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In recent years, various product developers have pushed the envelope of so-called "transformational" and "convergence" products.
What are these innovative designs? What do they have in common? And what does that commonality say about the future direction of the financial product world?
Transformational products: The industry has not yet settled on a catchall phrase to describe the increasing variety of innovative products, but "transformational products" is as good a phrase as any.
"Continuum products" would work as well.
Both terms refer to the increasing number of insurance products, both fixed and variable, that seek to address multiple insurance needs that are becoming increasingly significant as the baby boomer generation ages.
Example: Annuity contracts are available that either truly or virtually morph into either life insurance (by emphasizing the annuitys death benefit features) or that provide a special provision to address an extraordinary event (such as nursing home confinement)
An increasing number of variable annuities, for instance, feature enhanced death benefits, disability and terminal illness benefits, and companion term insurance contracts. A growing number of annuities and life policies also have begun featuring long-term care benefits.
The emergence of these products or design features, of course, has its roots in our changing demographics.
The baby boomers are aging, and, as they age, their concerns are focusing on the conflicting worries of outliving retirement savings or not leaving a legacy for heirs. Those worries are magnified by the rising costs of health care and the threats of disability or LTC needs. Hence, they are increasingly focused on maximum flexibility in payout from their financial products.
Convergence products: To date, there seem to be fewer convergence products than transformational products. But they do exist.
Such products combine elements from the banking, investing and insurance industries in a single product. An example of a convergence product would be an FDIC-insured Certificate of Deposit with its rate of return pegged to a market index.
The Gramm-Leach-Bliley Act has made these products possible. "Convergence" was originally used to describe the heretofore prohibited affiliation of banking, insurance and investment entities. Post-GLB, an insurer can own a bank, an asset manager and sponsor insurance products and mutual funds and become not just a "supermarket" but also the commissary of banking, investment and insurance products.
Although convergence products have not yet proliferated, many analysts see signs of their coming. One of the main signs is the insurance industrys renaming of its distribution networks, with the keyword "Financial" appearing with greater frequency.
