Gimme Guarantees

Welcome to the post-meltdown insurance market, where guarantees are golden—and priced accordingly; where volatility is a four-letter word for investors and insurers alike; where de-risking has become an imperative for many insurance companies; where investors value downside risk protection as much or more than upside potential; where insurers are tossing aside old pricing models and embracing new, more flexible schemes.

Needless to say, keeping up with the latest supply-side developments with annuities, life insurance and long-term care insurance is a major undertaking. To help you stay a step ahead, here's a look at some of the products and features that have insurance industry observers buzzing.

Annuities

Staying abreast of the many complex new features and designs insurers are rolling out as they attempt to de-risk their annuity portfolios while keeping their products relevant is no easy task. Just ask John McCarthy, Morningstar's product manager for annuity solutions.

"I think we set a record for man-hours spent reviewing one [annuity contract] benefit," a new long-term care option that a carrier unveiled recently with one of its annuities, says McCarthy, who is based in Chicago. "In terms of the volume of activity and complexity, it's getting harder for advisors to keep up" with annuity product changes. The average variable annuity product prospectus, he notes, now runs 125 pages.

Much of that complexity, and many of those changes, relate to living benefits—the optional income and withdrawal guarantees that the vast majority of annuity buyers now elect to purchase with their contracts. To de-risk, insurers not only are reducing the guarantee percentages and raising the fees associated with these benefits, they're restructuring the benefits altogether, pushing more risk down to the investor using volatility-based fee structures, ETF-based sub-accounts, dual-sleeve designs (with one sleeve consisting of lower-risk sub-account investments to underpin the living benefit and the other of higher-risk sub-account investments to underpin the base contract), and the like. The result: variable annuities now come with even more variability.

Another area where VA providers are innovating is in O-share products tailored to specific large wirehouses and brokers such as Edward Jones. Essentially, says McCarthy, it's a move by annuity providers like John Hancock, Prudential and others to provide VAs with pricing and compensation structures better suited to fee-based money managers and RIAs. In most cases, he notes, the O-share products come with lower M&E, a broader range of investment choices and fewer living benefit options than their A-share counterparts.

A fixture in the VA space for the last decade, living benefits are fast finding a foothold in the fixed index annuity market, too. According to recent LIMRA estimates, living benefit riders are offered with about 90% of FIA products, and that when they're available, they're elected about 60% of the time. Guaranteed lifetime income benefits "helped sustain indexed annuity sales" in 2011, according to Jeremy Alexander, CEO of Beacon Research in Evanston, Ill., which tracks the fixed annuity market.

Income annuities are another hot annuity product, having posted an 18% sales gain in the fourth quarter of last year and a gain of nearly 7% for all of 2011, according to Beacon Research. "Income annuities generally provide the most retirement income bang for the buck," says Alexander. "Sales results indicate that advisors and their clients are becoming aware of how these products can be used to create a personal pension.

Life Insurance

Fueled by traditional products as well as relative newcomers, individual life insurance sales increased 4% in new annualized premium in 2011, marking the second consecutive year of growth, according to LIMRA International.

A sustained resurgence in whole life sales, driven largely by a growing consumer appetite for safer permanent products with premium and cash value guarantees, has been accompanied by stronger sales of emerging life insurance products such as indexed universal life and term universal life, observes Kathy Ho, a research actuary at LIMRA in Windsor, Conn.

Whole life premium increased 9% in 2011 compared to 2010, according to LIMRA, the sixth consecutive year of what Ho terms "phenomenal growth." Consumers are flocking to whole life not just for safety but for simplicity, she says. "There are not a lot of ins and outs with the product."

Overall in 2011, according to LIMRA, insurance companies issued 2% more individual life policies than they did the previous year, just the fourth year in the past 30 that annual policy sales increased. Strong universal life (UL) sales were a big reason, and much of that strength came from indexed universal life, premium of which increased an impressive 38% in 2011, in tandem with a 30-percent rise in policy count. Consumers, especially those in the 60-to-70 age bracket, like the indexed UL proposition of greater potential upside accompanied by protection from downside risk, says Ho. As a result, she and LIMRA expect indexed UL sales to remain strong in 2012, with more carriers entering the fray to give buyers a broader product selection.

