If you chose c, you're not like most Americans. Recent economic stress has driven life insurance ownership to very low levels, says Todd Katz, executive vice president for insurance products at New York-based MetLife. According to a recent MetLife study of employee benefit trends, 30 percent of American households have no life insurance coverage at all, and the average U.S. household owns enough life insurance to replace just 3.6 years of income.

“The economic downturn has definitely put more challenge in our business,” agrees Pat Murphy, president and general manager for life and disability products at WellPoint, based in Indianapolis.

Stressed companies move prices higher

Insurance consumers aren't the only ones feeling economic strain, of course. Insurance companies are under stress, too.

“I think the companies are still feeling the impact of the economic downturn, and that's showing up in financial strength ratings,” says Tony Steuer, a life insurance analyst in Alameda, Calif. Insurance companies are typically restricted to investing premium dollars in highly rated debt instruments. As a result, the insurance industry is heavily invested in Treasury bills and related U.S. government securities, and is vulnerable to the specter of a U.S. government default, which would force down ratings for both U.S. government debt and insurance companies themselves. “The fear is that, long-term, the insurance industry is on a negative ratings trend,” Steuer says. “There's a concern about how solid the industry will be in the future. That's not yet showing up in pricing, but it may.”

Historically low interest rates, on the other hand, are currently affecting some life insurance pricing. Insurance product pricing is based on predicted costs of insurance, lapse rates and investment returns, so policy performance suffers when rates of return are lower than predicted. Universal life policies have been hit hardest by lower returns, Steuer says, but other policies are affected as well.

At the same time that insurance policies as a group have suffered from low investment returns, variable and equity policy returns have been hurt by stock market underperformance. “Some companies have minimum payouts, and lower interest rates mean that they have to make up the profit somewhere,” Steuer says.

Insurance firms have also felt pressure from a trend toward policyholders selling their policies on the life settlement marketplace. Third-party purchasers almost keep the policies they buy in force, and that skews lapse rates upward, a change that also costs insurance companies deep in the pockets. “That impacts the pricing across the board,” Steuer says.

Something's got to give, and that something is typically either premium level or term length. “Some companies have sent out 'heads up' letters asking clients what they want to do, but the industry doesn't generally give heads up about underperforming policies. Some people are going to have a lot of unpleasant surprises,” Steuer says. They may either pay higher premiums or see policies terminate prematurely, a choice that only increases their financial stress.

Changing with the times

Despite increasing costs and decreasing terms, life insurance is still a popular group benefit with employers and employees. “During the economic crisis, people were very happy to have a job. They still are happy to have a job, but given that salary increases have not been all that great, benefits programs are more important” as a way to attract and retain employees, Katz says. Moreover, people who are happy with their benefits are typically happier at work, and therefore more productive—important at a time when firms are looking closely at ways to maximize worker productivity, he adds.

Federal health care legislation may also make group insurance benefits more important, Murphy predicts. If many employees buy medical insurance through health insurance exchanges, employers will need to offer other benefits as recruiting and retention tools. Life insurance could fill that gap.

Many people get life insurance through their employers, Katz says, and often feel good about the product's convenience and ease of purchase—and about the due diligence they assume their employers have done. Unfortunately, many employees don't buy enough insurance through their employers, nor do they always buy the right kinds of insurance. They often don't have enough portable, permanent coverage to protect their families in case a breadwinner dies after a layoff or job change.

“I still find that too many individuals rely on group term insurance as their only coverage,” says Diana Scheel, a financial adviser with Sapient Financial Group in San Antonio, Texas. (Sapient is a general agency of Mass Mutual.) She notes that jobs are becoming more transient, with fewer and fewer people spending decades working for a single company. “When they leave a job, the coverage goes away. The new employer may or may not have coverage, and the worker may not be healthy enough to buy a policy on their own,” Scheel says.

To address that, some companies have begun to provide portable insurance, particularly for key people within a firm. An employer pays the premium and takes the resulting tax deduction, Scheel says; an employee handles the benefit as a 162-form bonus.

