In Romancing the Middle Market (Part 1) we zeroed in on important recent data pertaining to life and long term care insurance (LTCI) in an effort to develop a strategy to help the middle market with their planning needs. We discussed:
- How and why the middle market is underserved by the financial services industry;
- The sad fact that many Americans are unprepared for a wide range of financial emergencies;
- That financial optimism/pessimism varies widely depending on where one lives in America;
- The importance of developing a meaningful definition of the middle market;
- Why traditional long-term care insurance has missed the mark in the middle market; and,
- How we’ve been selling too much LTCI coverage to too few.
In Romancing the Middle Market (Part 2), I’ll cover:
- The two worlds of chronic illness coverage;
- The Great Expansion;
- More on what middle market consumers want from insurance companies and financial advisors; and,
- Solutions that work for middle market customers.
Is it Life Insurance or Long Term Care Insurance?
In the world of insurance, long term care is synonymous with chronic illness. For the purposes of this discussion, both require an inability to care for oneself without assistance from another individual due to either physical or cognitive impairment. Under the Internal Revenue Code, there are two ways insurance companies can provide tax-free benefits for chronic illness: §101(g) (life insurance) and §7702(b) (Health Insurance Affordability and Accountability Act—health insurance).
Traditional LTCI is a §7702(b) product which confers upon it (a) the ability to call itself “long term care insurance” and, (b) general tax-deductibility of premiums. §101(g) allows for an acceleration of a life insurance policy’s death benefit when a policyholder suffers from a chronic illness. Life insurance policy premiums are not deductible, but the chronic illness benefits are tax-free. Life insurance combination policies generally offer a §101(g) acceleration death benefit rider (ADBR) feature. In addition, some offer an extension of benefit rider (EOBR) that will allow for continued payment of benefits after the initial face amount of the policy has been exhausted by the ADBR. EOBR’s generally qualify under §7702(b).
Chronic illness benefits provided via §101(g) used to be the “redheaded stepchild” of the long term care insurance world. Originally benefit qualification under §101(g) required permanent disability. Recently, however, the Interstate Insurance Compact (IRPCC) will approve a §101(g) ADBR without this prerequisite, creating near parity between §7702(b) and §101(g) on this matter. This equivalence, as it pertains to benefit qualification, has led to a rapid expansion of accelerated death benefit riders on life insurance policies of all types: Term, universal, variable and whole life are now in play.
Two important facts about §101(g) ADBRs merit note: (1) The sale of these policies does not require agent continuing education; and, (2) policies that use this section of the IRC cannot call themselves long term care insurance. Regardless, opportunities for chronic illness risk management have been expanded exponentially!
So, to answer the question, “Is it life insurance or long term care insurance?” I will paraphrase the great Ben Feldman: “It’s dollars guaranteed for future delivery,” with an expanded ability to help you and your family at your greatest point of need.
The Great Expansion
The 2015 Society of Actuaries Report on Life and Annuity Living Benefit Riders and 2016 LIMRA U.S. Individual Life Combination Products each point to a rapid expansion of life insurance policies with long term care and chronic illness benefits. Chronic illness ADBRs maintain a majority of market share with recurring premium and single premium options being equally popular. More than 60 percent of sales occur from ages 50-79 (Figure 2 page 12—SOA). However, there appears to be growing frequency of purchase by younger consumers ages 35-50.
SOA reports that 64 percent of purchases result from direct agent involvement, with agency building and independent brokerage leading the way closely followed by personal producing general agents. SOA and LIMRA point to growing sales leadership in the banking and financial institutions sector (23 percent) with exclusive multi-line agents rounding-out the totals (12 percent). This leads to one unassailable conclusion cited by a number of reports reviewed for our research: Life and long term care/chronic illness insurance is sold, not bought. Agents are essential to sales success, and I will outline my thoughts later regarding actions necessary to support “the troops.”
