Inflation isn't all it's cracked up to be. Despite the steady appreciation of almost everything except computer speed and digital storage space, premiums on term life policies have actually declined over the last decade – and will continue to fall over the next 12 months, according to the Insurance Information Institute. The decreases are fantastic news to consumers and their beneficiaries, but the very changes in the marketplace that make these cut-rate premiums possible also present today's advisor with a series of challenges.
Improved mortality
"Premiums are less than half of what they were a decade ago," says Dr. Steven Weisbart, an economist and life insurance expert with the III, who projects that they will undergo a further 4 percent drop in 2007.
What's behind the declines? Ultimately, technology. First of all, death rates for the 25 to 44 year-old demographic – the heart of the market for term insurance vendors – have decreased substantially. According to the National Center for Health Statistics, 25-to-44 year-olds suffered a mortality rate of approximately 177.8 per 100,000. But by 2004, that rate had fallen to 161.8 per 100,000 – nearly a 10 percent drop in less than a decade.
How did it happen? Credit a vast combination of factors – from advances in automobile crash survivability to better drugs and medical equipment. Overall, death rates of nine of the 15 leading causes of death declined substantially over the last year – offset by increases in mortality from accidents, high blood pressure, and Alzheimer's disease.
Most remarkably, mortality for breast cancer declined by 7.2 percent in 2003, according to a recently released study from physicians at the University of Texas.
The favorable changes in mortality extend to seniors as well: The average life expectancy at birth is currently 77.8 years – a record high. Women now have a life expectancy of some 80.1 years, again according to the National Center for Health Statistics.
Commoditization of the product
At the same time, technology has revolutionized the way insurance is sold: Web aggregators such as Intelliquote.com and ReliaQuote.com helped to turn term life insurance into a commodity, forcing insurance companies to slash premiums in an attempt to compete on price – an assertion of a ruthlessly efficient market that made sales a challenge for service-oriented insurance agents.
So how does an insurance agent add value when insurance is increasingly swapped like pork belly futures?
"Don't sell based on product," advises Randy Scritchfield, CFP, a life insurance agent with Montgomery Financial Group in Damascus, Md. "You build a relationship, and the product sale simply comes out of that."
Scritchfield, who's been a life insurance producer for 26 years, is a 22-year Million Dollar Round Table member with five TOT years to his credit – and he's willing to cede do-it-yourselfers to the Web sites. "I divide the market into three basic segments: do-it-yourselfers, collaborators, and delegators," explains Scritchfield. "I want to work with delegators. I will work with collaborators. I don't work with do-it-yourselfers."
Nevertheless, he cautions advisors not to burn bridges, because do-it-yourselfers can later become collaborators and delegators as their circumstances change.
Each of the above, of course, benefits term and permanent insurance policies alike. But term insurance premiums are particular to lapse-based pricing: Insurance companies have cashed in on the fact that relatively few term policies are actually paid.
Confusing term
Bob Barney, President of CompuLife Software, Inc. in Nicholasville, Ky., sees dark clouds on the horizon for many insurance agents pitching re-entry term:
"The core of the problem with re-entry, and the problem with the illustration of re-entry premiums, is the tendency for companies to illustrate re-entry premiums as though they were somehow a 'renewal' option," says Barney. "That is the heart of the confusion for the client and it is where such illustrations will come back to haunt the life companies and agents who use them to sell term."
Re-entry term, in short, is a term insurance policy with a provision that allows healthy policy owners to apply to become reunderwritten, usually in three to five years' time, at potentially lower rates if they are healthy enough. Otherwise, they continue to pay the guaranteed rate until the end of the term, at which time the policy has either been paid or expires worthless.
Suppose the client enters into the contract confusing the terms "renewable" and "re-entry." Re-entry term, however, does not guarantee the client the ability to purchase a new policy at the end of the term. If the client's medical situation changes, or he simply ages enough, he may not be able to find coverage at all – a situation that can lead to disappointed and angry clients at best, and at worst, a huge potential liability problem for agents.