Many experts think the trend toward permanent, portable insurance will trickle down from the executive suite to the rank and file. But while businesses may be willing to pay for key people to have permanent, portable insurance, the trend toward asking employees to pay for more of their benefits will probably hold when it comes to permanent, portable insurance for regular workers—particularly if premium levels continue to rise.

“I think we're going to see more and more employers move away from life insurance as an employer-paid benefit, but offer workers the opportunity to sign up on their own and get better group rates,” Murphy says. “We're seeing the voluntary market become more and more important.”

When employers expect workers to pay for the group benefits they choose, they often offer “a cafeteria of choices,” Katz says, instead of the single plan employees might get as an employer-paid benefit. Some plans might be unique to a particular firm and its workers, particularly if the group includes many higher earners, foreign nationals, students, seasonal or part-time employees, all of whom can have particular insurance needs. “There's more customization than you might have seen five or ten years ago,” Katz says.

Many choices might include such value-added extras as will and estate planning, estate resolution services, bereavement counseling for children or adults, consultations with legal and financial professionals, identity theft protection, or travel assistance.

With more choices often come increased corporate communication on the value of group benefits, as well as greater time and effort spent educating employees about different options. Some workers are getting education from growing numbers of brokers who specialize in life insurance. These professionals have realized that the marketplace boasts many experts on medical insurance group benefits, but comparatively few brokers with fluency in life insurance group benefits. They're moving into that underserved niche.

Whether a broker specializes in life insurance or not, she or he will probably hope that workplace education sessions will bring in new retail business in addition to group sales. MetLife, for one, is betting on it. “We made the decision as a company about two years ago to bring together our group and retail business, coming at this from a customer-centric perspective and not getting too caught up in what's traditionally group and what's traditionally retail,” Katz says. “Some people buy as much as they can at work but maybe that's not enough, or they don't have the product flexibility they need.” Brokers can help fill these needs using both group and retail products.

Insurance as financial planning

Increased product choice and flexibility can assist businesses and consumers who want life insurance primarily as a financial planning tool. Businesses might buy life insurance on key people to hedge against the economic impact of a key executive's death. Firms could also buy cash value life insurance as a business asset and borrow against it, investing the proceeds back into the company.

Employees might buy a life insurance policy as a way of funding a trust, as a means of paying future estate taxes, as an investment vehicle, or as a way of hedging against a particular concern. Guaranteed universal life, for instance, ensures that a policy won't lapse even if rates go down or there are other problems. An equity-indexed annuity might help an older worker prepare for retirement, as might a Ten Pay policy, a whole life policy that charges premiums for just ten years. “These plans establish nice retirement values that can come back to you tax free,” Scheel says. “The policyholder retires and pulls out income as tax-free dividends, then takes a tax-free loan against the policy, letting dividends pay the interest and paying off the loan with the death benefit when they die.”

Other policies combine benefits by wrapping together life insurance and long-term care or disability coverage. “Long-term care insurance can be expensive, plus people worry that they might not use it after spending a lot for the policy,” says Byron Udell, founder and CEO of AccuQuote, a life insurance brokerage firm in Chicago. A rider lets the policy owner use as much—or as little—as necessary of the policy's payout on long-term care insurance, then leave the remainder to heirs as a death benefit.

Permanent life insurance products can help manage cash flow, and so can term insurance, which stays in effect only for the stated term, often 15, 20 or 30 years. “Term insurance has gotten dramatically better, stabilizing at much cheaper rates than in the 1990s,” Steuer says. “It makes permanent insurance less important, and makes it harder to sell permanent insurance. As more and more people become financially savvy, you'll see the ratio of term policies sold to cash value policies increase. ”

With life insurance types for virtually every need and employers making it easy for workers to shop for and buy coverage at the office, workers seem to be set—as long as their personal budgets can hold out.

Instant Insights /

Life insurance&rsquo;s changing landscape

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