AN UNAUTHORIZED ENTITY IS AN INSURANCE COMPANY THAT IS NOT LICENSED BY THE FLORIDA DEPARTMENT OF FINANCIAL SERVICES. AGENTS AND BROKERS HAVE RESPONSIBILITY FOR CONDUCTING REASONABLE RESEARCH TO ENSURE THAT THEY ARE NOT WRITING POLICIES OR PLACING BUSINESS WITH UNAUTHORIZED ENTITIES. LACK OF CAREFUL SCREENING CAN RESULT IN SIGNIFICANT FINANCIAL LOSS TO FLORIDA RESIDENTS DUE TO UNPAID CLAIMS AND/OR THEFT OF PREMIUMS. AGENTS MAY BE HELD LIABLE WHEN REPRESENTING THESE UNAUTHORIZED ENTITIES. IT IS THE AGENTS AND BROKERS RESPONSIBILITY TO GIVE FAIR AND ACCURATE INFORMATION REGARDING THE COMPANIES THEY REPRESENT. ANY QUESTION ABOUT THE AUTHORIZED STATUS OF A COMPANY CAN BE CHECKED BY CALLING THE FLORIDA DEPARTMENT OF FINANCIAL SERVICES AT 1.800.342.2762.WE URGE ALL AGENTS AND BROKERS TO ADHERE TO THIS ADMONITION. THE STATE OF FLORIDA HAS TAKEN A VERY STRONG POSITION ON THE ISSUE OF UNAUTHORIZED ENTITIES.
NOTE: This text is written “gender-free,” and any reference to the male gender – he, him, man, etc. – should be considered as also being compatible with the female gender. It is much easier to read and understand (and write) by using a single-gender, as opposed to his/her, him/her, etc.
This text discusses in detail the indexed insurance policies, Equity Indexed Universal Life Insurance (EIUL) and Equity Indexed Annuities (EIA). In order to better understand these products and their origin & the role that they play in the modern life insurance and annuity markets, they should first be noted in their historical context.
In 1999, a respected text (Changes in the Life Insurance Industry, by EFMI-Innovations in Financial Markets and Institutions) opens with the statement, "The life insurance industry in the United States is at a point of evolutionary change." "Heaven n'er helps the men who will not act." (Sophocles). For many years, the life insurance industry "sat on their assets" and watched the financial institutions divide up the savings and retirement funds of their customers. Oh sure, there were some attempts by life insurers to share in this market through the "savings" elements of life insurance, but more particularly, through certain annuities. But when the customers started rebelling against the very low (such as 2.5%) growth of their funds in the cash values of life insurance, and when a somewhat "safe" mutual funds program would increase their savings at interest rates as high as 12%—which was, it is acknowledged, an exception—and even the more conservative plans were producing 7% to 10% steadily, then drastic steps had to be taken, otherwise life insurers were going to be nothing but term-insurance factories and annuities were going to be used primarily for funeral and burial insurance. Time for a change.
The past several decades have been a period of drastic changes and a fundamental change in terms of the state of affairs of the market, the anticipation of the buying public (not to mention existing customers), and the rapidly changing product-lines. Learning from the past has a challenge to the industry, and some have not made the change as evidenced by the large number of consolidations and mergers within the life insurance industry.
The acceleration of changes in product lines can be attributed to three important movements. The first is the technological revolution that has transformed the financial sector, which has opened up to the world through the use of computers and the personal internet. Now, an investor, who used to put savings into Certificate of Deposits as that was one of the few investment vehicles they understood, can now manage a substantial portfolio from his home computer, can change at will, and can review the actions and experience of the investments at the touch of a button on the keyboard. This is so obvious; it does no good to belabor that obvious point.
Secondly, the "baby-boom" generation has "all-growed-up" and is rapidly becoming the most important demographic shift in modern history. There are more people becoming older, wealthier, and in most cases, wiser. They are living longer, creating a challenge to the industry that had based its profitability on early deaths as people not only are living longer, they are living healthier and much more in charge of their own future. A retirement plan is now a necessity, not as something that is "nice to think about but only rich people can actually afford."
This brings up the third point: The continual and exponentially increasing market competition for the savings dollar through providing financial services. This is, of course, the purpose of this text—to explore and explain two of the newest financial service/insurance products. These three factors create their own expectations plaintiff change in the entire industry which, it is hoped, will continue to shift fortunes from other financial institutions. Actually, however, this is the plan for all financial institutions and for most other industries, but we will just be content talking about insurance products and how they fit into this financial environment.
