The changing world of life products.

Variable Life/Variable Universal Life

Variable-annuity sales have rebounded with the improved equities market, but VL and VUL sales fell another 37% through last year's first three quarters, according to Limra. Since the product isn't old enough to have emerged from a previous bear market, the industry doesn't know what to expect now, said Elaine Tumicki, a corporate vice president heading Limra's product research center. But variable life differs from variable annuities in that it needs cash value to pay annual insurance expenses, and some policyholders found they unexpectedly had to add money to their policies to keep them in force. Such unpleasant experiences could stall a rebound, Tumicki said. Robert Baranoff, senior rice president and head of North American research, said producers probably are "far more hesitant to recommend the product."

Universal Life, Whole Life and Term Life

Producers clearly view these fixed products more favorably than they view variable life, Tumicki said. Of much interest are UL policies with no-lapse guarantees, which she said have seen faster growth in sales than other UL products. That rate might be somewhat skewed because the growth is off a smaller sales base. Overall, UL products might seem attractive because of the relatively high interest rates insurers are paying on them. Tumicki said the median rate is about 5%.

Fixed Annuities 

Is there room to run for a product that has enjoyed record sales three years in a row? Eric Sondergeld, corporate vice president and head of Limra's retirement research center, said a recent trend is for insurers to offer longer guaranteed-interest periods, typically of three to 10 years. Another trend is to offer multiple rate-bucket options in a single product. Extended rate guarantees are a quick solution for writers in that they don't have to refile their products for state approvals, he said. Sondergeld said a steep yield curve--low interest rates for short-term bonds and significantly higher rates for long-term bonds--makes it possible for writers to offer long-term rate guarantees. The question remains whether investors will be keen about locking in money for longer than five years, he said. Insurers could do a better job promoting the payout feature of their fixed annuities, especially for contracts written under the 1971 annuity mortality table, he added.

John Fenton, a principal in the life insurance practice at Tillinghast Towers-Perrin, said that fixed annuities are likely to "hold their own" in a continuing low-interest-rate environment as interest shifts to variable annuities. The big challenge for the annuity market overall, though, is attracting more than a relatively small part of investable assets that otherwise go into stocks, bonds and mutual funds. "Only 20% of financial advisers sell annuities," he said. "So tapping into new distributors and customers should be a goal."

Variable Annuities

"If you're playing in the independent investment channel, you must have a story to tell, and for variable annuities, that story is guarantees," said Fenton. In the near term, a heavy focus on guarantees beyond the performance of the contract's investment options (in the form of death benefits, withdrawal benefits, asset levels and income from annuitized contracts) will be a way for insurers to differentiate themselves. Insurers charge additional annual fees for these benefits, typically around 50 basis points for each. But if the stock market has another great year in 2004, producers and their clients might turn their attention to fees charged for these guarantees as they again begin to compare VAs more closely with mutual funds, he said.

The bear market demonstrated the value of living benefits and death benefits, but it also might have shown insurers how risky it is to offer them. Many insurers have pulled their guaranteed minimum income benefit from new products, Sondergeld said. Fenton said many insurers no longer can buy reinsurance for benefits they offer, so they are exploring hedging programs to mitigate the risk and stay in the ballgame with guarantees.

Fortunately, the tax cuts last year on dividends and capital gains to a maximum rate of 15% didn't seem to hurt VA sales, said Sondergeld. The industry had expected a minor negative impact, since withdrawals from annuities continue to be taxed at ordinary income rates, he said. Income-tax cuts might provide more disposable income, so people might be more inclined to add to their retirement savings. Meanwhile, tax deferral no longer is the main selling point of VAs; now it's the guarantees, said Sondergeld.

Conventional wisdom is that annuities are less profitable than life insurance. That is correct per dollar of premium, but not for return on equity. The average annuity sale is $40,000 to $50,000, multiples more than the average life premium. Annuities' margins are smaller, but in terms of ROE, profitability of the two lines probably is similar, said Sondergeld. During the bull market, insurers strove for a 15% ROE and would invest money elsewhere if their products couldn't generate that much, he said.

