Term Insurance: The Cornerstone of Life Cycle Selling

In the original equation, term insurance was designed to support the life insurance industry’s carrier agency force. Whole life insurance was to remain the flagship product, the only choice when the best customer could afford to do everything right. Only with whole life insurance could a person build a savings account while providing family protection right up to retirement.

In the 1950s, after World War II, the industry’s plan was that a life insurance agent could use term insurance to capture the relationship with the medical intern, the beginning attorney, the college graduate entering business. As the client graduated to being a successful law partner, a medical practitioner with a substantial practice or a CEO of a profitable company, the term insurance would be converted to whole life. This is still the way most state life insurance licensing exams test the distinction between term and whole life insurance. The situation was a win-win for everyone – the client, the agent and the insurance company.

Everyone in the community would know who the life insurance agent was. No one could be more counted upon to have attended your father’s funeral, to be the pillar of the Lions and Rotary Clubs, to be the biggest contributor to the Little League, to be a moving force on the Church Council. The life insurance agent was intended to be with you at the start of your career, possibly even while you were yet in college, there to start you on the road to financial success with your first term policy, a policy which ultimately as your career took off would be converted to whole life – and a much more substantial commission with renewals.

Fifty years ago, life cycles financial planning did not have to be taught in continuing education classes or as part of CLU education. The logic was simply built into the expected progression from term insurance to more permanent coverage. The agent’s business grew as the career and family of the client expanded and matured. Everyone had a defined career path that began with the simple and easy-to-pay-for term insurance, progressing into the more complex and rewarding permanent policy. At every step of a person’s life development, from cradle to grave, the life insurance agent was there to provide the family the next financial solution.

Along the way, however, something happened. This harmonious partnership founded on the rock certainty of entry-level term insurance turned sour. Sometime in the 1960s the “Term Wars” began. The life insurance agent became a battle casualty as life insurance companies began to put some tentative space advertisements in the newspaper for term insurance sold directly.

Term Wars Begin

Life insurance companies in the 1970s and 80s went to school studying their own successful agents. Insurance agents struggling to make a living discovered that selling low cost term coverage had a fairly deep market in a public averse to buying any life insurance. Rather than go through abstruse explanations of cash value buildup and countless diagrams, agents found it easier to cut to the chase and sell pure protection. Customers found term insurance easy to understand and more palatable to buy. “Buy Term and Invest the Difference” was a mantra that awaited the creative marketing talent of the A.L. Williams organization to develop as a competitive threat.

Still, agents doubted life insurance direct marketing would work. “Life insurance is sold, not bought,” had been the dictum for decades. Then, to the surprise of many industry pundits, the first tentative newspaper ads promoting low cost term insurance began to produce applications by phone and mail, along with checks. Because term insurance so exactly met the average person's intuitive understanding of what life insurance ought to be, the product could be purchased without the intervention of a human being. By the 1980s, a few life insurance actuaries dared dream their ultimate dream - eliminate the agent altogether and wipe out the single major cost in the insurance equation. With acquisition costs pushed closer toward zero, huge industry profits loomed on the horizon.

The print advertisement direct writers evolved into television marketers. Then, in the late 1990s, with the bloom of the Internet, websites appeared promoting term insurance. The theme has remained the same - get price quotes, buy term life insurance and save costly premiums that otherwise would go into permanent life insurance.

Who was the casualty of the Great Term Wars? John Q. Agent, the bright young college graduate recruited by the reputable mutual company to work a professional market, such as physicians or attorneys. The plan was to sell term insurance to interns and law students, beginning a relationship that could be upgraded to whole life as the client’s career expanded. Just as the agent was proceeding to reap the rewards from this market, the physicians and attorneys became a target for new competitors, stock brokerage firms and financial advisors offering higher rates of return in generally aggressive investment markets. The willing accomplice was the life insurance company ready to provide term coverage through retirement years, aggressively priced so as to free dollars for market investment what otherwise would have been earmarked to pay the premiums of permanent life insurance coverage.

The other shoe dropped in the late 1980s and early 1990s when banks realized that the crumbling Glass-Steagall Act would not keep them from selling life insurance for much longer. Expanding on Savings Bank Life, which had long been popular in states such as New York and New Jersey, banks realized that they could aggressively market term insurance to their customer base. In-branch sales efforts were supplemented by wave after wave of direct mail term insurance offerings to the bank’s credit card base. Retail bank customers anxious to protect a variety of consumer debt ranging from auto loans to mortgages could purchase credit term coverage painlessly, without medical exams, charging premiums to credit cards or paying through direct debits from checking accounts. With the strong erosion of the consumer-protection and mortgage term insurance markets resulting from aggressive bank marketing of term insurance, the traditional insurance agent was again left out in the cold.