In one area, in particular, the increase in technology has created an atmosphere where the consumer has much more "say" in how they conduct their daily lives, how they interact with others from a bookstore to a broker. Further, the service provider now has many options for marketing their products to the consumer. Arguably, technology has altered the financial services industry in a way that is totally different from other industries.
Looking at demographic changes reveals that their impact on the product mix of insurers is also readily apparent in their substantial impact on the life insurance industry. The result is perhaps surprising to those outside of the industry, but the largest business Segment is not life insurance! The single largest share of life insurance premiums are directly attributable to annuity sales to this new generation that appears to be more concerned about protecting their income than their legacy.
This is more startling with a backwards-look to 1945 and the end of WWII, when life insurance premiums were about nine times annuity contributions to premium income. Demographic changes affect all aspects of the economy, but probably not more than the area of savings/insurance. Dresses are shorter, cars are longer-shorter-longer-shorter, but there has not been any other industry whose revenues have been so transformed by the emergence of the baby-boomers and their combined incomes.
Competition cannot be eliminated from discussion as it is a common theme throughout the economy in all areas, and perhaps the changes in life insurance are not more or less than changes in other areas, but regardless, the changes in the life insurance industry has been dramatic and fundamental and intense. Insurance, viewed by most other industries as a staid and un-dramatic type of business that was regulated by sometimes overzealous state regulators was hit by financial competitors and other financial service firms. With visions of limitless depositor and investor clientele, insurers trembled at the prospect of terrifying competition for the public's savings dollar with big institutions that had for years advised the public on investments and actually were in a position to direct such investments! Then to top-it-all-off, foreign insurers were arriving on the shores of the United States, with pockets full of pounds, (now) euro-dollars, francs, deutschmarks, yen, etc.
While the insurance industry being shaken was not unique, at least it was a case study of the great risks and perils of competition and the effect it has on a market.
The lights in the insurance companies' offices burned late and brightly as the industry and its senior managers attempted to react to this changing environment. The industry was under a microscope by its managers and its owners. Researchers from the most prominent colleges investigated the industry, usually with the instigation and cooperation of the insurance companies, but often for their own information. The results were not too reassuring as it appeared that the insurance industry was in a great state of flux with problems that were quite well-defined, leaving numerous challenges. And, of course, they proposed a wide variation of proposed solutions.
Those who love the insurance industry—or at least put up with it as it provides a good living—mostly just shook their heads as the problem was so obvious: Produce products that can provide accumulations at interest rates that are competitive with other financial institutions. However, changes do not come easy to the insurance industry, primarily because of the tight–but necessary–regulations. One of the important decisions had to be in respect to the role of the Securities and Exchange Commission (SEC) in marketing products that had fluctuating results. This brought in federal supervision in addition to state regulation.
Management had to—and has risen to the challenge—provide strategies for success that will work well for the industry. Management should be, and usually is, judged by its ability to face the challenges of today and eliminate as much as possible, the maladies of the business. If they did not—or do not—failure and/or extinction will be the result. This is so apparent when discussing companies that market indexed products—except for a handful of financially strong insurers who have moved well into today's world, the companies offering indexed products were not around 10–and in some cases, 5–years ago.
Not only insurance companies have changed in the past 20 years, but also there has been a revolution in the financial institutions. It is difficult, if not impossible to differentiate between commercial banks, thrifts, investment banks, investment management companies, and insurance firms. The reasons for this transformation are technology that affects them all, plus the diminution of the regulations that had since time immemorial preserved these separate sub-identities and guarded these walls between industries with passion and purpose. Still, changes are intimately unique to each of the industries.
Remember the dreaded intrusion of the banks into the insurance business? Segregation was assured by the Banking Act of 1933, in particular the Segments that are usually referred to as the "Glass Steagall Act" separated banking from underwriting. This has been eroded by permissive regulations and the popular-at-the-time deregulation of the 1980's. The McCarran Ferguson Act of 1945 relegated the full authority to regulate insurance to the states. But insurance distributions by banking institutions is increasing everywhere, due mostly to the Gramm Leach Bliley Act of 1999 which allowed insurers, banks and securities firms to sell each other's products.
