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Love, Life...Insurance

When is the last time you spoke to a client about insurance? Unless that conversation was about annuities, well, it was probably some time ago. In general, life and health insurance are subjects financial advisors discuss reluctantly and infrequently. But they're tools that are essential to wealth management. Life insurance can be a key component of succession planning (protecting buy-sell agreements),

When is the last time you spoke to a client about insurance? Unless that conversation was about annuities, well, it was probably some time ago. In general, life and health insurance are subjects financial advisors discuss reluctantly and infrequently. But they're tools that are essential to wealth management. Life insurance can be a key component of succession planning (protecting buy-sell agreements), estate-tax planning (reducing the estate-tax bill) and charitable giving, among other high-end services. And long-term care insurance is a great way to protect against a health care crisis in retirement, a growing risk in an age of rising longevity and health care costs. So if you don't talk about it with your client, someone else probably will.

Indeed, financial advisors, planners and stockbrokers accounted for just 10 percent of individual life insurance sales in 2003, which totaled $98 billion, according to the Insurance Infor mation Institute (III). And while that's more than double their 4 percent share in 1995, it's still very low, analysts say, when you consider that so many financial advisors and stockbrokers claim to look at a client's total financial picture today. The same is true of long-term care insurance. In 2003, stockbrokers accounted for just 7 percent of all long-term care sales, which totaled $953 million that year, though that's up from 3 percent in 2002, says the III.

So advisors are warming up to life and health insurance, but ever so slowly. According to an annual study conducted by The Hartford and Registered Rep. magazine, those reps who don't sell life insurance say they would be more inclined to do so if making the sale were simpler and faster (28 percent). Likewise, 63 percent of those who do sell life insurance, say they would sell more insurance if the sales process were simpler and faster. And that's just it: Insurance can be difficult to explain to a client, with its multiple riders, fees and death benefits. There are a lot of gizmos to figure out. Plus, selling insurance products requires a special insurance license and special suitability considerations, while state securities regulators, rather than the SEC or the NASD, primarily regulate insurance products. All of which, some reps appear to think, adds up to one giant headache.

What's to Like

But what of those financial advisors and reps who are selling life insurance? Who are they and what kinds of life insurance are they selling? Respondents who have been in the industry for five years or less are more likely to consider life insurance “very important” than those who have been in the industry for more than 20 years (68 percent versus 38 percent). Stands to reason, considering the guy who's been around a long time probably started out selling stocks and bonds, and, since he's still around, he's probably done well for himself doing just that. He may not be inclined to begin selling new kinds of products.

Life insurance is also more popular with advisors who have higher-end clients and work for the indie shops. Respondents with less than $20 million in assets under management are more likely to consider life insurance very important than those with $100 million or more (68 percent versus 32 percent). And respondents from independent broker/dealers are more likely to consider life insurance very important (60 percent) than respondents from wirehouses (40 percent) or regional firms (44 percent). This, too, makes sense. Advisors with more assets are more likely to have the kinds of clients who will need insurance to cover trust and estate-planning needs, while independent brokers probably have more flexibility in selecting products.

Respondents who sell life insurance said the primary reason they sell it to clients is still the most traditional reason: to protect family income in the case of the client's death (90 percent). But some 87 percent say they also use it for wealth transfer or estate planning, and 75 percent say they use it for long-term care expenses.

Both estate-planning and long-term care needs could draw more advisors to insurance in coming years, too. If the estate-tax repeal doesn't become permanent in 2011 — and a Democratic Congress is unlikely to make the repeal permanent — then there will probably be some big estate-tax planning needs that year, says Elaine Tumicki, head of insurance research at LIMRA International. And advisors might turn to life insurance, which can be used to pay off a large estate-tax bill without increasing the size of the estate.

LIMRA says that sales of long-term care insurance, based on annualized new premium, declined 5 percent in 2005. But interest could rebound due to a provision in the Pension Protection Act, passed this fall, that allows life insurance and annuity contracts to include long-term care riders. Still, Barry Fisher, vice president and chief marketing officer of Republic Marketing Group, a New Braunfels, Texas, insurance marketing organization that specializes in long-term care insurance product development and distribution, says marketing of the product has to change. “The training methods we used 10 years ago were geared toward selling the product to 72-year-old grandmothers, and that approach doesn't resonate with today's target market — people in their 50s,” he explains. “The average age of issue for a long-term care product is 58, so it's not a senior product.”