Price Competition Hits Term Wars Hard

Term Wars were not, however, a run-away victory for direct marketers and banks. Price cutting was inevitable, along with the resultant profit squeeze that made initial actuarial calculations optimistic if not rosy.

Different companies carved out particular niches - some preferring the under 50 market, others offering better rates to substandard cases or to smokers. Direct marketers of term insurance began finding it difficult or impossible to offer only one carrier’s product. If the goal was to offer the prospect the cheapest price term every time, more than one company was required. This company would be best if the prospect were a male non-smoker under age 40. A different company would be required if the prospect were a male smoker over age 50. Still another company would be needed if the prospect had health problems. Then, too, some carriers were tough on cancer risk, others on heart disease. A few carriers accepted hazardous sports, such as scuba diving, others were willing to underwrite prospects at reasonable rates even if they had a passion for skydiving.

Nor was prospecting by direct marketing methodology always certain. Consumers became savvy and began hitting direct marketers just to collect and compare price quotes, looking for the cheapest offering to suit their particular age, life situation and need. In response, direct marketers began focusing not just on offering quotes but on capturing leads. Print ads began publishing 800-number telephone lines for prospects to call. Ad copy started emphasizing how every prospect needed a tailor-made illustration in order to have the best quote for dozens of carriers available in the market. The direct marketing game became one of capturing the prospect’s name and contact information so an actual person could begin pursuing the lead over the phone. Some direct marketers came full circle and began referring leads back to life agents in the field, acknowledging even if through the back door that in-person sales efforts had merit.

As the Term Wars progressed, new entrants flooded the direct marketing game. Several name-recognized carriers decided not to be left behind by their more aggressive brethren. Newly formed marketing organizations calculated that getting carrier appointments and writing spaces ads presented very low entry thresholds. Competition became cutthroat. Every newspaper, it seemed, carried five or six different space ads warning the customer not to overpay for term insurance. Internet marketing evolved to the point where active Internet users began receiving spam e-mails from vaguely identified marketers offering to provide term insurance quotes to anyone willing to respond. As carriers and marketers competed for the finite number of genuine leads available, the allure of going direct to the term insurance prospect began to become much less appealing.

Refund Term:
Agents Back to the Attack

Then a relatively simple idea began to get agents and brokers back to the attack - Refund Term. The concept was first developed in mortgage term policies where for the price of a refund rider, a policy offered to pay back at the end of a specified term all premiums paid-in minus the cost of any benefits paid-out. The client was promised what amounted to a “no cost” insurance plan. Premium expense would be returned to the buyer one way or the other – either the policy would pay stated benefits or the premiums paid would be refunded to the policy owner. The customer who paid premiums simply “couldn’t lose.”

The Refund Term approach has some additional benefits. Refund Term allows the life insurance company to charge slightly higher premiums, rates more favorable to the carrier than cutthroat term. Many consumers, it turns out, will tolerate slightly higher term rates if, in the final analysis, the money paid out in premiums is certain to be returned either in death benefits or in the form of premium refund. Refund Term premiums tend to be about 25% higher than low-cost term rates in a 30-year level contract.

Refund Term has been designed to pay a commission more resembling whole life commission structures than level term commissions. Carriers rethinking the term insurance market in light of Refund Term concepts have rediscovered selling principles that had been in vogue a century earlier. Carrier agents armed with Refund Term once again are armed with an entry-level product to use in developing an initial relationship with a prospect, setting the stage to cross-sell as the client advances into additional life cycle needs. Agents have a new story to illustrate – pay premiums with the guarantee that all premiums (minus benefits paid) will be refunded at the end of the term.

Refund Term can be combined with other products – such as annuities and 401(k) plans – provides new dimensions to “Plan Completion” design. Refund Term continues to play the traditional life insurance in retirement planning – providing a guaranteed maturity value that completes the goal if the prospect dies too early. Refund Term, however, adds a new dimension to retirement planning. If the prospect “lives too long,” the other pole of the retirement planning dilemma, all premiums paid are refunded, enhancing yields at a specified time in the future – 10 years hence, 20 years hence or 30 years hence.

Those who predicted that the Term Wars would signal a death knell for life insurance agents may have spoken too soon. Even at the beginning of a product introduction cycle, Refund Term promises to be a resilient competitive tool – one adapted to providing even the customer who wants the “cheapest price” something additional to consider. Think about it – which product is really cheaper? Low-cost term insurance which provides no refund of premium whatsoever or somewhat more expensive Refund Term which offers 100% return of premium?

