Term life vs. no-lapse UL: sales of both product lines are growing, but universal life with a guaranteed death benefit threatens to cut into term sales.
Well, not anymore. As of July, online broker Insure.com showed that its lowest-priced 30-year level-premium term policy for a 57-year-old prospect had higher annual premiums than a universal life insurance policy with a secondary no-lapse guarantee.
Granted, this is an exception to the rule, and term policies with terms shorter than 30 years will probably always cost less than a no-lapse UL. But it is an indication that these UL policies, which have proliferated in the past few years, are becoming so inexpensive that they have emerged as an alternative to term. Does that mean they are actually eroding the term life market? Not according to several direct writers with strong businesses in those product lines, although some admitted there has been a slight overlap in what they can accomplish.
Term insurance has traditionally filled a temporary need, usually income replacement. Only a small percentage of term policies actually pay a death benefit because insureds tend not to die while the policies are in effect. Permanent insurance has been for people who know they will need a death benefit for estate planning, liquidity or wealth transfer. But now some no-lapse UL policies give term buyers a better chance to actually collect death benefits.
No-lapse UL is certainly the hotter product, both in annualized premiums and number of policies sold, according to a recent Limra International report (See "Growth Rates by Product, Life Insurance" on page 46). The report showed that in this year's first quarter, UL annualized premiums grew 26% over premiums in last year's first quarter, and the number of policies sold rose 6%. Term life was the only other major product line to show increases in both categories with 5% in premiums and 2% in number of policies. So it is not surprising that direct writers continue to find ways to lower prices in these lines or to beef up their offerings in term or UL.
Protective Life Insurance Co., one of the top competitors in both lines, bolstered its position in May by introducing products with lower premiums. Its MultiTerm product reduces term premiums by 35% at some ages and face amounts, and Select UL VI also offers prices lower than previous products. No-lapse UL products, however, have had very little impact on Protective's overall term insurance sales, said Eric Miller, vice president of marketing in the Life and Annuity Division. "While there's no doubt that the popularity of secondary-guarantee UL plans has increased, most of our customers still make life insurance decisions based on whether they consider their coverage needs to be temporary or permanent, and buy term or UL accordingly," he said.
While term insurance sales have grown consistently and steadily, Protective has seen volatility in its no-lapse UL sales, both upward and downward. "That's been fueled by an increasingly competitive market as well as some regulatory factors, like changes in the reserve requirements associated with these products," said Miller. "Together, that's resulted in a plethora of product rollouts, changes and enhancements throughout the industry that have made it a little difficult to clearly identify sales trends."
Term sales tend to come from buyers in their 30s and 40s, while no-lapse UL products are favored by older and more affluent buyers generally associated with estate planning and wealth-preservation applications, Miller said. In some cases, these older buyers are upgrading their coverage from term insurance or older permanent plans to newer no-lapse products, he said.
American General Life Insurance Co., a member of American International Group, has not seen the emergence of no-lapse UL affect its term business, said Doug Israel, senior vice president of product development and advertising. "The only thing that is an effect is that no-lapse UL puts further pressure on methods to provide reserves because no-lapse UL and term require big reserves," he said. "We are beginning to see companies securitizing their term block of business so they can put up the required reserves."
Also, American General does not write 30-year term on anyone older than 50. From a premium perspective, 70% of the company's no-lapse UL is issued on lives age 50 and above, while 70% of term is on people under age 50. "So it's a whole different demographic, and the premium and face amounts on the UL tend to be much higher," said Israel. "We believe the average no-lapse face amount is certainly in seven figures, and maybe in eight."
American General's term sales also are being helped by a relatively new product, return-of-premium term, although the company sells much more regular term. Israel said that if ROP term were all the company sold, American General would be in the top 20 companies in overall term sales.
Israel said that the ROP term receives a lot of press. That might explain why the many direct marketers with which American General does business, including Matrix Direct, AccuQuote, SelectQuote and Family Direct Insurance
Services, report that clients have been asking about the product. "It appeals to people, the notion of getting your money back if you outlive the level-term period," Israel said. "It's an emotionally appealing aspect to a traditional term product."
