With the COVID-19 pandemic, it is easy to assume that things in the life insurance business have just been on hold since March. Probably—with everyone working remotely and nobody but you and me selling any life insurance—the company employees have probably been on vacation all year! Obviously this has not been the case and, just like everything else, the life insurance industry has had what may be a period of the quickest change in its history. We have been asking for “straight-through processing” and simplified underwriting for years, and the closed-business society has led most carriers to implement and improve both online application processes and the ability to get significant coverage with limited field underwriting that we didn’t really expect for more than a year or two. These have been some of the large-scale changes. We have also seen improvements in illustration software that make it easier to compare carriers and products and deliver better solutions to clients.
Permanent life products have continued to evolve throughout time, and this year is no exception. The low interest rate environment that ushered in 2020 has seen even more pressure because of the pandemic and continuing economic pressures. The cap rates and participation rates are being adjusted on a regular basis, and the leveraged products that were leading the market are not able to perform as illustrated. Normally we would have expected this to be from the index performance (or lack thereof), but it is instead a direct result of interest rates. This is leading to a new generation of structured crediting within the products. I expect this will become the dominant internal product structure going forward. At the same time, the insurance companies have realized they can make indexed life products work better for the clients and the companies by putting all these indexed strategies into a variable wrapper. Within the next 18 months, the indexed sub-accounts within variable wrappers will be out-illustrating and outperforming the traditional IUL products just like we have seen in the guaranteed death benefit market. The biggest reason this will work for the policyholder is that the fees are much less, with the insurance company making approximately the same profit. This is going to change the way we sell these products because the reinsurance companies have had good experience with the simplified issue processes of 2020, and these products will easily fit into those processes. In the annuity market we have seen a proliferation of the registered index annuities (also known as buffer annuities). These types of subaccounts fit better in the registered products because the insurance company can give more transparency through the prospectus and clarity of the pricing within the policy and the ability for the client to move between sub-accounts as the economy changes. The drawback to this is that the agent has a responsibility to service the product after the sale. This is really the biggest risk for leveraged IUL products also. We have lived in a world where we sell it and forget it and that will need to change. This also means that we will all need to be securities registered to sell the new products.
While all these iterations are happening, there is still an ongoing movement to more simplification of the product issuing process. This will simplify the sale but will inevitably lead to lower compensation as the carriers realize that the process is doing much of the work that we have done in the past. Because of SEC Regulation Best Interest, there must be more disclosure of internal costs and compensation. This also leads to a regulated chassis with more flexibility and price transparency.
Regardless of who wins the elections in November, we know that taxes will rise to pay for the cost of the COVID-19 bailouts that have added more than $4 trillion to the deficit. We can plan on a return of the estate tax and that will lead to more development of death benefit products. We will also see more mass affluent desire for tax advantage, and that will continue to push the industry to more simplified accumulation products. Again, the reinsurers are driving the process with more lifestyle crediting and data mining to make the policy issuance quicker and simpler. The metrics data available has grown exponentially through the pandemic, and the increase and improvement of digital utilization by consumers allows for a wider and wider array of products and services. This has reduced some of our privacy but has created new markers for underwriters to use in making better risk assessments. All these changes will make us more important in guiding our clients (agents or consumers) through the increasing maze of products, carriers and planning that cannot be automated…yet! Unlike cars, where the need only determines the type of vehicle (sedan, SUV, pickup or minivan) and the individual selection is all based on wants (color, style, horsepower, options), life insurance is seldom a want and we need to help our clients understand their needs and then help them settle on the best solution (term or permanent then product type, carrier and product). This is why the online auto dealer can thrive, but the only online life insurance solution is still just term. The needs still overshadow the whole process, and consumers don’t have the tools to make the decision.
Now that the insurance companies have begun to see that they can move more quickly to adapt to the needs of the market, we will continue to see more innovations in product design and pricing. However, because of the regulatory burden of product approval on a state-by-state basis, we will still see a slow rollout of new and innovative products. If we can continue to adapt with the consumers to the less personal digital relationships, we will thrive. However, if we do not continue to step up, the insurance companies are already trying to create new ways to take agents out of the process, and that will only increase.
Stay safe and God Bless!