Another UL product, term universal life, is carving out a niche in the life insurance market, notes Ho. It, too, is finding appeal among older, 60-something consumers, but also is establishing a foothold in business planning and wealth transfer applications. Affordability is a key selling point, as term UL premiums tend to be "much cheaper" than those of traditional UL, she says. Giving policyholders the flexibility to convert into a permanent policy via a relatively straightforward process adds to the allure of term UL.

Variable universal life is now more of a niche market." Kathy Ho, LIMRA

Obscured by the buzz surrounding indexed UL, term UL and whole life, variable universal life (VUL) experienced a resurgence of its own in 2011. A huge 36-percent jump in the fourth quarter of last year led to an overall 22-percent increase in VUL premium in 2011, according to LIMRA. Still, the number of VUL policies sold dropped 9% last year, part of a broader trend in which VUL policy count hasn't increased in 29 quarters.

Despite the premium surge in 2011, "Variable universal life is now more of a niche market," says Ho. "Consumers just are not interested" in riskier life insurance products. As a result, VUL is losing market share to products like indexed UL.

Long-Term Care Insurance

Steady, sustained growth has been elusive for the long-term care insurance industry, even on the heels of a 4-percent increase in new individual annualized LTCI premium in 2011. To maintain that momentum in 2012, the onus is on suppliers and salespeople to deliver products that resonate with buyers. And these days, what buyers want most are affordability and flexibility, according to Tom Riekse, Jr., managing principal at LTCI Partners, an independent broker based in Lake Forest, Ill.

"We need the flexibility of more moving parts because we have a lot of different types of people who are considering buying the product," explains Riekse.

Flexibility in the case of long-term care insurance means the ability to tailor plans to client needs using such moving parts as future purchase options, alternative inflation-protection options, ultimate cash benefits, calendar elimination periods and the like, he says. These flex points give advisors the ability to "come in at a more affordable price point to start," he says, with the opportunity to beef up benefits later.

Flex points give advisors the ability to "come in at a more affordable price point to start." Tom Riekse, Jr., managing principal at LTCI Partners

To Riekse, giving clients and their advisors more latitude to customize plan designs represents another step in the maturation of LTCI as an insurance product. "It makes more sense, generally, to be able to design a plan this way," he says. "It puts [LTCI] more in line with other types of insurance products."

Already, 2012 is shaping up to be the best year Debra Newman's Minnesota firm, Newman Long Term Care, has had in a decade. One reason, says industry veteran Newman, is the growing popularity of shared-care LTCI products, which for couples represent a more affordable alternative to purchasing two stand-alone policies. Not only do they get adequate coverage, they get flexibility in how to use policy dollars and benefits.

Companies such as Newman's and Riekse's are also finding a broader market for a hybrid life insurance product that provides policyholders with the option of purchasing LTCI coverage. These so-called linked benefit or combination LI plus LTCI products are finding "a lot of traction," says Newman, particularly among people who have money sitting in a savings account or CD, earning virtually nothing.

By using that money to purchase a single-premium whole life or universal life LI plus LTCI policy, not only do they get both life and long-term care coverage, they also can earn slightly more interest on their money than if they left it in a CD, for example, notes Riekse. What's more, if they never need the long-term care coverage, their money stays inside the policy, where ultimately it may be transferred to heirs on a tax-favored basis. Such a combination is gaining appeal among wealthier people in their 60s, who have the liquidity to afford the premium (often $100,000 or more), and who, for estate planning reasons, see merit in protecting their assets from a long-term care event.

Beyond individual policies, Newman sees strong growth in the group LTCI market. These days, people are accustomed to purchasing insurance through their employer, so selling LTCI off the workplace platform makes sense, she says. The challenge for LTCI salespeople is getting their foot in employers' doors. Newman's suggestion: start by targeting top company officials and their executive benefits packages. "Make it attractive for the leaders [of the company]," she suggests. That often opens doors to entire employee groups.