When I was a young pup starting in the life insurance business, 40+ years ago, our bread and butter sales were made to mid-market consumers: People who had just gotten married or purchased a home, small business owners who greeted you wearing an apron or wiping grease off their hands, young professionals just out of college (much like myself) who were starting new jobs and families. These individuals were looking to make ends meet while providing themselves and their loved ones with basic financial security. In those days $10,000 face amount policies were the norm, $25,000 made for a good day and a $50,000 whole life sale was something to celebrate. These middle-class consumers, some of whom would eventually become affluent, were living the American Dream and young and hungry insurance agents romanced them for their business.
Today, many agents and financial advisors don’t have the time or inclination to work with this sort of consumer. The traditional life insurance agent is “aging-out” of the industry. Those left are “elephant hunters” working the estate planning or high-end business insurance markets. Few pure life insurance agents are being hired today and the young recruits that enter the financial services industry are trained as advisors in complex investment vehicles. They are after assets under management—to them, life insurance is an afterthought. None of this is necessarily bad, but like many other trends in our society it has left the middle market sadly underserved.
Market Watch reported on April 30, 20171: Some 50 percent of people are woefully unprepared for a financial emergency, new research finds. Nearly one in five (19 percent) Americans have nothing set aside to cover an unexpected emergency, while nearly 1 in 3 (31 percent) Americans don’t have at least $500 set aside to cover an unexpected emergency expense, according to a survey released Tuesday by HomeServe USA, a home repair service. A separate survey released by insurance company MetLife2 found that 49 percent of employees are “concerned, anxious or fearful about their current financial well-being.”
On September 6, 2017, The Wall Street Journal poll3 reported growing disparity of opinion and optimism between college-educated urbanites and the middle-class, particularly those in rural communities. The opportunity for upward mobility and retirement seems to be slipping away from many Americans.
“Rural and working-class white Americans are also pessimistic about their retirement prospects. Their views are one reason that only 13 percent of Americans expect to retire before age 60, down 10 points since 1999. The share of Americans who say they will retire at 70 or older has climbed 10 points.”
Two other facts, known to many reading this article, cause me to lose sleep:
- LIMRA reports that life insurance ownership is at a 50-year low; and
- Society of Actuaries data reveals that while we’ve done a great job of selling large long term care insurance policies to affluent Americans (both traditional and combo), the middle market is priced out of the game.
What can our industry do to better serve the middle market, both for life and long term care insurance? What’s the path forward? I believe a finer focus on who the customer is and what they want can help us re-purpose existing insurance products and create new, improved versions that are affordable and reliable. What follows is from a research project my business partner Ronald R. Hagelman, Jr., and I wrote about issues faced by middle market consumers regarding financial service providers and vehicles that provide liquidity for long term care and life insurance. We believe there is a way to help less affluent customers achieve their retirement and security goals.
Data and presentations reviewed and cited in this report include:
- Ernst & Young: Voice of the Customer —Time for Insurers to Rethink Their Relationships—2012
- U.S. Census Bureau: Examining the Middle Class in the United States— September 2014
- Society of Actuaries Report on Life and Annuity Living Benefit Riders—April 2015
- Deloitte: Life Insurance Consumer Purchase Behavior—September 2015
- Society of Actuaries Post-Retirement Experiences of Individuals Retired for 15 Years or More—January 2016
- LIMRA U.S. Individual Life Combination Products Annual Review 2015
- Society of Actuaries Long-Term Care and the Middle Market—May 2016 (Bodnar, Forman & Zehinder)
- Society of Actuaries Middle-Market Life Insurance Findings from Industry Thought Leaders—November 2016
Who is the Customer?
Are middle market consumers the same as the middle class? Possibly, but even the U.S. Census Bureau has difficulty pinning down a working definition of the middle class.
While much has been written on the middle class, there is no widely accepted approach to defining the middle class. Some analyses of the middle class equate being in the middle class with having income in the middle of the income distribution. Other analyses include in the middle class anyone who self-identifies as middle class. A third approach is to count as middle class anyone who has achieved certain aspirations—owning their own home, having savings for retirement and/or the ability to send their children to college. As may be expected, these disparate approaches do not identify the same people.
For our purposes, we turn to a Society of Actuaries (SOA) presentation prepared by Vince Bodnar, Stephen Forman and Sania Zehinder in 2016 entitled Long-Term Care and the Middle Market. This report identifies two primary components of the middle market:
Middle Mass: 55-64, average income $75,000, average assets greater than $100,000;
- 83 percent of market for long term care insurance (“LTCI”).
- Low ability to fund catastrophic costs out-of-pocket.
- Good ability to pay for LTCI.
Mass Affluent: 55—64, average income $132,000, average assets approximately $400,000;
- 17 percent of market for LTCI.
- More discretionary income to spend on LTCI.
- Agents prefer this group.
