Anyone awake the past couple of years knows well the gut-wrenching feeling of financial insecurity. Here we are, about two years after a stock market drop of historical proportions, in addition to other equally awful financial events, and most of us are still shaky, financially speaking.
To me, a time that is full of financial insecurity sounds like the perfect time to be telling the story of the unique power of life insurance. There is no other financial product quite like it, and there is no other financial instrument that can provide the same kind of security to a family or a business. But of course, if you're reading this publication, no one needs to convince you of that.
Yes, this is a good time to be shouting from the rooftops the value of life insurance. And it's also a good time to consider where we are, where we might be headed, and some of the more prominent trends in the business. To get some thoughts on the current trends in the life insurance business, we posed questions to these top producers: Thomas J. Henske, CFP, CLU, ChFC, CLTC; W. Luther Pierce, IV, CLU; and E. Dennis Zahrbock, CFP, ChFC.
1. Charles K. Hirsch, CLU: As you look at the current "state of the art" of life insurance products, is there any one thing that strikes you as particularly innovative or noteworthy about today's products?
Thomas J. Henske, CFP, CLU, ChFC, CLTC: We have obviously seen a tremendous amount of innovation in the products we have available today compared to products of many years ago. It is rare that a client is looking for a particular insurance product for use in their financial plan that can't be provided within some range of acceptance to fulfill that need. Premiums can be flexible or rigid. Correlation to different investments -- fixed income vs. equity based products -- is available in abundance. This enables a financial advisor to not have to fit a "round peg in a square hole," which is beneficial both for the advisor and the clients he or she serves.
However, innovation does have its drawbacks. Some of these products have a use that is solely appropriate for a single area of a client's life. And as we all know, clients' lives change, and when they do, many of these products become obsolete to their initial needs. Furthermore, changing course does not come without cost and burden; meaning, many of the historically "simpler" products had multiple -- instead of single -- purposes. If they weren't used for one specific reason in a client's financial plan, they were still useful to that plan if a change occurred. This is not always true of some specialty products available today.
Additionally, many new innovative products are significantly more complex. This leads to a greater likelihood that the end user of these products -- the clients -- are further in the dark on the risks that each of these products can present. And while clients claim to understand these products at point of sale, there is a good likelihood that they in fact don't, which could lead to litigation down the road.
Lou Pierce, CLU: The life insurance products today are more flexible than ever before. People in the insurance business realize the economic powerhouse for the next few decades will continue to be fueled by baby boomers. Enhancements in the "living benefits" of life insurance policies through distribution riders for long-term care, critical illness, and even unfunded major medical expenses are driving the purchase decisions for seniors. Indeed, the capital needs analysis paradigm has been shifted on its head.
E. Dennis Zahrbock, CFP, ChFC: First of all, there are two kinds of life insurance that I believe best suit today's insurance buying public. The first is the "protection-based" products, which are either term or universal, or variable with secondary guarantees. The goal of these products is low cost with long-term protection. I think the innovation is the evolution of variable life and the death benefit guarantees provided in an equity-based product. The continued price increases in ULSG make it less and less the "always best choice" for the insurance buyer. I do believe, however, that in a few years the competitive nature of the marketplace will have the carriers back seeking market share and thus price reductions will again be in our future.
I don't see anything happening in the whole life arena that is innovative enough to make it a true player in protection-based insurance, but who knows? Maybe a carrier will come out with a blended product with secondary guarantees.
Second, there are the accumulation-based products, in which I definitely see high premium, low death benefit whole life as an innovative product for the buyer. If tax brackets increase, this will be even more true, assuming the inside build-up remains on a tax-friendly basis. This is another arena where VUL shines and will continue to shine.
2. Hirsch: From a practical standpoint, how have some of the current innovations made a difference in your life insurance practice? In other words, how have you made product improvements work to your advantage in solving your clients' problems?
Pierce: I have observed two very interesting realities unfold over the past decade. First, clients who assumed the 10- or 15-year level premium term insurance that they -- and their CPAs -- insisted would suffice are now realizing their need for life insurance not only did not disappear, but actually has increased.
Second, cash value accumulation in excess of the "minimum funding amounts," is now considered prudent asset allocation. With the advent of indexed universal life (IUL), we have an additional permanent life insurance option to illustrate when designing the most appropriate mix of insurance policies to meet our clients' long-term insurance and accumulation needs.
Zahrbock: A current innovation that has worked for me is the UL with secondary guarantee concept of making the guarantee for less than life -- or policy -- expectancy. In other words, many policies now offer guarantees up to age 120 or 125; however, when we view mortality tables, 95% of those insured are no longer living by age 90 or 95, depending on the rating. Often, when you lower the guarantees from age 120 to 90, the extra rating for the non-standard table is not that large in a "dollars and sense" view and thus we have successfully delivered several rated contracts. It really takes the client viewing both a standard and a rated mortality table to make the decision.