Other than insurance, even though the Congress has been rather reluctant to pass financial reform legislation, the banking sector is moving inexorably toward expansion of products and universal banking.
The thrift industry is also moving much in the same direction. This association of savings and loan associations and mutual savings banks has had its up-and-downs over the past 25 years, and those that have survived have become direct competitors for the retail banking business. While banks and S&Ls are not likely to emerge as major competitors of any magnitude when compared to the larger financial service giants, the leaders here have ample regulatory leeway to compete and to succeed in this sector of the business.
Investment banking firms are not waiting for challenges as they have always been aggressive. They have used the financial booms of the last 20 years in addition to the increasing interest in Capital market investments by the baby-boom generation and have succeeded in expanding their focus and influence throughout the financial institution sector. Morgan Stanley, for instance, which has been associated with wholesale underwriting, has become mass-distributors for Dean Witter. Merrill Lynch has been associated with life insurance companies for years. E.F. Hutton had its own life insurance company (E.F. Hutton Life Insurance Co.) and it introduced the first Universal Life insurance policy in 1979—indeed, one of their actuaries, in cooperation with a consulting actuary and a German actuary, is considered as the "father of Universal Life." Merrill Lynch is now a full-service financial giant that is Capable of large scale underwriting, asset management, brokerage services, and the offering of standard insurance products.
The insurance industry has been moving toward asset management and the related businesses association with retirement savings because of the deinstitutionalization of pension funds and the trend away from defined benefit plans. As far as competition is concerned, one should remember that these companies have managed corporate pension assets for many years, and because of the evolution of greater personal interest in the accumulation of funds for retirement and for later-life, the industry has become more interested in the insurance market and many now has led to entrance into assurance products or close substitutes over the past 10 or so years. True, at this time there are some regulatory problems but they seem to increase their presence in the insurance market.
Suffice it to say that the period of 1970 to the late 1980's, the most widely sold life insurance product was the single premium life insurance policy which was sold by life insurance agents, banks and stockbrokers. Whole life insurance was the most common of the permanent life insurance plans, with its fixed premiums and with a fixed guaranteed rate of return. It also provides guarantee cash values on premiums paid, as long as the policy is in force. It was a "dull" product as it has little for an agent to get excited about, but it was secure during times when there were concerns of insolvency. Policyholders generally enjoyed growing dividends, which at that time, the 1970's, with the tax benefits, fixed premiums and guaranteed death benefits, were satisfactory to most policyholders.
But, during the 1980's interest rates climbed rapidly and policyholders felt that they would have generated more return for their money had it been invested in mutual funds, stock or bond markets, instead of in whole life insurance policies.
Another problem besides the consumers demanding a higher return of their investments, the Federal Trade Commission (FTC) added to the pressure on insurance companies by highlighting the limited investment returns of traditional life insurance. Professional financial advisors, including CPAs, recommended to their clients that they should buy term and invest the difference. Indeed, that was the battle-cry of financial advisors at that time, including many agents who sold term insurance and recommended investing in other products. Among insurers, a term-rate "war" was instituted with agents selling multi-million dollar term policies to their customers instead of whole life.
This added pressure on life insurance companies to create new kinds of interest-sensitive life insurance policies so that they could compete effectively with the financial institutions that were fighting for the investment dollar. Interest-rates peaked during this time, which further supported the viability of interest-sensitive products. Insurance companies produced life insurance policies that allowed policyholders to enjoy higher interest rates while at the same time, making sure that the policyholder's families would be guaranteed a death benefit.
One thing that helped market the policies, and the one thing that later caused problems with the product, was that there was new computer terminology that would allow an agent to generate illustrations that were accurate—as far as the math was concerned—and that way the policyholder or applicant would be able to visualize how their insurance dollar would grow. Keep in mind that at that time, interest rates were high and it was inconceivable to the greatest majority of experts that rates would ever reduce by any significant amount.
This new type of insurance basically consisted of a renewable term insurance and fixed or variable side fund such as an annuity or mutual fund. This way, the policyholders would be able to provide for their beneficiaries in case of premature death and at the same time, accumulate sufficient wealth.
The illustrations of the growth of the cash value at the assumed interest rate used at that time showed how (eventually) the policy would be paid up and the policyholder would have "free" insurance for the rest of his life. Or at the very least, the term insurance would be decreased significantly. The term "disappearing premiums" was thrown around quite a bit in those days.
