A Quick Look Back at 2011

Posted at Advisors4Advisors.com on January 4, 2012

Here’s what stands out in my mind when I think about last year’s trends in life insurance and annuities.

Life insurance

- For people with an existing whole life policy, it was probably one of their best investments. My small policy paid a 4.8% rate of return on the cash value, tax-deferred (tax-free up to basis) and virtually risk-free — and that ignores the value of the life insurance benefit.

- Indexed universal life sales are growing at a brisk pace, rising from about $700 million in 2010 to over $850 million in 2011. Some of these sales are greased with leverage: any policy looks good if you can illustrate a crediting rate of 8% and a borrowing rate of 5%. Other sales are greased with optimism: let’s hope that a hedged S&P 500 significantly outperforms bonds and mortgages. My impression is that few sales occur because the buyer has diligently examined the value proposition of the product.

- The trend in flexible-premium product design is toward making flexibility more expensive to exercise. Some no-lapse universal life products (e.g., MetLife, Northwestern Mutual) restrict free flexibility to a small range. John Hancock’s nonguaranteed Protection UL 11 has a complex design that discourages underfunding. If you’re faced with an inflexible flexible-premium product, shouldn’t you take another look at traditional whole life, which at least has a long track record of success to point to?

- The new commission disclosure regulation in New York (Regulation 194) seems to have accomplished nothing. Agents tell me that no one has asked them for the details that are available upon request; the disclosure form is just one more piece of paper in a stack to sign.

- It is still true that most people do not understand what they are buying in enough depth to be able to take advantage of risk-free opportunities to save money (e.g., blending, non-level premium schedules). I’ll copy and paste this item next year, and the year after that, and…

- What is it about life insurance that produces a constant stream of Missed Fortune, Infinite Banking, Be Your Own Banker and other promotions that sound like these after a few drinks? Is it the commissions? No one has ever asked me about a scheme involving a low-load life insurance policy.

Annuities

- Variable annuity guaranteed living benefits, especially lifetime withdrawal benefits, continue to be popular. To manage risk, insurers have adjusted the charges, benefits and investment options, or have exited the market.

- Indexed annuity sales were probably close to the 2010 record of about $32 billion. Most products continue to fit the stereotype of relatively high commissions, high surrender charges and lack of transparency. The academic debate about the merits of indexed annuities continues.

- Deferred income annuities (often called longevity insurance) are gaining acceptance from the public and the press (e.g., 11/21/11 Barron's). New York Life’s Guaranteed Future Income Annuity has exceeded sales expectations since its launch last July, although most people seem to be buying it as a pension substitute rather than as the tail end of a life annuity.

Other

- Insurance companies are increasing their promotional activities for combination (also called hybrid or linked-benefit) products. These combine life insurance and annuity benefits with long-term care insurance, taking advantage of the favorable tax treatment provided by the Pension Protection Act of 2006. In theory, combination products are a good thing, so advisors should welcome more product development in this area.

- The life settlement market is still a buyer’s market. Policyholders have to be willing to leave a lot of money on the table if they want to get a deal done. Most of the activity seems to be in the tertiary market, as institutional investors buy distressed portfolios that were created in the pre-2009 glory days of non-recourse premium financing.