We have certainly also seen that the secondary guarantees of the VUL product have increased our sales of VUL products. A client with a traditional ULSG product may have zero value at age 90, while for less than 10% more in annual premium, a VUL may have hundreds of thousands of cash value. Simply put, in the worst case it also has zero, but with the secondary guarantee the coverage remains. Many are willing to pay an extra 10% for the chance of having the cash value just in case their long-term needs change.
Henske: It is true that these product innovations have made it relatively easier for us to find solutions for potential clients owing to the enormous scope of new and different products. From that standpoint, the opportunities have increased tremendously.
The ripple effect of this added complexity is how the infrastructure of our practices has had to be built to handle that complexity. Is it realistic to build a scalable model when "every" case that's coming in is new and different and your staff has to "recreate the wheel" to get up to speed on the new situation? Would it be better for the proficiency of your staff to see the same cases coming in over and over again in order to develop expertise? Doing so would enable the staff to anticipate potential challenges that could arise during the underwriting or service stage of the client relationship.
Innovation has caused financial practitioner practices to either focus on a very narrow line of products, enabling employees to become experts, or to take in multiple products, leading to tremendous ramp-up time for staff to become educated on the particular product. Some, however, utilize a "band-aid approach," inevitably leading to a sloppy job that will come back to hurt the practice. How appealing are these options to those entrepreneurs trying to establish robust insurance practices?
3. Hirsch: One hears a lot of talk these days about fiduciary vs. suitability standards for all kinds of financial advisors, and I'm wondering, as you look down the road, how you see that debate ultimately impacting the lives of life insurance producers?
Zahrbock: This is a very difficult issue facing all of us. To me, the fiduciary standard leaves no room whatsoever for not recommending the correct product to the insured. Suppose the insured's objective is lowest cost long-term life insurance by a top 10% company. In this case, there are two issues. First, lowest cost may also mean lowest commission, so if a product allows a term component, under a fiduciary standard one would be compelled to use max term and receive little to no compensation. This would lead to fee arrangements and in some cases, clients may not wish to pay the fees that should be charged for doing the work. Because we would be dealing in a fee environment, we'd be subject to legal rebating as every agent could choose his own fee. At first blush, this may sound good for the consumer, but in the long run, it would run the "full-service-properly-staffed-professional" out of business and leave the "fast-and-dirty-make-a-buck-agent" the only survivor. If this were to happen, the industry would really suffer as life insurance would become a commodity, and the product is too complex to be a commodity.
Second, the top 10% company may be easy to prove at the time of sale, but what about one year later, two years later, five years later? No agent could truly guarantee a top 10% company. There are certainly companies out there today that have been top 10% for as long as any of us have been alive, but that does not make them immune to an unexpected management mistake. I'll bet no one thought BP would have the problems it is now experiencing! In a practical sense, I would see much more upfront discussion and understanding between the agent and the client as to fair compensation for the work to be provided. The more educated -- CLU, ChFC, CFP, JD, CPA -- and the industry-proven -- MDRT, COT, TOT, Forum -- would stand a much better chance of commanding higher fees because the consumer would need to know who would have the best chance of giving the best advice vs. having the best price on product. All prices would be the same, so the only difference would be value.
Henske: It would be hard to imagine any insurance professional not agreeing, in theory, to the intent of those who argue in favor of fiduciary standards. Think about it: Are there really a lot of long-time successful insurance professionals out there who don't practice in a way that would be deemed in a court of law as in the best interest of the client? I just can't imagine a viable long-term business model that didn't follow the spirit of the fiduciary standard. However, there is a valid argument that the lawmakers trying to formulate what will constitute the details of following that standard have very little clue about the implications that will follow based on their sometimes unrealistic view of how the fiduciary standard gets implemented in the typical financial services practice. And unfortunately, the consumers who will blindly support these details not knowing the difference either will forever change the practice of insurance professionals and the clientele they are able to serve.
Should these standards be put in place and mandated to insurance professionals, it is clear that business practices will have to be altered in a way that will dramatically change the clientele advisors serve. The massive cost of these potentially onerous hurdles to doing business will cause dramatic shifts in what our industry usually refers to as our A-client or "target" client. There will be a seismic shift and a host of consumers who will be left without any financial advice because in serving, the financial advisor would incur an enormous financial burden due to the hurdles imposed in implementing these fiduciary standard rules within a full-service practice.
However, I can see an enormous opportunity for any large-scale collaborative practices that, owing to their size, are able to maneuver within whatever rules are settled upon to maintain comprehensive streams of revenue within each line of business and still satisfy that fiduciary standard. I can't venture a guess at this current point, of how that will look. But rest assured, there are some unbelievable entrepreneurial professionals working within the financial services industry ranks, and those sharp enough to build that model will have a flood of insurance professionals flocking their employment in order to regain revenue losses that were incurred when these fiduciary standards became reality.
Pierce: The current financial regulatory debate is extremely volatile and brings added uncertainty to an already unstable financial planning environment. Through the long-term efforts of NAIFA, The American College, Society of Financial Services Professionals, MDRT, and other industry-related organizations, licensed life insurance professionals have always been encouraged and even required to maintain the highest level of ethical behavior and prudency. Unfortunately, political influence has reached an all-time high, and the regulatory end results will be ineffective and costly. An excellent example is the DOL's position on 401(k) plans' default investment account. It becomes virtually impossible to meet government-mandated standards, when those standards are being amended as financial crises continue to emerge.
