Traditional Life Insurance Regains Appeal

Policy returns don't look so bad when interest rates are low and safety is king.

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Long derided for providing low returns, traditional whole life insurance has weathered the recent economic storm better than many other insurance products. And while its sales trail those of its more sophisticated cousin, universal life, the safety and certainty of whole life insurance have appealed to increasingly risk averse consumers.

[ See America's Best Affordable Places to Retire.] I'm well aware of the long-standing view that it's better to buy term insurance and invest the difference in costs between term and a cash-value insurance product. Traditionally, that cash value product was whole life insurance. These policies are designed to be held until death, and have been heavily used in estate planning and asset preservation (life insurance proceeds generally are exempt from income taxes).

Term insurance, by contrast, is much cheaper and provides no cash build-up. It is designed to lapse when you no longer need insurance protection, usually after 10, 15, or 20 years. Parents of young children, in particular, are advised to get large term policies so their children will be financially protected.

To make the cash-value products more appealing, the life insurance industry began about 30 years ago to offer fancier cash-value products such as universal life (UL) insurance. It provides flexibility in how much money you want to put into the product both for its insurance component and its cash-accumulation features. Variable universal life (VUL) products offer the additional appeal of being able to put funds into the policy that can be invested in higher-return investments, usually via mutual funds.

Term life supporters are generally unswayed by these other products. Mostly, some argue, providing a multitude of product features just muddies the waters and makes it harder for consumers to get a clear view of their underlying choices. The more complex products may have extensive and often confusing product illustrations and a numbing array of choices. But when you strip them away, critics say, you're left with a very expensive form of life insurance and modest cash-value appreciation at best. Buy tern and invest the difference remains their mantra.

[See Annuity Buyers Seek Safety, Risk Guarantees.]

The only problem, of course, is that many consumers like the forced savings component of conservative whole life policies. And after getting hammered for two years by a recession and plummeting stock and housing values, there has been an understandable flight to safety. This means whole life insurance and it means, in many cases, whole life policies sold by the most financially sound life insurers. These companies have tended to be mutually owned by their policyholders and not insurers with publicly traded stock.

The quarterly sales changes for all life insurance, which are tracked by the LIMRA research firm, have been abysmal. Sales of all individual life insurance products plunged 26 percent in last year's first quarter and continued their slide throughout the year, falling 20 percent in the second quarter, 12 percent in the third quarter, and 5 percent in the fourth quarter. Sales finally bounced back by rising 10 percent in this year's first quarter. But that change was from such a low base, LIMRA noted, that it only brought sales back to where they had been in 2003.

"The last couple of years have been pretty challenging for life insurers," said LIMRA's Karen Terry, a research manager. And the fancier UL and VUL products really hit the skids last year. For each of the four quarters beginning with the first three months of 2009, the quarter-over-quarter percentage declines for UL were -32, -27, -15, and -3. For VUL, the numbers were a disastrous -61, -49, -52, and -36.

Term sales, by the way, have been about flat during the past year. But our old boring friend, whole life insurance, has been a relative star. Sales were off 5 percent and 3 percent in last year's first two quarters, but rose by 12 percent in each of the third and fourth quarter and climbed by 15 percent in this year's first quarter.

"What we did see last year was a return to the traditional products," Terry said. "These have been very good times for the mutual insurers." In part, that's because other insurers have stopped selling whole life but it's also because of the perceived financial soundness of the mutual companies.

[See Good Health Raises Lifetime Care Costs.]