Three years ago it was "almost impossible" to get brokers to sell life insurance products, according to Jerald Hampton, director of Salomon Smith Barney's estate and trust services group. Only 250 brokers at the firm were doing any insurance business. Today that's grown to nearly 2,000.
Those reps are part of a new strategy at wirehouses to direct brokers to solve wealth transfer problems through life insurance.
"Wirehouses are looking at life insurance differently," says Robert Kerzner, director of the individual life division at The Hartford Life. "They're asking: 'How are we bridging to the next generation? What will happen to us when the big generational transfer occurs over the next 30 years if we lose 50 percent of client assets to estate taxes?'"
The securities industry is the fastest-growing segment of the life insurance market, reports the Life Insurance Marketing and Research Association (LIMRA). All traditional agency distribution channels are losing market share. Broker/dealer sales are growing at a rate of 40 percent, according to LIMRA, citing 1997-'98 data. But stockbrokers accounted for just 3 percent of individual life insurance premiums in 1997.
"When we met with a group of wirehouse executives recently to look at life insurance revenues, they joked that they didn't need to worry about competing with each other because they weren't likely to run into each other in the life insurance market," Kerzner says. "Life insurance is where annuities were seven years ago."
Revenues from insurance, including annuities, account for 3 percent of Prudential Securities' revenues, according to Nathan Crair, director of financial services in Prudential Securities' estate and insurance planning division in Century City, Calif.
Annual premiums at Salomon Smith Barney are up 40 percent from last year to 150 million dollars, Hampton reports. Three years ago annual premiums were 30 million dollars. The Hartford Life's sales through full-service brokers are up 37 percent through July, Kerzner says. Last year's sales were 38 percent higher than 1997.
Popular Products Survivorship and variable life insurance, especially variable universal, lead wirehouse sales. At Salomon Smith Barney, nearly one-third of insurance business comes from survivorship products, Hampton says. Universal life accounts for 28 percent and variable universal life (VUL), 15 percent. Two years ago, VUL policies accounted for only 2 percent of the firm's insurance business.
"Sales are coming from investors in their 40s and 50s who have maxed out on their retirement plans," Hampton says. They supplement with an overfunded VUL policy, attracted to the death benefit that passes tax-free to the next generation.
Dain Rauscher reports survivorship (or second-to-die) insurance brings in nearly 60 percent of insurance sales. It's a product poised for strong growth among brokers, according to Rose Cahill, marketing director for Investors Partner Life, a wholly owned subsidiary of John Hancock Life in Boston.
"Many clients who purchased large annuities now feel they don't need that money," she says. "They don't want it to pass to their heirs, so they're annuitizing and using the proceeds to fund second-to-die policies, which transfer tax-free."
Interest in long-term care (LTC) insurance has exploded this year at Prudential Securities, Crair says. Sales are up 154 percent for the year through July, twice the sales as all of 1998, with twice the number of brokers selling the product. Both Salomon Smith Barney and Dain Rauscher also are seeing increases in LTC insurance sales. It now makes up 15 percent of Dain Rauscher's insurance revenues and 7 percent of Salomon Smith Barney's.
Crair sees LTC sales driven by baby boomers now needing to care for aging parents. "In talking to boomers about their parents, the broker then starts to think of the nextgeneration and that creates awareness of estate planning needs," he says.
Insurance Specialists Life insurance sales are still coming from a small number of brokers. Only about 5 percent of all full-service brokers write a life insurance ticket each year, Kerzner says. That's starting to change, thanks in part to electronic brokers.
Kerzner believes electronic brokerage is pushing brokers to look for ways to distinguish themselves. "When a broker starts talking to a client about wealth transfer strategies with insurance, it plays to the broker's strength as a value-added intermediary," he says.
Some brokers are coming to insurance "kicking and screaming," Cahill says. "A couple of our wholesalers were talking to a group of traditional stock jocks at a wirehouse. The brokers said: 'This electronic trading thing is starting to kill us. We either have to move to financial planning or get out of the business.'"
Firms don't want to position brokers as insurance salespeople, according to Geoff Bobroff, a mutual fund and insurance industry consultant in Greenwich, R.I. Some are putting in place salaried insurance specialists with estate planning backgrounds to work directly with brokers and their clients.
"There's a growing interest at wirehouses in offering more complex insurance solutions," Bobroff says. "At Merrill Lynch, for example, although many brokers are insurance licensed, they've put insurance specialists into their larger offices. The reason: There's a lot of interesting product design going on in order to customize insurance solutions for clients."
Other firms also are building up insurance-specialist programs.
* Salomon Smith Barney has built a network of insurance specialists over the past three years that takes virtually all the details of an insurance sale out of the broker's hands. "The role of the FC is relationship manager," Hampton says. "What the FC needs to know is how to profile an estate planning need. ... Our goal is to develop a road map for clients to see that their legacies are ensured."
Close to 40 salaried specialists work in the firm's branch system. They're directed to meet with clients to design an insurance solution once a broker identifies a need. They also train brokers to look for needs. Six estate planning attorneys have been added to handle complex cases and lead advanced broker training in insurance strategies. The firm has contracted with 10 outside insurance agents to process brokers' insurance applications, double-check illustrations and shop for the best carriers.
