Gaining ground: in the market-share race between fixed and variable products, insurers say sales are running nearly even.

Everything may not be coming up roses yet for some categories of individual life insurance, but the prospects are smelling sweeter. After registering falling profits since 2000, the industry saw overall sales in this line rise earlier this year, with Limra International reporting a 10% increase in annualized premium in the first quarter of 2004, compared with a year earlier.

Moreover, the general improvement in the equities market--against the backdrop of a more stable economic environment--appears to be spurring a turnaround in sales of variable life insurance, which tracks closely with stock market trends. Although annualized premium was down overall in this category in first-quarter 2004 compared with the first quarter of 2003, half of the top 20 variable life companies reported increases, and nearly all were double-digit in size, Limra noted.

In the booming stock market of the late 1990s, buyers eagerly embraced variable products, especially variable annuities and variable universal-life insurance. But as prices fell, sales of less-risky, fixed products, notably universal-life, increased sharply. Lately, life insurers report seeing more of a balance between some variable products and some fixed products, with consumer interest especially favoring variable life, universal-life and term insurance, said Mike Kalen, head of Hartford Life's individual life-insurance division. In this vein, insurers offering new hybrid products that combine features of two or more life products say these are attracting increasing numbers of customers.

"The way the industry is responding--as Hartford has responded--is to try and meet the more diversified needs of the marketplace," Kalen said.

"If you ask me what's selling," said Dick Hall, senior vice president, life product, at Northwestern Mutual Life Insurance Co., "my answer would be a little bit of everything in some way."

Universal's Appeal

Through early 2004, universal life continued to drive sales growth. This product accounted for 38% of new annualized premium during the first quarter, and may seem attractive because of the relatively high interest rates that insurers are paying on it, Limra said. During the last half of the 1990s, fixed universal-life sales were declining at an average rate of 1% a year, the organization said. But at the start of 2004, universal life had its best quarter ever, primarily occurring in products with secondary guarantees. "There seems to be a very strong market for that and it's both single life and survivor," said Jeff Carleton, vice president, sales and business development, for MassMutual Financial Group. "I think the industry will continue to see strong universal-life sales"

While Northwestern Mutual does not offer a fixed rate universal-life product, it has cornered a good share of the industry's whole life premium. For a number of years, Northwestern Mutual has been selling its Complife line of products--a blend of whole life, term life and some additional single premium concepts. "Our intent was to allow flexibility and yet keep it in what's considered a whole life mode," Hall said.

Northwestern Mutual's whole life product has the cash values invested in the company's diversified portfolio, which is paying a dividend rate of 7.7% on non-borrowed cash values in 2004. "It has been very popular for people who want to have their cash values in a fixed portfolio product," Hall said.

Hartford Life has been seeing that customers interested in short-term needs still find current term insurance products very desirable.

At Northwestern Mutual, term also continues to sell well. "It fills many needs," Hall said. "Term coverage has been extended to allow for 10- and 20-year level premium products, which I think has helped sales."

Hartford Life finds that the market has become clearer now in terms of preferences following the introduction of affordable secondary guarantee universal-life insurance. "That really has become the product of choice for people who need pure death protection over a long period of time," Kalen said.

Winning Combinations

MassMutual introduced its version of a hybrid in May 2003. Called VUL Guard, it has proven to be the company's single most successful product launch ever and its fastest growing business line segment, Carleton said.

"At the time, we were the only company that had a contract like that and I think our timing was very good," he said. "But since then, both the Hartford and Lincoln National have come out with similar kinds of contracts. To my way of thinking, it offers a consumer the upside of market-like returns, but also guarantees the death benefit against negative market movements."

The challenge in launching this product was to differentiate it from other VULs on file market, Carleton said. After all, the first reaction from advisers and consumers might be "that this is just like every other VUL and VULs aren't in vogue right now," he said.

