How Long Will Traditional Life Products Hold Their Appeal?

By Marianne Purushotham

The recent market downturn and ensuing volatility have resulted in a renewed interest on the part of both producers and consumers in traditional life insurance products such as term, whole life and fixed universal life.

Based on LIMRA Internationalís estimates of individual life insurance sales, during the latter half of the 1990s (when the Standard and Poorís 500 index was regularly producing double-digit returns), new variable universal life premium grew at an average annual rate of almost 30% (see Figure 1). During that same period, fixed UL sales declined at an average rate of 1% per year.

However, with the start of the most recent recessionary period, this trend reversed itself. Fixed UL new premium growth now averages 29% per year.

Clearly, much of the current sales success of traditional life products can be attributed to growth in the fixed UL market.

Early in this decade, customer concern about exposure to market volatility led producers to call for products with stronger guarantees that better insulate investments from adverse experience. As a result, many insurers now offer at least one universal life product to compete in the death benefit guarantee market.

In a recent LIMRA survey of UL carriers, two-thirds offer a product that provides for death benefit guarantees to age 100 or for the insuredís lifetime.

It is not just the flight to guarantees on the part of the traditional insurance-buying public that has led to the recent success of traditional life products. UL with long-term death benefit guarantees is also an attractive product for the older age market and is helping some life insurers to take advantage of the changing demographics of the
U.S. population.

These products have become popular in both individual sales situations as well as in the estate planning market where older age buyers are primarily interested in payment of a death benefit with minimal exposure to changing market conditions. In fact, over the past 4 years, the product mix for survivorship life sales has shifted from almost 60% VUL to more than 60% fixed UL (see Figure 2).

For individual sales situations, some insurance companies are attempting to reach the older age market with UL products that offer riders allowing for acceleration of death benefits in the event the insured requires long term care or is diagnosed with a critical illness.

The trend toward attracting older age buyers is also occurring with term plans.

Based on the results of a term insurance study conducted by LIMRA in 2001, 20-year level term insurance products typically had maximum issue ages between 55 and 60. Now, just 2 years later, 20-year level term products with maximum issue ages between 65 and 70 are becoming more common.

Data from the MIB Life Index, which tracks life insurance application activity, also indicates that over the past few years the largest increases in business submitted were in the 60 and older age group.

Will traditional life products continue to hold their appeal if the equity markets begin to offer more attractive returns? The answer is probably yes and no.

Yes, traditional products will continue to appeal to the older age market and other more risk-averse individuals whose focus is death benefit protection with strong guarantees.

And no, since eventually variable products with their potential for higher returns will begin to interest the typical younger insurance-buying market again. In addition, the new death benefit guarantees being offered on variable life products, although generally more expensive than the fixed UL guarantees, may help to entice consumers back to variable products with their higher cash value potential.

Marianne Purushotham, FSA, is a research actuary with LIMRA International,
Windsor, Conn. Her e-mail address is