Other prominent uses of life insurance include business continuation or succession planning (58 percent) and charitable giving (48 percent). In addition, this year reps are selling more term and universal life insurance than a couple of years ago — the number of respondents selling term life insurance rose to 90 percent versus 82 percent in 2004, and the number of respondents selling universal life insurance jumped to 69 percent from 55 percent in 2004.

Bigger Business

Of course, financial advisors seem more than happy to sell annuities — contracts that guarantee a fixed or variable payment over a given period of time. In fact, financial advisors and planners' share of annuity market sales has stayed relatively constant over the past five years-at 30 percent in 2005, versus 31 percent in 2000, even as sales have more than tripled to $163 billion during that period, the III says. And, despite the bad rap variable annuities have been getting of late — for high commission and costs and unsuitable sales to seniors — advisors seem to be particularly fond of these products, which are part security, part insurance.

Maybe that shouldn't come as any surprise. Hordes of Americans (you know who we're talking about) are heading into retirement with longer life expectancies and smaller nest eggs, and the periodic payments offered by annuities both mimic the all but extinct defined-benefit plan, and, if used correctly, can help protect a client against the risk of running out of retirement money before he or she dies. In fact, it's not just financial advisors and planners who like annuities. The dominant business of life/health insurance companies has shifted over the past five years, from traditional life insurance to the underwriting of annuities. According to the III, annuities now account for 51 percent of all life/health business, followed by life insurance products (26 percent) and accident and health products (22 percent).

Fixed-annuity sales are also growing among advisors, despite an overall decline in sales for the product this year. In fact, Beacon Research of Evanston, Ill., finds that sales of fixed annuities through b/ds have been climbing steadily since November 2005, reaching their highest level in 15 quarters in the third quarter of 2006. Market value-adjusted (MVA) annuities, which invest in fixed income and offer withdrawal rates that vary according to interest rates, were particularly popular while Greenspan was lowering interest rates. “Most of the growth in b/d sales came from MVA declared rate annuities,” says Judith Alexander, Beacon Research's director of sales and marketing. “This was the case in all distribution channels, but MVA annuities have been more popular in the b/d channel than in the overall market for some time,” she says.

For advisors who want to really look at the total client picture, though, annuities just aren't enough say some. Scott Sanderson, vice president of marketing and strategic relationships at The Hartford, says that while adding insurance products to manage the risk of income distribution can result in increased referrals from clients who appreciate the comprehensive nature of the advisor's service, focusing on insurance as an estate-planning tool also benefits the advisor's practice over the long term. “Insurance is central to intergenerational marketing,” he says. “When you speak to the family about insurance, you are looking out for the children's interests as well as your clients' interests.”

However, Sanderson's top reason for talking about insurance is simple: “Our surveys show that pre-retirement, individuals have three advisors and in retirement they have just one. People are looking for one trusted advisor to depend on in the income-distribution phase. If you are not talking about insurance, whether for risk management or estate planning, watch out. Someone else will and the assets you helped build will be out the door.”

What You Can Do with Life

Needs reps meet with life insurance.

Q: If you do sell life insurance, what kinds of needs do you recommend it for?

Income protection (protect family income in case of death) 90%
Wealth transfer or estate planning 87
Long-term care expenses 75
Business continuation (business owner, partner or key employee death) 58
Disability income 49
Charitable giving 38
Supplemental retirement planning 48
Critical illness expenses 18
Source: The Hartford / Registered Rep. 2006 Wealth Management study

Annuities Everywhere

Individual annuity sales year-to-date through the third quarter, by channel.

(Dollars in billions)
Variable Fixed Total
Banks $16.1 $14.5 $30.6
Career agents 27.6 8.6 36.2
Direct response 11.8 0.8 12.6
Financial planner/independent b/ds 31.9 1.8 33.7
Independent agents 8.2 25.6 33.8
Stockbrokers 21.7 2.7 24.4
Other 2.3 4.3 6.6
Total 119.6 58.3 177.9
Source: U.S Individual Annuities (2006, 3rd quarter), LIMRA International
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