So MassMutual decided it had to build awareness that its new offering was a product choice unavailable before. To that end, the company has done extensive trade advertising, and its wholesalers are filling in all of its distribution partners on the product, Carleton said. "I think we will benefit from the Hartford and Lincoln joining in the marketplace because now you've got three major carriers out there that are educating consumers and advisers," he said. "That will have a positive impact on us."

In this same category, Hartford's new Quantum Life product combines the best features of universal life with the best features of variable life, Kalen said. "It offers what Hartford believes to be the best of guaranteed death benefit universal life and the ability to accumulate additional dollars using an accumulation vehicle like variable life on a tax-preferred basis."

The product has three features. First, an affordable, low-cost guaranteed death benefit portion allows consumers to pay the premium over their lifetimes, over a 10-year period or on an accelerated basis. As long as they pay the proscribed amount, whatever the timetable, the death benefit is guaranteed "regardless of what happens to their investment account," Kalen said. "So that works very much like the universal life with secondary guarantees."

The second component allows additional dollars to be put into an investment account, and that money can be used to fired later premiums, or pay for retirement or college needs. These dollars, when taken out of the contract as a loan, can be accessed on a tax-free basis. If not taken out, they are paid out as a death benefit, and any of the accumulation that occurs in those accounts passes on a tax-free basis as a death benefit.

The third component is flexibility. "What we're finding is while some universal-life purchasers want the death benefit guaranteed for life or to age 100, not everybody feels the need to guarantee a death benefit for life--they might think they have a life expectancy of 95 or 90 or 85," Kalen said. "Our contract allows them to pick a shorter duration for their death benefit guarantee. And if the consumer chooses that, it will lower the cost of their premium."

Quantum, launched in April 2004, is generating positive reactions from some consumers and Hartford Life's own field force, he said. "They think this is a very creative solution to a market need," he said. But the company recognizes that it is going to take time for many consumers to learn about this new generation of life products. "A lot of our focus for the third quarter is to continue to educate brokers and consumers about the benefits of our new product," Kalen said.

There's abundant commentary circulating on the merits of buying term, or whole life or variable life, Hall noted. In Northwestern Mutual's view, consumers first should sit down with a trusted adviser, determine their real need for life insurance and their real ability to pay for it, then use one of these life products to custom design a solution. The company has 7,900 financial representatives who can help customers devise these solutions, Hall said.

"That's the beauty, in a sense, of the life insurance industry today, because 20, 30 years ago, people could either buy term or whole life and that was it," he said. "Now they have lots of choices."

Carleton thinks variable is poised to make a strong comeback. In the past six months, he said, MassMutual has seen double-digit growth in variable sales. "Once the rest of the industry reports later on this year, I think you'll see an uptick in variable sales," he said.

But variable universal life has yet to recover that quickly, he added. "To me, that means the marketplace is paying attention, consumers are aware of the opportunities again, and I'm assuming that's just a precursor for continued growth in variable products," he said.

Kalen expects to see continued consumer interest in all of the life product categories. "What we're seeing is a balance of needs and it's important that as any life insurance company looks to serve the life insurance marketplace, it understands the needs of the different customer bases it is marketing to" he said. The winners in this arena, he added, will be those insurers that respond with multiple product offerings and make product recommendations consistent with consumers' needs.

Key Points

* Upticks in the equities market and the economy are boosting variable life sales. Leading insurers report double-digit growth.

* Insurers are achieving more balance between some variable and fixed products, with consumer interest favoring variable, universal and term life.

* Sales of hybrid products, which feature elements of universal life and variable life, are growing, and insurers predict consumer education will increase that growth.

Learn More

Hartford Life Insurance Co.

A.M. Best Company # 06518

Distribution: Stockbrokers, banks, financial planners, independent agents, certified public accountants 

MassMutual Financial Group

A.M. Best Company # 69702

Distribution: Career agents, independent brokers, wirehouses, banks, other financial institutions, regional independent broker-dealers

Northwestern Mutual Life Insurance Co.

A.M. Best Company # 06845

Distribution: Career agents

For ratings and other financial strength information about these companies, visit www.ambest.com