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Insurance: Guarantee Me

Insurance: Guarantee Me

Clients seeking investment guarantees are increasingly turning to insurance products.

Registered reps say investment guarantees are spawning sales of insurance products, ranging from fixed and variable annuities to whole life insurance.

A June 2011 survey of over 1,000 Americans by Prudential Financial found that investors are willing to pay the insurance charges for investment and income guarantees. More than half the respondents say they have lost faith in the stock market and want to invest more conservatively.

“The financial crisis has driven changes in the way Americans are saving for retirement,” says Christine Marks, president of Prudential Retirement, N.Y. “One solution has been to include guaranteed income products in retirement plans.”

Graydon Goghlan, a San Diego, Calif.-based financial planner, says a lot of investors are expressing an interest in variable annuity lifetime withdrawal bonds. Depending on a client's financial plan, he recommends retirees should anchor their retirement portfolio with guaranteed sources of income.

Data indicate that at least through the second quarter of this year, sales of virtually all types of insurance have been on the rise. For the second quarter, sales of variable annuities and index annuities were up 16 percent and 35 percent respectively over the same period of 2010, based on data by LIMRA and, Des Moines, Iowa. Third-quarter insurance sales statistics are not available until mid-November.

LIMRA reports that sales of annuities and life insurance linked to long-term care rose 41 percent over the past 18 months, and even traditional whole life insurance sales rose 10 percent in the first half of this year.

Cathy Weatherford, president of the Insured Retirement Institute, Alexandria, Va., says strong sales in the first half of this year are a harbinger of things to come. She's anticipating a record-setting year for the sales of retirement annuities.

Dave Paulsen, chief sales officer at Transamerica Capital Management, Los Angeles, says education and training are keys to establishing a flourishing insurance practice.

Paulsen attributes the company's average 21 percent annual growth of variable annuities since 2005 to communication of the benefits of adding variable annuities to an overall retirement income plan. “Our products focus exclusively on solutions that help advisors solve clients' needs,” he says.

Registered reps are also showing more interest in fixed index annuities due to the recent entries of Symetra, MassMutual and John Hancock into that market, says Sheryl Moore, president and CEO of She estimates that 55 percent of those selling index annuities are registered reps.

Index annuities, Moore says, should be positioned as a “safe money place.” Their interest is linked to market performance. Returns are limited, she says, so that the insurance company can provide a minimum guarantee on the contract. These annuities are priced to return about 1 percent to 2 percent more interest than a fixed annuity. Plus, the index annuities offer a guaranteed zero percent floor in addition to a secondary guarantee called a minimum guaranteed surrender value. This secondary guarantee kicks in when the client cashes out or if the market value of the investment does not perform, and provides at this writing, she says, about 1 percent to 3 percent interest on no less than 87.5 percent of the premiums paid into the contract.

“Index annuities are not intended to provide all of the stock market's upside,” Moore stresses. “Index annuities are promoted as allowing the purchaser to have limited participation in the market upside, while avoiding the downside risks associated with the market.”

Even stodgy old whole life insurance, up 10 percent in the first half of this year, is showing signs of life, LIMRA reports.

By contrast, total individual life insurance sales were up just 1 percent.

Mutual insurance companies, the primary sellers of whole life insurance, are less affected by the economy compared with public nonparticipating insurance companies, explains a report by A.M. Best.

“Interest rate risk lies on both sides of life insurers' balance sheets given their high proportion of fixed income investments and substantial exposure to interest-sensitive products such as universal life,” says Andrew Edelsberg, vice president at A.M. Best.

Marvin Feldman, insurance agent and president of the Life Foundation, Arlington, Va., says the strong selling point for whole life is it provides protection for a lifetime. It offers guaranteed premiums that will not increase, a guaranteed death benefit and guaranteed cash value. The policyholder gets a relatively large amount of permanent protection for the premium dollars because the mortality fees and other costs are paid over the life of the contract. Policyholders also can borrow tax-free against the cash value at net zero interest.

Feldman says whole life insurance companies are paying a 3 percent guaranteed interest rate on the cash value. And the internal rate of return on the policies, including the reinvestment of dividends, is 4 percent to 5 percent.

“I've talked to a number of advisors who are considering using whole life insurance as an asset class instead of low-yielding Treasury bonds,” he says.

Although overall life insurance sales are sluggish, Cheryl Retzloff, senior research director at LIMRA, says sales could double through 2017.

The underinsured life insurance market offers financial professionals tremendous opportunity, she says. “The greatest challenge is not getting them to understand they need life insurance, but rather getting them to give it a high enough priority to investigate coverage now.”

So where is the opportunity? A September 2011 LIMRA study shows that there are more Generation Xers thinking of buying life insurance than there are from Generation Y and Baby Boomers. Since three-quarters of the Generation X households are married, and half have a child under 18 living at home, this makes them great candidates for life insurance.

Insurance agent Feldman says the vast majority of people do not contact insurance agents about life insurance. Advisors need to pound the pavement, meet people and take an active role in their communities to sell life insurance.

“Advisors need to contact people and make them aware they have some type of financial problem that can be solved with life insurance,” he says.

On the retiree side of the business, immediate annuity sales picked up steam as people sought a guaranteed lifetime income. Over the past year ending in June, immediate annuity sales, LIMRA says, were up 5 percent.

Dale Krause, a De Pere, Wis.-based elderlaw attorney, says more people will buy fixed immediate annuities because of the volatility of the financial markets. Many clients have doubts about giving up their assets to an insurance company in exchange for monthly income. However, when clients see that annuity income is guaranteed, they can visualize it in their retirement income portfolio to cover basic expenses, such as food, clothing, housing and medical.

Krause, however, cautions advisors about properly structuring immediate annuities so they can be Medicaid and Veterans Aid & Attendance benefit compliant. The immediate annuities must adhere to Social Security life expectancy tables, as well as meet specific beneficiary requirements.

Krause has seen a number of affluent individuals who have exhausted their savings due to medical and long-term care expenses. As a result, they are forced to go on public assistance to pay for assisted living or nursing homes.

“I've seen a lot of insurance agents selling immediate annuities to help families pay,” he says. “But there are a lot of problem sales if they are not done with the understanding of Medicaid and Veterans Aid and Attendance Benefits.”


Alan Lavine is a contributing writer to Registered Rep., and author of some 15 books on investments and insurance. He writes a column for Dow Jones MarketWatch's '''Retirement Weekly,” and is a contributing editor to Financial Advisor magazine.

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