decade of the 1990s, the Moody’s Aaa was 7% or higher, meaning that VUL illustrated at 12% was just 4-5% higher than corporate credit. Not unreasonable, in retrospect, but it turned out to be a complete disaster for our industry and a lesson in overpromising and underdelivering. Now, with Indexed UL products illustrating at 7.5% or higher (including bonuses) and the Moody’s Aaa at 3.5%, we’re illustrated the same spread over corporate credit as VUL did in the 90s. Little wonder that people are skeptical of the promises made by life insurance agents about future performance. Should we be surprised that people like Dave Ramsey and others rant against permanent life insurance? Should we be surprised that the vast majority* of financial professionals at major banks, wirehouses, independent B-Ds and RIAs don’t sell or even talk about permanent life insurance, despite the fact that a fair number of them started their careers by selling life insurance? Based on our track record, it’s kind of hard to blame them.
At the end of the day, this is the biggest problem with selling traditional accumulation life insurance products – we’re just not that good at it. Unless we think that life insurance companies have an edge on their asset management counterparts in thinking up ways to deliver better risk/return tradeoffs, then the best life insurance accumulation solution looks like TIAA Intelligent VUL. It simply serves as a clean, simple, transparent, straightforward and low-cost wrapper for the investments that the financial advisor is already recommending. The alternative, to recommend something like Indexed UL, implies that life insurers have an edge on asset managers. I don’t know about you, but I wouldn’t exactly feel comfortable making that bet.
Neither are consumers or their advisors. Life insurance for accumulation is a teeny, tiny rounding error on the asset management industry. If consumers were willing to bet that we had an edge, wouldn’t our sales be ten or a hundred times what they currently are? But they’re not. Instead, consumers and their advisors are inherently suspicious of permanent life insurance and its promises of high performance with no risk. How many times have you heard someone say about life insurance, particularly Indexed UL, that if it looks too good to be true then it probably is. And you know, they’re probably right. Selling life insurance for accumulation plays to our weaknesses. It puts us into the same category and comparisons as every other asset class. And on those metrics, our products will be found wanting.
Ultimately, I believe life insurance for accumulation to be an imperiled proposition. If life insurance was regulated like its investment counterparts, then most of what “sells” life insurance would no longer be available. No more illustrations, no more 50% illustrated option profits in Indexed UL, no more illustrated distributions, nada. We’d have to sell our products based on their charges and past performance – not exactly the best setup for accumulation life insurance. Furthermore, the tax law around life insurance for accumulation is specifically designed to strangle the accumulation applications of the product because, in the reasoning of the IRS, if you want an accumulation product with insurance features then you should buy an annuity. The difference between annuity and life insurance regulation is stark. Annuities are treated like investments. Everyone is keenly and universally aware that annuities will be positioned against other asset classes and the regulations are written accordingly. Life insurance? Not so much. Life insurance gets the benefit of the doubt. But the more that we focus on accumulation sales, the more the abuses come to light and the more likely it is that the things that make life insurance look so good on paper will disappear thanks to new regulation.
