#275 | Permanent Insurance Goes Direct(ish)

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If you were to just read the industry headlines, you’d think that the only revolution happening right now in the life insurance space is the explosion in growth and investment in online insurance marketing firms. That’s why I wrote last week to opine on these firms, their models and their prospects. What’s more interesting, however, is what those firms are generally not doing. They’re not focusing on permanent insurance. They’re not partnering with established distributors. They’re not engaging with financial advisors. They are, in other words, ignoring the vast majority of the life insurance market and the ways that the vast majority of Americans buy life insurance and receive financial advice today. And that may be their biggest and most baffling mistake of all.

But that doesn’t mean other firms aren’t picking up the mantle. These firms have realized something that the online distributors and the general public haven’t yet, which is that Universal Life is structurally superior to term insurance. Universal Life in its fullest form, with all of its functionality available for use and unhindered by surrender charges and commission-related fees, is a powerful, compelling and multifaceted financial planning tool that can be used for everything from temporary death benefit coverage for one year all the way to overfunded accumulation-driven designs. Universal Life can both purr like a kitten and roar like a lion.

And yet it is a much-reviled, oft-misunderstood and rarely used financial planning tool when placed in the hands of fee-based and fee-only financial advisors. Why is that? From my vantage point, there are three competing views of the source of the problem and how to solve it and, in the last few weeks, we’ve seen major moves by life insurers to bring their solutions to the table.

The first view is that life insurance is fundamentally sold, not bought, and that the people best equipped to sell it to fee-based and fee-only financial advisors are traditional life insurance distributors. The problem, in this view, is that heaped commissions paid to agents are fundamentally not a fit for fee-based and fee-only financial advisors and that the associated policy and surrender charges are unpalpable for them. The solution, then, is to eliminate street-level compensation but – and this crucial – to continue to pay a traditional override to the life insurance distributor.

This is something of a hybrid strategy, if you will, where the agent receives no commission but the BGA maintains a traditional override. The life insurance industry runs on the fossil fuel of heaped commissions. Asking the entire industry to switch to renewable energy is a herculean task. It’s far easier – and probably more effective – to simply maintain traditional compensation for the life insurance distributor but to pay the advisor the way that they’d like to be paid which, in this case, is through their normal fee structure billed on assets.

That’s exactly what Mutual of Omaha appears to be doing with its new Professional Advantage IUL. Currently, the product is only available through Ash Brokerage, a life insurance BGA that has spent years successfully building a practice serving RIAs. It’s a natural partnership between the two firms. From what I understand, there is no street compensation in Professional Advantage but BGAs writing the product receive a 40% override, which is fairly standard in the Indexed UL space. From a compensation standpoint, this structure seems to be the best fit for both the RIA and the BGA.

But from a product standpoint, the result is not as dramatic as you might think. Professional Advantage is a near-clone of Mutual of Omaha’s street product, Income Advantage IUL, which I’ve been a fan of since it was released a few years ago. The change for Professional Advantage is that it has no premium load and no fixed per thousand charges. That sounds like a bigger deal than it actually is. Income Advantage already has some of the lowest charges in the industry. The premium load is 4.5% to Target and 3% over Target and the per thousand charges are about a quarter of the industry average over 10 years. At a 6.2% max AG 49 illustrated rate, Income Advantage can generate something like 5.85% IRRs after 30 years using the new Section 7702 premium limits (modeled in my own DIT, Mutual of Omaha hasn’t made the update yet). Professional Advantage picks up about 20bps to bring the IRR to 6.05%. Meaningful? Yes. Revolutionary? Probably not – although both products are wickedly efficient relative to traditional IULs.

The real challenge with Professional Advantage, however, is that it has a significant surrender charge that lasts for 10 years. This restricts the ability for financial advisors to use Professional Advantage for anything other than long-term accumulation and distribution. Professional Advantage is not a multi-faceted financial planning tool, it’s a retail accumulation IUL product that has been stripped of its fees directly related to compensation.

So why did they keep the surrender charge? Presumably for two reasons. First, they’re still paying a 40% override that would be at risk without a surrender charge. Second, it appears that Mutual of Omaha relies heavily on high surrender charges for profitability in Income Advantage IUL, the street product, so it would follow that they also need high surrender charges in Professional Advantage IUL. If they had eliminated their surrender margin, then they would have had to increase other policy charges and that would have reduced the illustrated benefit of the product. It’s a devil’s bargain that all companies reliant on surrender margin ultimately find themselves making. The better solution is to not be reliant on surrender margin for profitability – and those companies may ultimately be better suited for building products geared for the fee-based and fee-only financial advisor market.

The second view on how to solve the problem of selling life insurance through fee-based and fee-only financial advisors takes a more optimistic stance. This view believes that these advisors fundamentally understand and like life insurance, but they’re put off by typical products and distributors. Instead, they want products and partners that are in alignment with their own models. They want purist products without any compensation paid by the insurer whatsoever and, if they can get it, they want a partner that holds itself to the same fiduciary standards that they do.