Genworth Financial, which sells both term life and no-lapse UL, reported that the emergence of the UL product has not had a substantial effect on its term sales. "We're doing very well in both," said Eugene S. Koster, senior vice president, life insurance sales with Genworth Life Insurance Co. "We've been able to show very good increases." But in the future, the no-lapse UL could displace some term business if term policyholders choose to exercise their right to convert from the term policy. "Our no-lapse product is quite competitive, and it's a great product to convert to" he said. "It's really quite a change in the market to have that combination, of going to a UL on a conversion that is relatively less expensive than it was five or 10 years ago."
Koster said Genworth's "sweet spot" is 20-year term. It also has introduced a ROP product that has seen a very nice upward sales trend. "It's another choice consumers can make based on what they can afford," he said.
Genworth's term buyers usually average 35 to 40 years old, while its UL buyers are closer to 50. A distinguishing feature about the company's UL business is that it is one of the few carriers to offer a UL product with a face amount as low as only $25,000, which can appeal to the middle-income market.
According to Koster, the "short answer" about no-lapse UL affecting the term business is that the products "can be and should be different markets." First Colony Life Insurance Co., a Genworth member company, has long been one of the nation's major term life writers, and Genworth's predecessor companies have sold UL as far back as 1981. But its UL secondary guarantee, Flex Plus, which is growing rapidly, has been on the market only since early last year.
New Focus on Term
In June, ING U.S. Financial Services ramped up its term life products by means of an instant-issue policy to be sold through banks and a revamp of its core term product. The revamp of its TermSmart line lowered prices, eased underwriting requirements and enhanced product features. Alan S. Lurty, senior vice president of commodity markets for the Life Business Group, characterized the effort as "our reentrance into the term market."
ING has had an affluent market strategy, focusing on sales of high-end UL, variable universal life and variable annuities. "We need to complement that strategy because we see some real opportunities in the U.S. market for growth, with large segments of the population underinsured or uninsured," he said. "We see an opportunity to sell a lot of term life to those folks and make it easy for them to obtain the insurance."
A 35-year-old buying term insurance to protect his or her family might become ING's future affluent buyer, Lurty added. "So our strategy is to build more volume in our business and to start to capture the customer at an earlier point in their life cycle," he said.
ING expects its brokerage general agency distribution channel, where it has a big position, to sell the new term products, Lurty said. The alternative distribution channel, including quote services and bank insert programs, also should contribute to reaching the middle-income market. "We are working diligently in bringing on a lot of the quote services," he said. The insert program reaches the public through banks' monthly statements, a program in which ING already is finding success, said Lurty.
The June revamp brought to market TermSmart 2006, the new version of the TermSmart line. "In most of the pricing cells, we are ranked number one in terms of lowest premium" Lurty said. The company is able to issue the policy in about 20 days, nearly twice as fast as the competition, according to Donald "Butch" Britton, president of ING Life. "That's contingent upon a clean case," he said. "If the distributor can give us the right parameters, we've built a process called Orange Express that gets a fairly quick delivery of the policy to the customer."
Britton said ING also was revamping its no-lapse UL product, which it introduced in early 2004, and was planning to come out with a repriced, more competitive product in August. It also is planning to introduce a ROP term product in the fall. "From our standpoint, it's the very nature of the product that provides some anti-adverse selection for us," said Lurty. That's because buyers of ROP term are betting they still will be alive when the term expires.
Lurty said no-lapse UL has had a limited effect on the industry's term-life business, and perhaps a modest effect on the 30-year level-premium term. "If anything, it's hit the accumulation UL more than the term business, and it has also displaced some VUL sales for people who did not want the volatility."
Producers See Effects
John Spoelker, a broker with McGohan Brabender Financial in Dayton, Ohio, said his experience has been that no-lapse UL has slightly reduced term-life sales because there are more cases now in which permanent insurance is "not out of reach" clue to price. "In some cases where you might have had to sell term insurance because a client couldn't afford UL, now ... you can sell UL with a guaranteed death benefit," he said.
Larry Young, owner of the life, employee-benefit and equity area of Insurance Planning Services, Anniston, Ala., said the emergence of no-lapse UL has probably affected UL sales more than term life and has "tremendously" affected whole life sales. Before no-lapse UL, a person who wanted life-insurance protection for a lifetime had to choose between whole life or UL, which was 30% to 40% less expensive, but which did not guarantee the death benefit. "So when guaranteed UL came out, suddenly people had the option to buy insurance that would last a lifetime but with substantially less cash value than whole life," he said. "So my thinking was to define a client's objective and fit it to his budget. If he just wanted insurance and was not interested in the cash value, I could help him invest outside the life product."