Profits on variable annuities have been volatile, and the industry is realizing that, said Fenton. He said the average might come to 13% over time, more than on fixed annuities.

Profitability of term insurance probably is less than for UL, but it varies by the age of the customer. "Cells" of business made up of 45-year-old males are the least profitable, said Fenton, but insurers make a lot on cells of 65-year-olds because higher premiums help to carry expenses. There's also a tendency for insurers to compete for younger insureds, so the mortality assumption is "really aggressive." A male age 40 in good health can probably purchase $500,000 of coverage with level premiums for 20 years for less than $500 a year, he said. "That doesn't give you much margin for messing up," he cautioned.

Equity Index Annuities

This will be "the year" of equity index annuities, predicted Jack Marrion, president of The Advantage Group, which tracks that product. "The dynamics are set up for it--low interest rates, a decent stock market, and people still feeling skittish from the bear market" he said. Also, a large, New York-based insurer is likely to launch an index product in the first quarter, which would "really shake things up" in a product line written mostly by smaller companies, Marrion said. EIAs guarantee safety of principal, but they credit gains that are linked to a stock index, usually each year.

After plodding growth in sales since their introduction in the United States in 1995, annual sales have significantly more than doubled in the past two years to last year's expected $13 billion to $14 billion. Marrion said EIAs could become "the new fixed annuity" if interest rates remain low for an extended period, but if rates go higher, they are likely to remain a niche product.

Insurers also offer equity index life insurance, but annual premiums have been stuck in a range of $60 million to $90 million, despite a "full-court press" by companies on their producers, Marrion said. "Sales will only pick up when interest rates make regular UL unattractive" said Marrion.

Immediate Annuities/Annuitization of Deferred Annuities 

Annuitization is the tremendous opportunity for the industry, and insurers ought to start promoting the feature, Sondergeld said.

The bank channel is the perfect place to begin, because it's where the typical retiree keeps money. And a fixed payout annuity is simple to understand, since there are no bells and whistles, Sondergeld said.

But Sondergeld said there are a couple of challenges if these products are sold in other venues. One is that financial services in the past 20 years have "gotten into a transactional mode," and retirement planning requires more attention. Financial planners are well positioned for this kind of work, he said, and the bear market might have prompted them to take a second look at payout annuities.

The other challenge is that America has become a nation of do-it-yourself retirement planners probably not willing to part with sizable portions of their assets. "It's going to be an interesting transition," Sondergeld said. While payout features that exist today are adequate, Sondergeld recommended that insurers tinker with the products' features and options in the belief that no one feature will be the answer for retirees.

Fenton predicts immediate annuity sales will grow off a low base but "won't explode," because most distributors aren't comfortable selling them. The industry needs to implement ongoing education programs, he said. Roll-overs from qualified plans such as 401(k)s could be a substantial source of money for immediate annuities, and Fenton said much of that money is likely to get rolled over when the owner turns 60 or so.

Peripheral Products

Long-term-care insurance and critical-illness insurance haven't caught on with Americans for a variety of reasons. The federal government, however, launched a program to sell LTC insurance to its employees in 2002, and Tumicki said there is hope that it will have residual effects now that more people know about the product. Tumicki said a Limra survey of LTC writers showed optimism about selling group LTC over the next several years, but she said LTC faces a long road before it reaches the penetration level of more accepted products.

Competition for discretionary dollars might playa role in the slow growth of LTC and critical-illness insurance, said Baranoff. "People have lived before without LTC insurance," he said. "It's relatively expensive, there's some degree of denial, it's an intangible compared with buying a new flat-screen TV or a car. From a societal standpoint, LTC insurance is really an uphill battle. Everybody knows someone with cancer, so critical-illness insurance, which is less expensive, may have more potential"

Even disability insurance, a much older product, has its problems. The number of writers has dwindled through consolidation, and there still is a misunderstanding by the public of the product and the risk of disability, said Tumicki. Many people are covered by group products at work, but often the coverage isn't robust.