To meet these demands, a whole crop of distributors have popped up under the general label of Outsourced Insurance Desks, or OIDs. Probably the best known of these firms is DPL Financial, founded by David P. Lau (see what he did there?) who was formerly the COO at Jefferson National. JeffNat famously marketed its Monument Advisor VA as a “flat-fee” product where the client only paid $20 a month for the annuity wrapper. It was successful enough for JeffNat to be scooped up by Nationwide. What’s the difference between a BGA and an OID? Mostly product platform and positioning. BGAs have traditionally been geared towards agents, but are increasingly taking the role of the actual insurance salesperson when they work with institutional firms and fee-based or fee-only RIAs. They obviously get paid off of overrides on traditional retail products.

OIDs, however, almost exclusively serve fee-only RIAs and sell fee-only life and annuity products. They may have a membership fee where the RIA pays a nominal fee on an annual basis to have access to the OID. DPL charges, for example, $5,000 per year for RIAs with over $1B in assets. But OIDs really make money on overrides, which are sometimes branded as “partnership” payments from the life insurer. The business model is not really any different than at a BGA. The difference is mostly in the product suite and marketing positioning. To go back to the JeffNat example, the $20 per month was a great marketing gimmick – but the reality was that Jefferson National had worked out revenue sharing agreements with the fund companies on its platform and that’s where they actually made money. The analogy applies equally to OIDs.

That’s not a disparagement to OIDs. They do fantastic work selling life insurance and annuities to hesitant RIAs and they have the best possible tools to do it. The products on their platforms are generally stripped to the minimal possible costs, rarely have surrender charges and have a suite of attractive and low-cost funds. They are Universal Life products in their fullest, most powerful and most flexible form. TIAA Intelligent Life qualified before TIAA pulled out of the life insurance market. Ameritas Advisor II VUL qualifies as well and is actually a bit leaner than TIAA for accumulation sales. Life Annuity Specialist, an industry publication geared towards insurers, dropped the news last week that Nationwide Advisory – which is basically Nationwide’s own in-house OID for RIAs – will be adding a VUL soon as well. And you can bet it will be every bit as lean and mean as the TIAA and Ameritas offerings, maybe even with a few more bells and whistles added.

There’s no doubt that these products are more flexible and can be used in more planning applications than traditional, heaped compensation Universal Life products. But are they actually more efficient for accumulation in the long run? Not if there’s a financial advisor involved that is wrapping the assets in a fee of, let’s say, the industry average of 1%. Over time, that 1% fee is going to be significantly higher than the policy charges required to cover traditional heaped compensation. Let’s do some simple math. The Mutual of Omaha product picked up 0.2% in IRR by eliminating street compensation. If the advisor wraps it in a 1% fee, then Professional Advantage would actually underperform Income Advantage by 0.8%. This isn’t about pure performance. This is about product flexibility and about aligning the compensation model with what the client is already paying their fee-based or fee-only advisor.

This leads us to the final view of how to tackle life insurance distribution in the fee-based and fee-only advisor market – don’t use them. This view essentially believes that well-informed consumers can buy their own permanent insurance policies and, if the product and process are good enough, won’t need any goading to do it. In this model, anyone can go to the life insurer’s website and buy their own best-in-class Universal Life product designed to their specification and all they have to do is fill out a form or dial a 1-800 number. Although TIAA worked and Ameritas still works with OIDs, they both offered their products to anyone who picked up the phone to call them at the exact same price.

There’s something beautiful about this idea. It’s the concept that life insurance is bought, not sold, and that an informed consumer will want permanent life insurance, especially if it’s packaged in a slick and simplified way. That’s exactly what Security Benefit has done with its new Forever Life product, which was recently rolled out via Everly.io, its own online insurance brokerage firm. In some ways, Forever Life is exactly what you’d expect – a stripped out Universal Life product without any surrender charges. But in other ways, it’s not what you would expect. It’s a traditional Universal Life product, not an Indexed UL or Variable UL. It pays a current crediting rate of 3.6%. It has a “match” feature where the company tacks on a modest sum to certain premium payments that vests in 10 years. With Everly and Forever Life, Security Benefit is clearly making a consumer-oriented play with a beautifully designed website and the talking point of a “match” that is analogous in spirit, if not even remotely analogous in form, to the well-known 401k match. Very clever.

It’s far too early to tell if any one of these approaches is going to be successful – and the track record so far is not stellar. Ameritas has been doing this since the mid-1980s and it hasn’t yet revolutionized the business. TIAA did it for over a decade and then bailed out. During my time at MetLife, we built a levelized comp product that, although it sold $100M in its first year, didn’t gain broad market appeal. Protective had a stripped out, RIA-oriented VUL product that it decided not to carry over for the 2017 CSO transition. But the winds are starting to change. From what I hear, TIAA was growing at a very fast clip before the company decided to pull the plug in a decision that had little to do with the Intelligent Life platform. I’ve heard that Ameritas is having a banner year. If nothing else, we’re going to see more and more companies enter this space under these models – and maybe a few new ones we haven’t seen yet as well.