Term Life Insurance Declines as Hybrid Policies Gain Ground


When it comes to life insurance, it seems that more folks are passing up plain vanilla term life for flashy hybrids.

In the past several years, the number of new term life policies in the U.S. has continued to fall, dipping to 41.1% of the life insurance market in 2009 from 44.6% in 2007, according to the American Council of Life Insurance. And last year, the slide continued. The number of new term life insurance policies sold in the U.S. dropped by 16% in the fourth quarter, compared with the same period in the previous year, according to insurance researcher and consultant LIMRA.

That's surprising, considering that a number of personal financial advisers and consumer experts still point to plain old term life insurance as the best choice when selecting a financial umbrella for your loved ones, especially before the kids are out of college.

"Term is still 99% the right thing to get, if you need insurance, and have a baby, and want to make sure they are fed and educated if you die," says Bob Hunter, director of insurance for the Consumer Federation of America. "But if you're looking for a tax break, then whole insurance makes sense."

"There's still too much non-term insurance being sold," he adds, "because agents make more money when selling things that are hooked onto it, or have premiums that go up. They have an incentive to sell you the wrong thing."

Nonetheless, consumers increasingly are purchasing life insurance policies that are other than straight term. For example, the number of new whole life insurance policies in the U.S. gained 6% in the fourth quarter over the previous year, while universal life insurance polices rose a whopping 20%.

Universal Policies Gain by Mimicking Term Life

Ironically, the driver of this double-digit gain for universal life insurance policies in 2010 was the addition in 2009 of term life features to these hybrid policies, says Elaine Tumicki, vice president of product research for LIMRA.

"Some companies introduced a combination of permanent universal life and term life insurance products in 2009, and that's why we've seen some term life insurance policies decline, while universal life and whole life increased in 2010," Tumicki says.

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Term life insurance is considered attractive because of its low premiums which are set for a given number of years -- a 10-year, 20-year or 30-year period, for example. Universal insurance generally costs more and allows policyholders to have flexibility in determining when and how much to apply to their premium payments. Whole life insurance is a permanent insurance that is available until the policyholder dies, and it can accumulate a cash value.

Under hybrid universal-term life insurance policies, like those of term universal life pioneer Genworth Financial Companies (GNW), the policy starts like a term insurance plan, with a set number of years at a level premium that's designed to be comparable to traditional term policies. However, Genworth's Colony Term UL, introduced in 2009, allows policyholders to extend their coverage, after the initial term is set to expire, at a new, higher premium that's good until the policyholder is 95.

Genworth created the term-universal life insurance product as a means to compete with term products, while giving consumers a permanent and flexible universal life product, says Janet Deskins, senior vice president of Life Products for Genworth, in an email interview.

Consumers who aren't sure if they want permanent insurance or term insurance are best suited for this type of universal term life insurance, says Scott Witt of Witt Actuarial Services, a scheduled panelist at this week's National Association of Personal Financial Advisors (NAPFA) annual conference in Utah.

"The disadvantage with term universal life is there's no cash value like a permanent one," Witt says. "Cash values are useful if they lower your premiums later on or you can take a loan out against it. Then there is a living value to it."

Buy Long-Term Care Separately

In addition to this tweak to term and universal life insurance, other changes have been afoot in the life insurance industry.

John Ryan, a strategy consultant with Ryan Insurance and another panelists scheduled to appear on NAPFA's "Changing Face of Life Insurance" session, noted an increasing number of companies are offering long-term care insurance riders on universal or whole life insurance policies.

"They're becoming popular to where about 10% of policies are sold with this, versus 2% to 3% a couple years ago," says Ryan.

Witt is not a fan of these type of long-term care riders.

"If you need long-term care insurance, then you should buy long-term care," Witt says. "If you need life insurance, you should get life insurance. If you put the two together, you can erode your death benefits if your long-term care is paid out of that."

Long-term care riders are just part of a mix that's been introduced since the insurance industry was socked by the recession. And the wave of riders that's emerged is far different from the innovative products that came on the scene after the recession of the early 1970s, says Jim Mitchel, LIMRA vice president of developmental research.

In the six years that followed the dour early 1970s, those products included universal life insurance and stock-based variable life insurance. But since the current economic malaise hit, the insurance industry has largely pumped out new types of riders, says Mitchel.

He points to the example of a critical-illness rider, which allows policyholders to cash in a portion of their life insurance as a lump sum if they have a stroke. Then there are income-replacement riders, which allow policyholders to get an amount equivalent to their paycheck, that's paid out on a regular schedule rather than a lump sum.

In summing up the type of products introduced since the nation was hit with a recession a couple of years back, Mitchel says: "There may be some innovative products in the pipeline now, but I haven't seen a lot of innovation this year. A lot of people are introducing extensions of their existing product line."

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