"Brokers now recognize they're under increasing pressure to be much more well-rounded," Hampton says. "We're pulling them, but they're also coming along."
* Prudential Securities began building its staff of 21 estate planning consultants (EPCs) two years ago. "We don't want to make brokers estate planning experts," Crair says. About 93 percent of all insurance sales last year came through EPCs teaming up with brokers, according to Jim Hiles, national sales manager for Prudential Securities' estate and insurance planning division in Century City, Calif.
The firm has also begun housing a small number of Prudential Insurance agents in its branches, an initiative that is expected to grow, Crair says. "Prudential Insurance is very strong on having us look at a client's whole picture," he says. "You'll see a lot more [cross-selling] between Prudential Insurance and Prudential Securities." The firm projects the number of insurance-licensed brokers to "increase significantly in the coming year," Hiles says, from its current 4,700.
The Hartford Life and Investors Life Partners are creating new systems for brokers to streamline the underwriting process. "A broker will be able on his own computer system to answer three or four questions. We'll take over the entire process from there and handle the application directly with the client," Kerzner says. "We're aiming to make it as close to dropping a ticket as we can, to make life insurance feel like the business the brokers understand."
Life insurance isn't the buy-term-and-invest-the-difference world it once was for brokers. As reps move toward estate planning, the chance for costly mistakes grows.
Those who've worked with brokers and insurance over the years see the dangers. Ray Gault has been an estate planning consultant for Salomon Smith Barney in Sarasota, Fla., since the mid-'80s. He says he's seen many brokers write policies in a client's name or wife's name, oblivious to the estate planning problems it causes. "Products also are so varied today that brokers may easily portray [incorrectly] what a policy will or won't do," Gault says.
Richard Weber believes "it's definitely a challenge for brokers to do a good job" selling life insurance. Weber directs strategic marketing for Financial Profiles in Carlsbad, Calif. He trains brokers and insurance agents on compliance issues through the Society of Financial Service Professionals (formerly known as the American Society of CLU and ChFC).
"Not even traditional agents appreciate how sensitive and sophisticated variable policies are, the tricks and traps in them," Weber says. Policy illustrations are a particularly dangerous trap. "Agents often think that because they're allowed to illustrate 12 percent, that's the right thing to do," he says. "Some even believe 12 percent is what they're supposed to say." Not looking deeper to find the appropriate illustration can create unrealistic expectations, Weber warns.
Brokers also may not realize the implications of the NASD's rules regarding use of variable insurance policy illustrations. "You must use the number as an average and therefore a constant rate," Weber says. "Since no market operates at a constant rate, that creates an illustration inherently incorrect."
Weber is also concerned brokers won't be effective with insurance because the selling skills are different. "Brokers know how to motivate clients on an activity basis-making a trade or rebalancing a portfolio," he says. "It takes a more subjective approach to get people to act on insurance to protect their family."
Rose Cahill heads marketing for Investors Partner Life, a subsidiary of John Hancock Life, formed in January 1998 to serve full-service brokers. Life insurance is the "next frontier" for wirehouses, she says, but its complexity will keep sales growth gradual.
"You can't just put a bunch of products out there for brokers to sell," Cahill says. "It will take good internal wholesaling support, outstanding external wholesaling support and a lot of continuing education to make it work."
I remember going to meetings at the firm to learn about estate planning, and they were full of trust officers, CPAs, attorneys and insurance people," says Leonard Leetzow, a 35-year Salomon Smith Barney veteran in Sarasota, Fla. "The attitude was that brokers weren't allowed to participate because we weren't insurance agents."
For years, Leetzow says he was only able to scratch the surface of clients' insurance needs.
Things changed when Salomon Smith Barney began a push a few years ago to team brokers with insurance specialists, according to Leetzow. He began working with such a specialist, Ray Gault, who joined EF Hutton as a life insurance specialist in the mid-'80s and stayed during the Shearson merger. Gault's title is divisional sales manager for estate and trust services in Florida.
When Leetzow does initial fact-finding with a new high-net-worth client, he now routinely runs the details by Gault. The two usually meet with the client to discuss how insurance can address estate planning problems wealthy clients typically face.
"Most people had insurance sold to them long ago in their name or their wife's name, and it ends up in the estate," Leetzow says. "We explain to them why they really don't want that 500,000 dollars sitting in their estate."
Teamwork helps. "Ray may think of questions to ask I might not," Leetzow says. "It's a great thing to watch happen. Now I'm more aware of opportunities to do estate planning. I can even talk now about buy-sell agreements."
Gault holds regular education meetings for brokers in his region. "I tell them to look for clients with large IRAs, which can involve very complex estate tax problems," Gault says. "I have them look for clients with large stock positions, which clients typically don't want to sell because of capital gains. We can set up an exchange fund or charitable remainder trust and avoid capital gains. I also want them to look for family businesses and identify succession issues that aren't being addressed," he says.
Brokers often are surprised that their high-net-worth clients need help, Gault says. Don't assume because someone has a lot of money, he must have done everything right. "I've been brought into cases where a client had 10 million dollars, paid to set up a living trust but never funded it," he says. "We want FCs to know we lose out on the future if estate taxes are paid out of a Salomon Smith Barney account."