In a US life insurance industry that has seen overall sales
plummet since 2008, standing out as an exception are whole life
policies which are enjoying a strong rebound in popularity among
risk-averse consumers seeking a more stable investment alternative
to the equity market. Charles Davis reports.
Shoved to the sidelines during the heady days before the
economic meltdown of 2008, whole life policies suddenly are back in
vogue.
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The reasons for the comeback of whole life products are quite
simple: retirees, and those eyeing retirement, find themselves in a
cash crunch – with a lower income stream from their investment
portfolios, personal expenses that are higher than expected, or
both.
Retirees often decide they no longer need life insurance once their
children are grown. If they own whole life policies, which have an
investment component, and want to drop them, they can either cash
them in with their insurers or sell them to investors, who will pay
the premiums until the policyholders die.
Having worn the bruises of a pair of cataclysmic stock market
crashes in the past decade, investors are more than willing to give
whole life a long look these days. Indeed, whole life offers the
industry a clear sign that consumers have not completely abandoned
life insurance.
Whole life sales shine
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By GlobalDataAmid the chaos of the past year, it is easy to forget that term and
whole life insurance remained relatively intact in 2008. Sales of
term life policies were only down 1 percent and whole life, after
experiencing a 7 percent increase in the third quarter followed by
a 2 percent increase in the fourth quarter, was the only product to
grow in 2008, ending the year up 2 percent, according to figures
from industry body Limra.
In 2009, whole life continues to perform much better than universal
life products, declining by single digits in the first and second
quarters. In addition, term and whole life each accounted for 28
percent of new premiums in the first and second quarters, the
highest share for whole life since 1999 and a record for
term.
Whole life’s resilience is particularly impressive when compared to
the life insurance industry overall, which after a 26 percent
sales-dive in the first quarter of 2009, dropped 20 percent in the
second quarter, according to Limra’s US Individual Life Insurance
Sales report.
The attraction of whole life centres on including it in the
fixed-income part of a portfolio to increase overall return while
dampening the volatility that has jittery clients hesitant to buy
coverage.
The guarantees of whole life make this possible. As long as
scheduled premiums are paid and there are no loans or withdrawals,
the issuing company guarantees that the policy cash value will grow
and never drop.
Cash values are based on the guaranteed mortality rate, the
guaranteed interest rate and the guaranteed expense factor.
Policyholders can access the cash value on a tax-favoured basis,
but doing so would impair the use of whole life as part of an
investment portfolio.
A whole life policy helps a portfolio not only due to the
guarantees, but because it is not correlated to investment markets
and thus adds diversification. For example, an investor may include
high-grade bonds and reinvest dividends. Using the dividends to pay
the premiums on a whole life policy is likely to increase the total
return of the fixed-income part of the portfolio with less
risk.
Forgotten in the days of ever-increasing equities investments is
the fact that while term life is cheaper for the first 20 to 25
years of a client’s investment cycle, that formula reverses as
insured clients enter their golden years. That makes it extremely
difficult for older clients to switch to whole life later, making
the sales proposition for whole life easier for insurers targeting
younger investors typically sold term products.
In addition to whole life sales to individuals, a huge opportunity
also exists to position whole life as a succession vehicle for
small business owners.
“The versatility, guarantees, and permanence of whole life
insurance can help solve some of the inevitable challenges that
businesses confront over time,” Beth Wood, an assistant
vice-president for the US Insurance Group of MassMutual, told
LII.
“Many business owners realise they will be forced to deal with one
or more of these types of issues one day, which is why they want to
have a plan that is guaranteed to be there when they need
it.”
Small business protection
MassMutual recently issued a release highlighting the power of
whole life in the small business context featuring a small New York
manufacturer. When its owner for more than four decades passed away
suddenly, Troy Belting and Supply Co could have collapsed, as do
many family businesses that lose their leaders. Instead, the
company continued to operate and grow, thanks in part to a
succession plan funded by life insurance.
“We were able to keep operating and retain every one of our workers
because my father had the foresight to put a succession plan in
place,” said Jason Smith, who succeeded his late father in 2003.
“Whole life insurance was a critical part of that plan.”
Whole life insurance can protect a business or business owner from
financial loss – including the loss of control of a part of the
business – as a result of the death of a partner or co-owner. As
part of a buy-sell agreement, the policy’s death benefit can be
used to purchase the deceased partner’s shares from his or her
estate.
The cash value of a whole life insurance policy can give businesses
the flexibility to manage through the ups and down of the business
life cycle by providing funds to respond to expected and unexpected
challenges and opportunities.
The urgent need for business owners to manage both personal and
business risks was highlighted by MassMutual’s 2009 family business
partners study, which found only 39 percent of those surveyed had a
legal succession plan in place. That fact alone assures whole life
has a place in the business-planning lexicon for years to come.