4. Hirsch: Is there a particular life insurance sales trend that you see as having great potential for the life insurance business, and that you would recommend that a producer consider integrating into his or her own business?
Henske: With the innovation of insurance products leading to more complexity, coupled with the fiduciary standards inevitably gracing our businesses in some way, shape, or form, it seems logical that there will be a greater need for insurance professionals who can evaluate the current state of particular in force policies to re-evaluate their value in the financial plans of those who have purchased them years after that decision has been made. And those who have established relationships with typical outside advisors -- accountants and estate planning attorneys -- will inevitably be called in to help them get a handle on what it is that their client actually owns and whether they should continue to own it.
Therefore, it seems clear to me that building relationships with accountants and estate planning attorneys, where they view you as a qualified evaluator of various kinds of insurance products, with a process for these audits, will be in even greater demand in the future years. Building this process and reputation now before the problems that we can't foresee today begin to arise will lead to tremendous amounts of business for that insurance professional.
Pierce: Although the boomer generation will continue to be the primary catalyst for the domestic economy, the future financial planning opportunities will be realized via the Generation X, Y, and Z's pocketbooks. These are the fortunate benefactors of the trillion dollar inheritance bounty that is forthcoming, unless Mom and Dad are forced to spend all of the kid's inheritance on taxes and health care. In order to connect with these eventual benefactors, we must embrace new modes of communication. Products must continue to become more flexible, transparent, and easier to comprehend through electronic communication. Buying decisions are now being made electronically -- just look at the success of eBay alone.
Zahrbock: As income tax brackets increase, the use of the high premium, low death benefit whole life and VUL should be constantly looked at as alternate source of accumulating wealth. Many years ago, we had at least two major carriers that created fixed premium whole life products with the "premium" as the decision maker and the "face amount" as what you got for the premium -- in other words, the client first selected how much they wished to invest in premium and the face amount then became the least possible for a given age and still not be a MED.
These products were designed to qualify as Non-MEC life insurance and create 60-80% first year cash values and IRR's of 4-5% by the 10th year. As higher tax brackets rise, these products will be more welcomed into the marketplace. They will still be complex monetary instruments, so only the truly qualified will know how to understand and communicate their value to the client. I know of many companies today that allow the agent to custom design such products, but I know of no companies today that have products that are on the shelf and just plain work! The on-the-shelf products, if created, will be better than the custom-designed, as there will be no variables in the design and thus no built-in cost if the variables are exercised in the product M & E.
My opinion is that the trends will continue in the direction they have for the past several years -- a wider and wider difference between protection-based and accumulation-based products. The traditional UL, VUL, WL with a premium that does some of each just won't work in the marketplace. Traditional products don't work well as protection vehicles or accumulation vehicles. The public wants products that meet their main objective, not products that try to meet many objectives. Who wants a product that doesn't work effectively on either end? I see more innovation on each end of the spectrum and less and less product in the center.
Henske, Pierce, Zahrbock to participate in free Web seminar Sept. 23
You are cordially invited to join us for a live Web seminar on Thursday, Sept. 23, "Emerging Trends in Life Insurance," featuring all three panelists from this month's Producer Roundtable: W. Luther Pierce, IV, CLU, Thomas J. Henske, CFP, CLU, ChFC, CLTC, and E. Dennis Zahrbock, CFP, ChFC. The discussion will be moderated by Life Insurance Selling Editor Brian Anderson.
Our expert panelists will go in-depth on key industry developments, and will also field questions from the audience. To register for the free Web seminar, visit www.lifeinsuranceselling.com/emergingtrends, or call 800-867-9287.
Thomas J. Henske, CFP, CLU, ChFC, CLTC, is a nine-year Million Dollar Round Table member with two Court of the Table honors. He is a partner at Lenox Advisors Inc. in New York City. He is a renowned speaker on the topic of developing financial literacy and values with children and developed the Money-Smart Kids program.
E. Dennis Zahrbock, CFP, ChFC, is a 38-year Million Dollar Round Table member with seven Court of the Table and 15 Top of the Table honors. Dennis is president of Business and Estate Advisers, Inc., in Rice Lake, Wis., and is a nationally known expert in the areas of retirement planning, business transition planning and estate planning.
W. Luther Pierce, IV, CLU, is president of Plybon & Associates Inc, a member firm of M Financial, in Greensboro, N.C. He joined Plybon & Associates in 1981. Pierce has qualified for the Million Dollar Round Table every year since 1983, has 21 Court of the Table qualifications, and achieved Top of the Table status 10 times. He is currently serving as Top of the Table's Divisional Vice President.
Charles K. Hirsch, CLU, is a contributing editor to Life Insurance Selling. He is the president of Hirsch Communications Consulting, LLC, in Florissant, Mo.