Young said that since guaranteed UL came onto the scene, people are more aware that a standard UL policy could lapse. Interestingly, however, Young said he has found that if clients buy a standard UL without the guarantees, and if they fund it with the same premium as would be required in a no-lapse product, the nonguaranteed product would have better cash values 20 to 40 years in the future based on current assumptions. "Basically, people are swapping the cash value for the guaranteed benefit," he said.
ROP term has never been a product that Young has sold. "It certainly has some sizzle," he said, "but if you instead took the price difference and invested it, where would you be 20 or 30 years down the road?"
Exploiting Scale, Brand
Despite the steady growth of the term life industry, it is a business that is currently dominated by "five or six big players," according to Israel. "After that, the sales numbers drop off precipitously," he said. "It is my observation that if a carrier isn't doing $40 million or $50 million in sales, it's really hard to get to the required unit cost and gain enough experience with the product."
Israel said that the importance of scale is such that it is becoming harder for companies to get into the business and compete profitably. "You need to get the process correct, the distribution correct, and you need to have a reasonably competitive product," he said, although he pointed out that American General's does not always have the lowest rate on the street.
"Term is easy to buy," he said. "And consumers tend to buy the product from a name they recognize. That probably helps us."
Then there is the matter of reinsurance. Israel said reinsurers have "tightened up" on their standards and terms. American General believes this favors the company because it can retain higher levels of business. Alternatively, Israel said that insurers wanting to reduce dependence on reinsurance may look to raise needed reserves through securitization, but in order to do that, they need "millions and millions of dollars in in-force premiums and hundreds of thousands of lives.
"If you don't securitize, you're going to pay a premium price in today's market for a reinsurer to provide the needed reserves. Reinsurance can provide the needed reserve credit, but in today's market, it is a costly expense," he said.
* The term and universal life markets have been the strongest in recent years.
* No-lapse universal life has become so inexpensive that it is making inroads into what are traditionally term markets.
* To take advantage of the trends, some insurers have strengthened their term and no-lapse UL lines.
* Scale and brand give long-time players in these markets an advantage.
Growth Rates by Product, Life Insurance
Percentage change, First Quarter 2005-2006
Universal life, helped markedly by sales of no-lapse UL, grew the most in all categories, while term life was the only other product to grow in all three areas. Interestingly, the statistics for variable universal life show fewer buyers, but that those buying the policies are heavily funding them.
Source: Limra International
Sizing Up the Competition
The illustrations provide evidence of why term life and universal life (helped by the emergence of no-lapse guarantees) have become so popular. Producers find them easier to sell than other life products, and buyers find they meet their needs at lower costs. Return-of-premium term policies have boosted sales of 30-year level-premium term, and many direct writers are offering the product to prospects older than 50, even up to age 70.
Producer Perspective Level of Difficulty Selling
Term Vs. Permanent As Reported by Producers
* 51% of 2005 life insurance sales were individual term products
* 30% of clients who purchase term convert to permanent insurance later
Term Sales by Level-Premium Period
Term Shoppers--Major Motivations
Maximum and Minimum Issue Ages Level Premium Term (Return-of-premium not included) Maximum Issue Age Minimum Issue Age Median / Range Median / Range 10-Year 75/60-85 17/0-21 15-Year 70/59-75 17/0-20 20-Year 65/54-80 17/0-20 25-Year 50/45-60 17/15-18 30-Year 50/45-70 17/0-20
Return-of-Premium Term Sales By Level-Premium Period
Protective Life Insurance Co.
A.M. Best Company # 06962
Distribution: Independent agents, broker/dealers, direct marketing
American General Life Insurance Co.
A.M. Best Company # 06058
Distribution: Personal producing general agents, brokers, independent marketing organizations, agency system
Genworth Life Insurance Co.
A.M. Best Company # 07183
Distribution: Financial intermediaries, independent producers, dedicated sales specialists
ING Life Insurance And Annuity Co.
A.M. Best Company # 06895
Distribution: Independent and career insurance agents, banks, broker/dealers
For ratings and other financial strength information about these companies, visit www.ambest.com.