Prior to 1982, annuities were the vehicles that allowed a policyholder to build their wealth as withdrawals from the principal would not be subject to taxation. However, in 1982, the Tax Equity and Fiscal Responsibility Act (TEFRA) was passed and it immediately blew a hole in the effectiveness of annuities as a method of building wealth by imposing a ten percent penalty tax on all withdrawals made before the policyholder was age 59 ½. To add insult to injury, substituting annuities with mutual funds was not adequate because the placement of the policyholder's money into the equities did not provide a guaranteed principal and tax deferral.
In order to surmount these problems, the Universal Life insurance was devised, patterned after an English policy, which had heretofore seemed impossible because of nonforfeiture laws in the United States that did not exist in England. It was soon to become quite popular during the 1980s, constituting 38 percent of new premiums for life insurance companies.
This plan (described in more detail later in this text) had the advantage of tax deferral on the interest earnings from the cash value and death benefits were covered by term insurance. Each month, the insurance company subtracted the insurance company's mortality and administrative expenses from the account, simultaneously adding new premiums and interest into the account. There were no taxes for the policyholder to pay on the increases in the cash values of the policy unless they decided to cancel the policy.
Universal Life policies were extremely popular during the early 1980's because of the high interest rates that were available at that time. Policyholders who enjoyed the high interest rate environment for nearly ten years came to expect them to be the norm and to continue ad infinitum. However, we all know what happened in the 1990's—the bottom of the market fell out and interest rates plummeted. Many Universal Life policyholders found themselves in the unhappy situation of having to pay higher premiums or sacrifice their death benefit. The biggest disillusionment was the failure of the interest-sensitive products to match the illustration produced by the insurers and their agents—even though they often had to admit that their expectations were not reasonable, or even realistic.
Because of the bad reputation that Universal Life products was obtaining and because of the public's resentment and frustration, insurance companies modified their provisions so as to provide greater protection to the policyholder. The "new" Universal Life product with a guaranteed premium was produced for a policy that would cover the policyholder up to the age of 90 or 100. Should interest rates fall or mortality charges arise above the insurance company's estimates, the insurer would, therefore, be responsible for assuming the burden of the charges and by doing so, the death benefit was protected.
Variable Life insurance also became available in 1976 to provide another form of interest-sensitive policies. Variable Life would provide them with higher returns on their cash values, a tax-free deferral of their accumulation of cash values, a tax-free death benefit and a fixed premium. However, there was a difference in how internally these policies were handled as opposed to ordinary life as the reserves that were kept for the death benefit by the insurer were not derived from the general funds of the life insurance company, but were stocks, bonds, and other investments that were placed in a separate account that was managed by or for the life insurance company. Basically, the reserves were separate from the general assets of the life insurance company. While the death benefit was guaranteed, the amount of the assets was dependant upon the performance of these investments.
The variable life insurance policy cost more than whole life insurance because the insurer guaranteed the fixed premium and death benefit. While the death benefit was dependant upon the performance of the investments, the life insurance guaranteed the policyholder a minimum amount. This meant that if the separate account did not earn sufficient income to pay the death benefit, the life insurance company would still be expected to provide the payment of the death benefit anyway.
Besides, variable life insurance policies did not allow policyholders to spend their dividends or even use them to pay the interest on policy loans. When the policyholder earned dividends, they were derived from the savings in the mortality charges and expenses of the insurance company, and not as a result of any investment performance.
Unfortunately, the IRS recognized that there were some taxes that would not be paid under existing laws, so congress rapidly changed the laws in endowment legislation that was especially designed to keep individuals from using life insurance to evade paying taxes, with the result that there was a diminishing of popularity of this form of life insurance.
It was no surprise that during the 1990's, during the "boom years," the public as a whole was rather disillusioned with life insurance policies and life insurers as a whole. Guarantees available under insurance products did very little good to change the public perception, and publicity of charges of over-zealous agent illustrating future earnings at a much higher rate than readily obtainable did not help matters. Insurers pushed single premium variable life (SPVLs) in response to the 1980's tax revisions, but they failed to keep up with the 1990s growth and wealth accumulation. Therefore, the SPVLs seemed to dissolve before they really had a chance to show how effective they could be as a wealth transfer mechanism. In contrast, Variable Annuities were not so complicated and were less expensive, and so they were more preferred for high net-worth investors.