The 50+ mass affluent individual continues to be the primary target market for most combo sales including chronic illness ADBRs. Additionally, insurance companies haven’t honed their marketing messages beyond outreach to their natural or inherent customer bases. This lack of outreach and imagination creates a big opportunity in the mass middle market as previously described.
SOA points to a “better than expected” chronic illness claims experience from 2010-2013. Lower frequency of claims appears to be the significant reason for this development. Adding chronic illness ADBRs does not appear to effect mortality, and while no improvement in persistency has been reported, it is expected this will occur as consumers perceive more value in their policies relative to the premiums they’re paying.
What Do Middle Market Consumers Want? (Part 2)
What are consumers looking for when it comes to their insurance companies and financial advisers? For insight, we turned to the 2012 Ernst & Young Voice of the Customer Survey, the 2015 Deloitte Life Insurance Consumer Purchase Behavior study and the 2016 SOA Middle Market Life Insurance Thought Leaders report. The good news is: Consumers generally trust the life insurance industry. However, despite this, according to a 2010 LIMRA study, “56 percent of households had no individual life insurance policy: a 50-year high.” The simple reason, according to the SOA, is that no one asked them to buy!
These studies also confirm that consumers want a relationship with an adviser who will discuss their insurance needs and provide them with guidance. However, the public is becoming more self-actualized in their decision-making process. They want clear, simple and concise information about their options and how the financial instruments they purchase will work for them over time. Product transparency is critical. The Deloitte study sums it up clearly: “Most current carrier models seem to focus on adapting existing go-to-market strategies to a digital marketplace. Our study suggests that the life insurance “winners” of tomorrow will likely be those organizations that blend an advice-driven approach with a digitally enhanced engagement strategy to help meet evolving consumer expectations.”
Ernst & Young and Deloitte agree it is critical to respond to the changing needs of our customers as their life cycle progresses. Strikingly, the life events we spoke of in the 1970s continue to hold true; marriage, parenthood, home ownership, and retirement are all key buying times for life insurance. By successfully weaving the life insurance and chronic illness messages into a consistent marketing effort, we can encourage people to consider insurance planning with a guaranteed product that can withstand a lifetime of changes.
Consumers want to feel good about the company with which they are doing business. Additionally, an ongoing relationship that includes rewarding customer loyalty and cross-selling is likely to increase persistency and ongoing sales opportunities. Incidentally, these features work extremely well in agent distribution. Many advisers are true believers in the companies and the products they sell. This can be a huge value-add to any marketing effort.
While we’ve already discussed how the mid-market is generally underserved, the SOA points out two areas where this is not the case: The senior market and voluntary worksite. These areas have well-established independent distribution. Affinity group marketing would also fall into this category and all would be well served by a life/chronic illness product that is easily understood and purchased.
There are hurdles to success in this marketplace, including: Competition for premium dollars; pricing; underwriting; providing pertinent information through various means; and agent recruitment and training. However, these obstacles can be surmounted with affordable insurance products that appeal to consumers during various stages of their lives.
The Path Forward
The research Ron Hagelman and I conducted leads to many important conclusions. While there is no one magic bullet, providing middle-market consumers with life and chronic illness solutions will require more insurance companies to step out of their comfort zones. Those with the vision and systems to create products that fit this market niche, and to distribute them effectively through BGAs and agents, will win this marketplace.
We believe mass middle-market consumers are ready for long term care planning solutions that are easy to understand and purchase. The formula for success includes:
- Providing consumers with understandable and actionable intelligence;
- Developing better agent support tools, empowering them with the ability to communicate product planning concepts, benefits and value;
- Affordability and guarantees;
- An insurance product that most can qualify for;
- Streamlined acquisition and fulfillment processes; and,
- Insurance companies consumers can trust.
These components, coupled with strong messages highlighting the value of supplemental chronic illness protection, will resonate with Americans in the underserved mid-market. A marketing and sales campaign emphasizing the importance of private-pay status and control of personal destiny must be a key element of this effort. This strategy and approach will help consumers avoid potential exposure to the financial and emotional devastation caused by an extended need for long term care.