Now, I don’t want to entirely abandon the idea of using life insurance for accumulation because I think there’s an insurance angle to the accumulation story as well that our industry doesn’t talk about often but has started to resonate in the most unlikely of places – Manhattan. Look, I know this sounds ridiculous on its face, but there’s a story starting to float around about the fact that high-flying financial professionals prefer Whole Life to any other life insurance product for accumulation. I’ve actually seen evidence of this, personally, from my time at MetLife and I’ve gotten some questions about this story in recent calls and webinars. The purported reason these financial professionals are attracted to Whole Life is that they see it as a simple way to preserve and protect their capital. The alternative that generates the same yield as Whole Life, medium duration fixed income instruments, is fraught with duration risk, which rears its head in rising interest rate environments. Whole Life, on the other hand, has no duration risk. Its value increases in a rising rate or falling rate environment. And, to boot, Whole Life is liquid and pays a solid interest rate. In other words, these financial professionals see Whole Life as the simplest manifestation of insurance for their capital. Indexed UL doesn’t fit the bill and neither does VUL. If you want capital protection, then you want Whole Life or traditional Universal Life. And since the latter is in short supply these days, Whole Life floats to the top of the list. This angle on accumulation at least fits with the overall narrative of life insurance as a tool for offloading risk to the life insurer. But, in this case, the risk for the life insurer is disintermediation, not mortality or morbidity. Life insurers are basically loading the risk of bond prices falling onto their own balance sheet and capital. This has been a wonderful trade for the last 30 years as interest rates have fallen. But it nearly bankrupted companies in the early 80s when interest rates spiked. Personally, I love the idea of pitching traditional UL or Whole Life for its capital preservation aspects, but I’m not ignorant to the risks. In a rising rate environment, I think the teeth of this strategy will bare themselves for life insurers and products might adjust accordingly.
Fortunately, that’s not all we have to offer. We can still sell life insurance for life insurance. There are thousands of substitutes for life insurance sold for accumulation, but there are zero substitutes for life insurance sold for life insurance. Everyone has liabilities tied to an untimely death and there is but a single solution, life insurance, to hedge those liabilities. There is no external rubric to apply to life insurance sold for life insurance because there is no comparable product. When we sell life insurance for life insurance, we are working from a position of strength. That’s our wheelhouse. And that’s also why the future of our industry will always and forever be managing mortality and morbidity risk. It’s the reason why our industry exists – and we’ve seemed to have forgotten that.
Life insurance for life insurance is perennial. There is an immense opportunity to innovate around how to build products that will encourage people to shift more risk to life insurers. Just look at the rapidly growing asset-based LTC/CI product category that barely existed 10 years ago. And it’s not like we’ve exactly done our job in terms of getting Americans to buy life insurance. Industry pundits and groups like LIMRA constantly harp on the fact that life insurance ownership is at an all-time low. The solution is not to build more accumulation products, which have not grown the industry. The solution is to actually figure out how to sell life insurance for life insurance.
That’s why I’m actually quite optimistic about the life insurance industry. Someone is going to figure out how to meet the middle market with digital life insurance sales. Everyone (and I mean everyone) is working on solutions for that problem. I’m also optimistic about life insurance at the high end of the market. There is currently and will always be a need for experts who sell life insurance for life insurance for as long as personal, estate and business liabilities arise from mortality. These experts don’t sell off illustrated performance – they sell the intrinsic value of the insurance. They don’t promote complex financial “arbitrage” transactions because protection, not gain, is the point. They position the product that best hedges the risk without introducing new risk from the product itself, making sure that the medicine is not worse than the disease. And, finally, for as long as life insurance can build and distribute cash on an income tax deferred or free basis, there will be a market for accumulation life insurance – clean, simple, straightforward accumulation life insurance. Illustration gimmicks, product fads and investment stories will fade. The ways that we deliver on protection and insurance for our clients will persist. If, in 10 years, our industry is slightly smaller and refocused on just delivering high quality protection and simple accumulation solutions, we will be in a markedly better place than we are today.
*Even saying that the vast majority of financial advisors don’t talk about life insurance would be an understatement. I’ve seen data from a host of financial advisory firms, including from the 4,000 former MetLife Premier Client Group (MPCG) advisors, and can attest to the fact that financial advisors put life insurance at the bottom of the list. That was even true of MPCG advisors. 25% of the field force sold zero life insurance policies. Less than 10% generated more than 50% of their revenue from life insurance. Most financial institutions would call these statistics a relative oversaturation and onslaught of life insurance production. For major banks, IBDs and wirehouses, life insurance generally represents less than 1% of their revenue, most of which usually comes from a tiny sliver of advisors who sell far more life insurance than their peers. Selling life insurance through financial advisors is a bleak proposition. I am fully convinced that someone will crack the code, but it’s going to take a markedly different product and process to do it.