As mentioned earlier, the Gramm Leach Bliley Act of 1999, which allowed insurers, banks, and securities firms to sell each other's products, resulted in a broad-based financial solutions industry. Rightfully or wrongfully, insurance downplayed their role in protecting their insureds against premature death and became known as providing financial services, large corporations, manufacturers of products and providers. Insurance trade groups and third-party providers started dropping "insurance" from their names and added "financial" or some other such term to their corporate names. Industry professionals had no choice to market themselves as financial professionals or financial services advisors—although too many of them knew little about providing financial services. The industry provided many new courses in financial planning and even developed a couple of professional designations after in-depth training and examinations. Unfortunately, there were few laws that would stop one from being self-designated and offering services as a financial planner. Nevertheless, they began offering mutual funds, annuities, private placements and other financial solutions products.
The elimination of the wall between insurance companies and their financial service counterparts has produced many challenges for life insurance companies. Basically, insurance companies can no longer have the protection of state regulators as many of these products require supervision of the SEC and representatives must be dually licensed as insurance agents and as security dealers, etc. The result is that the consumer does not also look upon insurance companies as the only source of life insurance policies as there is now not much of a difference between how insurance companies, banks and investment broker-dealers approach customers.
The end result is that the insurance industry is being completely reshaped by mergers and acquisitions, and the financial industry is also going through similar reshaping, and it would appear that such actions may extend into several years of merging, acquiring, etc.
There may be light at the end of the tunnel as many experts have stated publicly that in recent years, 2002 in particular, Variable Annuities evolved into a single premium variable life insurance (SPVL) market and are now starting to be recognized for their rather unique value in financial planning. Conversely, Variable Annuity sales decreased in 2001 and those who purchase Variable Annuities today usually indicate a preference for contracts that offer insurance features—such as income and death benefit guarantees.
Many of the experts are quite up-beat about the new products (the subject of this text) and new legislations for insurance companies—in particular, the Variable Universal Life and the Indexed Universal Life.
While the life insurance industry, in particular, suffered during the 1990s, in 2001 the insurers began reporting an increase in life insurance purchases. Interestingly, the economy (which was thought to be recessionary at that time) and the war on terrorism were cited as the primary factors. With the Dow Jones going higher than ever before and with a booming economy, but with the threat of terrorism still looming, forecasters are unsure as to what will happen to the industry.
LIMRA International reported that individual life sales, and in particular, Universal Life sales increased as in 2001, annualized premiums rose 18 percent as compared to 2000 figures. Fixed annuity sales rose by 36 percent from 2000 to 2001, and Equity Indexed Annuity sales increased 20 percent in 2001, compared to 2000.
In respect to the insurance industry itself, as opposed to its products for the time being, the picture has to be one of change and separation. At one time the industry operated like one large and rather homogenous sector of the economy. Distinctions across state lines were relevant, of course, but were not really fundamental, and the distinctions between firms were of little interest actually. Administrative and technical insurance personnel could move between insurance companies throughout the country and find little difference in operations. The major difference was in the organizational firms, whether the company was a mutual or a stock company, although they had broadly similar products.
However, the catalyst of change probably started with the introduction of special forms and specialized products, supported by separate fund accounting instead of the traditional general fund accounting. Moving from traditional to specialized focus meant that traditional competitors followed different paths—with some emphasizing health insurance, simple life insurance, and still others that emphasized products that were aimed at asset accumulation. These differences showed also in distribution (agency, mostly) approaches, some keeping career or Captive agents, while others relied upon brokers for distribution—and then, there were those who became increasingly dependant upon bank and/or brokers for distribution.
Some firms changed entirely, such as USAAA, and they now compete directly in the mutual fund and consumer credit arenas. Others have remained life insurance companies, but focusing on Universal Life and annuity products.
The end result is that the once-separate parts of the financial service industry are all moving and converging, either by design, by marketing, or by both, whether intended or unintended. Financial institutions are all looking more alike and their activity is overlapping and continuing to do so. Even geographical boundaries are no longer important due to computers. According to those who know or seem to know, they will not all converge or all offer the identical products that cover the entire market. However, they must all define their niche in the marketplace and focus their product line accordingly, and each firm must find it own niche to survive.
Yet, as dismal and dark as these prognostications appear to be, all is not lost. The life insurance industry has one ever-surviving and important advantage—its history and reputation in the most desirable financial market, that of retirement assets. The products as discussed in this text were designed to keep that history and reputation. However, the retirement asset market is changing.
