Baby Boomers Reshape The Life Insurance Industry
America's latest retirement wave thinks differently than previous generations.
In many respects, the evolution of Genworth Financial's approach to the life insurance market reflects the industry's evolutionary response to how baby boomer consumers are thinking about aging and living longer.
For many of this group, now roughly between the ages of 50 and 68, the appeal of life insurance products is more about providing safety and security while living, rather than passing on assets to the next generation.
"If you were to go back a few years ago, Genworth was really focused on the term insurance market. We were really focused on the idea of a dollar of premium being leveraged into the highest amount of death benefit possible. And now, one of our main products, indexed universal life with long-term care benefits, provides, per-premium dollar, a whole lot less death benefits, but a whole bunch of cash value that grows at a very nice rate of interest over time," said Chris Conklin, the company's senior vice president of product design.
Genworth's strategic pivot comes at a time when life insurers and the society as a whole have come to grips with the fact that one of the largest generations in American history is now at preretirement or retirement age. People in this segment, roughly a quarter of the American population, have different wants and needs than the generation before them.
At the same time, the echo of the recent financial crisis lingers, causing the preretiree population to think less about growing their assets and more about protecting what they have.
"Before it was all about getting the maximum death benefit and people didn't really care as much about cash value. They now want to make sure the money they have is protected and that it's growing, and that it's creating cash value they can use for any purpose. As the consumer need has gotten more nuanced and there has been less emphasis on the death benefit, we've seen our product portfolio go the same way," Conklin said.
"Before the downturn in the economy, many advisers were encouraging clients to look at retirement saving as building a pile of money. After 2008, when people saw 60% to 70% of their assets eviscerated, clients shifted from wanting a pile of money to making sure there's a check in the mailbox when they retire," said Robert A. Kerzner, president and CEO of Limra.
Twin Concerns
According to PricewaterhouseCoopers' 2014 Employee Financial Wellness Survey, the two largest retirement-related financial concerns among baby boomers were the possibility of running out of money and health care costs. The survey, incorporating the views of 2,100 full-time employed adults, was consistent with findings of the survey the company conducted the previous year.
"One of the biggest concerns consumers have as they age is dealing with a health issue. For life insurance, it's no longer just a matter of the risk of dying too soon, but also living too long, which is why a number of insurers have introduced chronic illness and long-term care riders. These riders help maintain financial security for individuals faced with a chronic illness," said Mark Hug, executive vice president of product and marketing for Prudential Individual Life Insurance.
The insurance product that speaks most directly to concerns about well-being in the aging boomer population is long-term care. But stand-alone LTC has a troubled history, with many formerly enthusiastic carriers exiting the market because of difficulties in making a profit in an era characterized by low interest rates and increased longevity.
Sandra Timmermann, gerontologist and former director of the MetLife Mature Market Institute, put it this way:
"Long-term care is really the elephant in the room, both for consumers and for the long-term care industry. The product really hasn't sold well, perhaps due to rate increases and the instability of the market. Insurers face some dilemmas, with more people living longer and the risk of insuring them in the current economic environment." (See Best's Review's September 2014 article, Longer Lives, Bigger Issues.)
"The problem with pure protection products, like long-term care or disability insurance, is that they can be a hard sell. People know they need the protection, but are reluctant to pay for that protection on a stand-alone basis," Mary Pat Campbell, a Conning Research life analyst, said. "People think they might never use it, and this coverage on a stand-alone basis can seem very expensive. That's where these combination products come in. You get some of the protection against these risks, and you also get cash value that you don't lose. There are both savings and investment aspects."
Rise of the Hybrids
"The stand-alone long-term care market has been cannibalized and overtaken to a certain degree by the riders that insurers have begun offering as a supplement to life insurance policies," said Drew Maresca, research manager of Corporate Insight, a competitive intelligence firm that monitors developments in the financial service industry.
Of the 14 life insurers the company monitors, half offer some kind of LTC rider on their whole life or universal life products.
"Since 2008, there has been steady growth in what I like to call 'two-fer' products," according to Limra's Kerzner.
"These are life policies with long-term care riders. Generally speaking, these combination products provide coverage for long-term care during your life if you need it, and a death benefit if you don't. It allows people to solve two economic challenges at once," Kerzner said.
According to Limra, life-combination product sales have grown from $600 million in 2008 to $2.6 billion in 2013.
Genworth, the largest U.S. writer of long-term care insurance according to Limra, is among the many companies selling a hybrid product, although the company remains committed to providing stand-alone products.