This presentation, relying on Economic Policy Institute findings, highlights some uncomfortable truths about the middle market:
- Most families in that large population have little to no retirement savings;
- Family finances have not recovered from the collapse of the housing bubble;
- Retirement savings have stagnated since 2000 with nearly half of families having $0 in retirement savings;
- Those 55—64 have a median net worth (excluding the home) of $45,447;
- Median household incomes drop significantly after retirement:
- $71,000 vs $32,000.
- Wide disparities between married and unmarried.
Did the middle market ever embrace traditional long term care insurance? It appears they did, in the late 90s and early 2000s. Presumably this was enabled by employer-sponsored group product offerings, Public Employee Retirement plan programs and the Federal Group Long-Term Care program. However, by the mid-2000s, overall sales of traditional LTCI declined precipitously with average premiums exceeding a price point acceptable to middle market consumers. By 2010, traditional LTCI sales became a product for pre-retiree, college-educated and affluent consumers. Moreover, the primary motivation for purchase shifted dramatically. In 1990, the primary reason for purchase was to avoid dependence. In 2010, the “new” long term care insurance consumers were more concerned about protecting assets.
Implied in much of the data is that post-retirement mid-market consumers, ages 65-74, are a significant cohort that have heretofore been unable to adequately plan for long term care. These individuals either had no opportunity to purchase LTCI because no one ever approached them about it, or they fell through the cracks of the “generational turnover” cited in the SOA data. Regardless of the reason, this post-retirement group is a target-rich environment that needs to supplement their retirement income and savings against a long term care event.
What Do Middle Market Consumers Want?—Part 1
The SOA Post-Retirement Experience of Individuals Retired for 15 Years or More project conducted extensive focus groups in the United States and Canada and determined an immutable fact: Long term care was number one on the list of unexpected expenses that create the greatest shock in retirement. While some unexpected expenses such as home repair, inflation and taxes are predictable, the survey found that “long term care, when it is required, is often a financially catastrophic expense in retirement.” The survey went on to conclude that:
“…many of the unexpected expenses in retirement could be mitigated with better planning and financial risk products. Few have annuities, long term care insurance, reserve funds for home maintenance and repairs, or other products to help them manage expenses in retirement. A number have life insurance coverage, but coverage levels are often low and intended only to cover funeral costs. Use of these products might help to prevent financial shocks in retirement.”
Traditional long term care insurance misses the mark for many middle-market consumers due to its cost and complexity. How much will consumers spend for some coverage? An insurance company survey reveals a considerable jump in consumer interest and willingness to purchase long term care insurance when monthly premiums approximate $100/month. AHIP confirms this finding in its Buyer/Non-Buyer Survey.
The average annual premium for traditional long term care insurance is currently about $2,500 per year, over twice the price point middle market consumers are willing to pay for coverage. Traditional carriers have responded by re-packaging current plans in efforts to appeal to mid-market buyers and have achieved some success. However, the inherent complexity of traditional products and concerns over continual in-force premium increases, creates dissonance in the minds of consumers and agents.
How Much Long Term Care Coverage is Enough?
One-hundred-percent risk mitigation was the hallmark of traditional long term care insurance planning from the early 1990s through 2005. As wholesalers, we trained agents on a simple proposition: determine the cost of care in your geographic area, include five percent compound inflation and lifetime benefits and your clients will be able to afford the best care for as long as they need it.
Consumers who purchased policies with this benefit configuration, particularly if they used a limited payment option (10-pay or one-pay), were well-served by this strategy. They secured high benefit policies at prices that were likely too low, due to inaccurate lapse rate assumptions and an unforeseen evolution in care options such as assisted living facilities. Couple these unanticipated developments to a historically prolonged low interest rate environment since the mid-to-late 2000s, and we now have a very constricted traditional market with products priced right, but too high for most mid-market consumers.
As pricing became problematic, even for mass affluent consumers and “one-percenters,” many of us asked for more insight into actual claims data. Maybe we were selling too much to too few? We saw the need to sharpen our pencils and apply a more disciplined approach to the question, “How much is enough?” As results of our inquires came into focus, it became clear that while the catastrophic cognitive claim is always a possibility, most consumers would be well-served if they had an extra $100,000 of long term care “liquidity.”
We recently asked our friends at the Long-Term Care Group, Inc., if they could provide us with a big picture of actual claims they are experiencing. They reviewed claims data for two very large groups, filtered for benefit design variation, 0-day elimination periods (thus removing short-term claims) and open claims and reported the following:
- 80 percent of claims had $100,000 or less in paid claims;
- 60 percent of claims had $50,000 or less in paid claims; (These only include claims closed in the past 10 years.)
Interestingly, these findings are consistent with other recent claims data we’ve seen from at least one major traditional long term care insurance company.
If, in fact, millions of mid-market Americans and their families can be helped by having an additional $50,000 to $100,000 of long term care insurance liquidity, what is the most direct and cost-effective way to deliver it?
…to be continued!
In Part 2 of Romancing The Middle Market—The Future of Chronic Illness Sales Success I will discuss:
- The two worlds of chronic illness coverage;
- The Great Expansion;
- What mid-market consumers want—Part 2;
- Solutions that will work for mid-market customers.