Do not think for a single moment, that asset accumulations for retirement are an immobile deposit of funds that never changes. Ever since Social Security started in the 1930s and the slow but steady number of salaries workers on company-provided pensions, and up to the present generation of retirees, the retirement funds were all in the hands of others—whether Uncle Sam for Social Security or defined benefit plan or a vested plan offered by the employer and guaranteed by the government, the average worker had little to say about his retirement future.
However, along comes the baby-boomers with their expectations of retirement assets, and voila! The whole ballgame changes. Better educated workers are reassessing their retirement needs and their dependency upon vested pension programs. And well they should as the government and the corporate providers of pension coverage are reassessing their own Capability to provide promised benefit levels with existing premiums. The federal government is considering changes in their programs and employers have begun to shift the burden of retirement coverage to their employees. There has been an obvious shift toward greater personal responsibility for retirement financial planning and greater dependence upon one's own resources to sustain current lifestyles.
This has created a shift by consumers of their personal financial portfolio choices from standard savings and bequest products, to asset accumulation and annuities and annuity-type plans. This has caused an unprecedented and welcome effect on the importance of annuities and standard life insurance products to the life insurance industry. Within the past 20 years, the ratio of premiums of life insurance to annuity products has decreased, but interestingly, annuities have not "cannibalized" life insurance products but have just been the group of products that have shown the most growth and they have maintained their growth. Life insurance, on the other hand, has shown anemic results comparatively.
The baby-boomers will be the first group to retire en masse with defined contribution account balances, instead of the annual defined benefit annuity payments. Besides, this generation is expected to live longer, and since they are better educated, they are expected to demand better standards of retirement living. This is a double-edged sword for the life insurance industry, as since life insurance protects against early death, annuities protect against (if you will) "late" deaths, and as we all live longer, the relative values of these plans changes since the likelihood of dying prematurely decreases and so the cost of this coverage declines. Conversely, as we have more time to provide for ourselves in our retirement years, the cost of such plans increase.
Other problems arise, such as the increasing preponderance of dual-earner households which compounds the shift of the husband purchasing insurance to provide for his wife and children in case of an untimely death. Now, a working wife provides such a hedge. On the other hand, if the couple decides to retire at approximately the same time, there is more of a need for old-age income protection.
And then there is the problem with the sheer size of the baby-boomer population which started in 1945 at the end of WWII when young men and women returned from battle with the dream of marrying and having a family. These boomers are now turning (or have turned) 50 and are eligible for AARP. When they turn 50, some have provided for their retirement and their retirement funds are growing rapidly. Unfortunately for many, they have not made such provisions. The retirement wealth of boomers is liquid and not pre-annuitized to a great degree, so there is and will continue to be a growing opportunity for life insurers to increase the market for annuities and utilize mortality risk pooling.
However, the majority of the annuities sold today are not Immediate Annuities but are Deferred Annuities and are tax-preferred savings vehicles with provisions for annuitization at some future time. For those households who cannot utilize such retirement vehicles such as IRAs or 401(k)s because they just are not available or they have been contributed to up to the maximum allowed by law, annuities may be useful savings mechanisms. Still, the insurer is in competition with those companies to have grown to dominate the field for tax-preferred savings, such as the mutual fund companies.
The changing nature of the consumer product choice has created a decline in whole life, which in turn reduces the attractiveness of its distribution by agents and independent brokers which has caused problems for the industry to grow and support its agent structures.
In respect to retirement asset plans, they have their own set of problems. When the defined benefit plans were so popular, assets were not dedicated to individual accounts, therefore they were managed by trustees who doled out the money to various other money managers as they saw fit—or several managers under some plans. Additional contributions are made quarterly, if at all, and disbursements are made monthly. With the defined contribution plan, on the other hand, each individual makes decisions, generally investing in any number of funds. Inflows of money may be weekly, outflows are sporadic and asset allocations can change daily. The needs, cost and demands are obvious.
In the "old days," many of these functions were performed by individual and outside consultant for record-keeping and management. Today, these functions must be performed by the insurer.