"Buying straight long-term care is the way for consumers to get the biggest pull of benefits for premium dollar. We stay with it for a number of reasons," Conklin said. "One is the fact that there's a tremendous need for the product, and that need just grows each and every year. And with relatively few folks providing it, we think there's an opportunity there."
Guaranteed Income
In addition to worrying about health care concerns, baby boomers are concerned about having enough money to enjoy a comfortable retirement.
The PwC Employee Financial Wellness Survey found that 62% were worried about either running out of money (37%) or fearful that they would not be able to maintain their standard of living in retirement (25%).
The industry response to these anxieties includes a range of products with guaranteed lifetime income, such as variable and indexed annuities with guaranteed living benefit riders, and immediate or differed annuities.
The popularity of these products has transformed the annuity industry in recent years. According to Limra's Secure Retirement Institute, 2013 annuity buyers elected a GLB rider on nearly $8 out of every $10 of variable annuity purchases ($77 billion) and $3 out of every $4 of indexed annuity purchases ($21 billion), when a GLB was offered. Combined sales of immediate and deferred annuities reached $10.5 billion in 2013 despite a very low interest environment.
"According to our research, since the economic downturn, 76% of preretirees say creating a guaranteed income is their top retirement planning priority. That percentage is up substantially from what we've seen in the past," Kerzner said.
"We now have 79 million boomers who have been focused on making a living and saving for retirement. Now, all of a sudden, they will need to determine how to turn those savings into a sustainable source of retirement income that cannot be outlived. That's where lifetime income strategies come into play. And that's what the industry can offer today's consumer," Cathy Weatherford, president and CEO of the Insured Retirement Institute, noted in an email interview.
"Deferred income annuities weren't even on the radar screen a few years ago but have since grown to $1 billion in sales in 2012, and to $2.2 billion in sales in 2013," Weatherford wrote. "When final sales results for 2014 are reported, we expect DIA sales to post double-digit growth."
Distribution Matters
The cliché that life insurance is "sold" rather than "bought" seems to apply particularly to baby boomers, whether the product is long-term care, life/combination products, or the various flavors of annuities.
"People get that they're on their own in protecting against certain risks, but they're kind of paralyzed. You see this when there's a really important decision to be made and people feel the danger of making a wrong choice. Rather than making the wrong choice, they make no choice at all," Campbell said. "In the case of life insurance and annuities, that means they don't buy anything at all. In addition, consumer surveys have shown that people overestimate by many times how much these protections cost, and assume it will be too expensive to buy. A large part of the sales process is to educate the client so that they can make the right choice for their particular circumstances."
According to Hug, the fact that people need help in buying these products plays into what he believes is a major trend: the need for advisers.
"What's happening in America and in advanced economies around the world is a greater emphasis on advice. This can be seen through the increased hiring in major career agency systems in the United States and by the influx of robo-advisers such as LearnVest and Personal Capital and availability of online tools and resources. I believe that while the technology boom certainly offers opportunity for the industry in terms of education, the demand for professional advice will continue to grow as America ages and the baby boomers reach retirement age."
John Fenton, director of Towers Watson's Americas Life Practice, believes that the industry already possesses the products to appeal to this generation. What may be blocking increased sales is an issue of distribution.
"Maybe one thing insurers should be doing is reaching out to consumers more directly," Fenton said. "The life insurance business means going through agents, advisers or financial planners. Some of them are comfortable selling income annuities, but it appears that many aren't. Insurers have the products that consumers need. I'm not sure they could do a whole bunch more on the product side, so it's a distribution issue."
According to some observers, an additional factor inhibiting sales growth has to do with the complexity of the products and the sales process.
"The way a lot of these products are sold is complicated. Part of this is not necessarily the insurers' fault, as these complications can be driven by regulatory requirements. Product complexity has certainly also been an issue for consumers but insurers are addressing that issue with streamlined product designs in just the past few years," Campbell said.
"Our research tells us that clients want the buying process to be easier," Kerzner added.
"Consumers have told us that one of the reasons they do not buy life insurance or annuities is because the process is complicated. They say it's too hard, there are too many decisions to make, and it takes too long. At the same time, our current regulatory environment keeps adding to the amount of paperwork it takes to buy a policy. And yet, regulators express concern that not enough people are buying life insurance and not saving enough for retirement.
"I'd like to see the industry and government work together to help consumers get the information they need without loading them down with superfluous paperwork," Kerzner said.
by Angelo Lewis, Senior Associate Editor, Best's Review.