The growth of the 401(k) has been a windfall to the mutual fund industry and has increased dramatically its share of the private sector retirement asset management. IRA contributions plus the establishment of the Roth IRA are programs that enhance the mutual fund's asset management. Besides, today if an employee leaves the employer (as many, many do), the employee can still keep the money where it is—whether with an insurance company or with a mutual fund. This is, obviously, a good "lead" situation for expansion. The mutual fund companies have been establishing affiliated insurers that underwrite annuities and receive a fee for bearing actuarial risk, but they leave the invested assets with the mutual fund. These "affiliated" firms are some of the fastest growing entities in the life insurance business.
If the initial provider is an insurer, then many companies now offer proprietary funds to industry clients and market their services to a wider array of customers through a wider array of products.
Another view today is that in order to be successful, you must be big. This is not news to the life insurance industry that has seen innumerable mergers and acquisitions, and as a matter-of-fact, the number of life insurers in the US decreased by one-fourth between 1989 and 1995. This is not all acquisitions and mergers, but there have been other pairings at the top, such as the pairing of The Travelers and Citicorp.
What does the cross-industry merging accomplish for the insurer? Basically, it provides information on individual consumers, many of which are businesses. With the improvement in information technology, great strides have been made by insurers to not only create possible clients, but to understand them much better.
The wealthy consumer purchasing customer-tailored products demands custom-tailored services. His insurance needs are more specialized and must be met by an array of products that take into account specific needs and incorporate existing portfolio composition, tax and estate planning. This type of customer is what every insurer dreams of, but they do demand hand-holding but they are willing to pay the price. In addition to a "fleet" of well-trained agents and other service personnel that have a broad spectrum of knowledge covering traditional insurance, investment management and asset allocation, tax and estate law, must be maintained. Such personnel must have many "arrows in their quiver," and the indexed insurance products are just two of the latest, and probably the most effective, "arrows."
STUDY QUESTIONS
1. The main reason that there have been drastic changes in life insurance products in recent years is
A. because commissions were not satisfactory.
B. a result of mutual companies becoming stock insurance companies.
C. customers were not happy with the growth of the cash values in their policies.
D. a result of many insurance company mergers.
2. The acceleration of changes in insurance product lines can be attributed to three movements, including
A. the increasing commissions.
B. the invention of Universal Life plans.
C. technological advances transforming the financial sector.
D. diversification of insurance company departments.
3. The increase in technology has created an atmosphere where
A. the consumer has much more say in how they conduct their daily lives.
B. people are not willing to do "grunt" work.
C. only those who teach or service technology can survive.
D. agents are able to make much better income from the first day.
4. Not only have insurance companies changed in the past 20 years,
A. but the marketing of insurance products has changed drastically to where insurance agents must now be licensed as security dealers.
B. the regulation of the industry is not in the hands of the Federal Government.
C. there are three times as many insurance companies.
D. there has also been a revolution in financial institutions.
5. Besides consumers demanding a higher return of their investments, the Federal Trade Commission (FTC)
A. refused to allow insurance companies to solicit on federal lands.
B. passed rulings that would not allow insurance to be sold as an investment in any situation.
C. highlighted the limited investment returns of traditional life insurance.
D. cut out all commissions on whole life products.
6. TEFRA demolished some of the effectiveness of annuities
A. by imposing a penalty on all withdrawals made before the annuitant was 65.
B. by imposing a 10% penalty on all withdrawals made before the annuitant was 59 ½.
C. by elimination of most types of Deferred Annuities.
D. accidently by forbidding the access to the fund while the annuitant was still working.
7. With Variable Life, the reserves for the policies
A. are integrated with the reserves of other policyholders of all life insurance policies.
B. are kept separate, are segregated from the other reserves of the insurer.
C. are immediately deposited into bank Certificates of Deposits.
D. are equal to the commissions and expenses the first 3 years.
8. The catalyst of change among life insurers, probably started with the introduction of special forms and specialized products,
A. and the merging with banks into life insurance companies.
B supported by separate fund accounting instead of the traditional general fund
accounting
C. and the restructuring of commissions.
D. and the marketing of products primarily through brokers.
9. Better educated workers are reassessing their retirement needs and their dependency upon vested pension programs as a result of
A. the baby-boomer generation.
B. overhaul of the Social Security Act.
C. retirement plans being taken over by the government.
D. better longevity.
10. The one government program that has been a windfall to the mutual fund industry is
A. NASDQ.
B. ERISA.
C. the growth of 401(k) plans.
D. Social Security.
ANSWERS TO STUDY QUESTIONS
1C 2C 3A 4D 5C 6B 7B 8B 9A 10C