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SIDEBAR #1
Term Insurance Direct Marketing on the Internet:
Three Different Approaches

Many websites have been created with the primary purpose of marketing term insurance directly to the buying browser. The following three sites are a non-scientific sampling illustrating very different approaches to marketing term insurance on the Internet.

InsWeb (www.insweb.com)
Multiple Insurance Lines, 800-Number Support

Insure Rate offers a selection of term insurance with quotes generated after filling in basic information including age, date of birth, amount of coverage desired and term (number of years) for coverage sought. A basic health insurance questionnaire screens big picture health issues. Comparative term insurance quotes are generated for a number of life insurance companies, including MONY, Prudential Financial, North American, Zurich Life, John Hancock and The Midland. InsWeb also features auto and health insurance. In addition to these fairly traditional lines of insurance, InsWeb also offers pet insurance. The InsWeb site provides analytic tools to assist prospects determine their auto, health and term life insurance needs. A “Learning Center” provides tips on such questions as “Are Your Tires Safe” and “Cell Phones and Driving – A Deadly Mix?” Telephone support is advertised on the site. When getting quotes, the site offers to remember your profile information if you register, thus capturing leads. InsWeb’s marketing strategy is to sell insurance directly, without the intervention of licensed insurance agents available in the field to contact prospects.

Select Quote (www.selectquote.com)
Term Insurance Only, Field Agent Support

Select Quote by contrast utilizes a single-focused approach - only term life insurance is offered. The site provides no calculators, no multi-product line and no pet insurance, just term life insurance. Again, an 800-telephone number is provided. Prospects are encouraged to call live operators to obtain quotes and, in the process, provide live lead information. The participating life insurance companies include AIG, Protective, Travelers, First Colony, American Mayflower, Zurich Kemper, First Penn-Pacific, CNA, North American Company, Banner Life, The Midland, William Penn and United of Omaha. All term insurance offered on the site is subject to medical underwriting. Unlike InsWeb, Select Quote refers all leads to licensed agents for follow-up, departing from the strict “no agent” methodology of term insurance direct marketing. The primary appeal, however, remains the cost-savings that may result from aggressive comparative shopping.

Quotesmith.com (www.quotesmith.com)
Lowest Cost Term Insurance Price Guarantees

Quotesmith represents over 300 insurance companies in a wide selection of insurance coverages. In addition to term life, Quotesmith’s menu includes dental insurance, medicare supplement, long-term care, annuities, auto insurance and disability coverage. Quotesmith’s less mainstream insurance offerings include coverage for boats, RVs, motorcycles and international travel. Quotesmith distinguishes itself by offering $500 guarantee that the term life prices shown in the Quotesmith.com price comparison report contains the lowest available premiums (within $2.00 to account for rounding) in America. Anyone who can find a lower-priced individual term life policy of equal coverage (and equal guarantees) from any company in America rated “A+++” (Superior) or better by A.M. Best Company is promised to receive an overnight check for $500. Quotesmith also provides a guarantee that its price comparison reports contain accurate premium quotes for all companies with whom Quotesmith maintains a click-through agreement. Anyone who can find an insurance-company produced proposal of the same date and coverage that shows the Quotesmith.com quote to be erroneous will receive an overnight check for $500. Quotesmith does not provide lead referrals to licensed life agents in the field, but it does publish on its website an 800-number for customer telephone support.

SIDEBAR #2
Refund Term as Mortgage Insurance:
“Buy the House, Get a Check.

Low-cost term insurance has dominated the mortgage market in recent decades, functioning as a specialized category of credit life and frequently sold by banks.

To appreciate the strong alternative Refund Term offers, consider the following example. A 40 year-old male buys a home with an outstanding 25-year mortgage obligation of $100,000 at a 7% rate of interest. He buys a Refund Term product with a $100,000 face value and a level 25-year term. The numbers work as follows:

Over the life of the mortgage, the Refund Term builds an accumulated payment that is 8.8% of the original mortgage amount. This is a nice bonus to receive immediately after making the final mortgage payment. Refund Term protected the mortgage obligation throughout the life of the mortgage at a net cost of $ 0.00.

SIDEBAR #3
Companion Sales:
A Retirement Plan PLUS Refund Term

Selling Refund Term alongside a retirement savings vehicle such as an annuity can be designed to make sure a fixed amount of money is always guaranteed to yield substantially more. In the following example, a person has $100,000 at 60 years of age to invest in a fixed annuity with a projected yield of 5% per year over 20 years. Here the prospect buys a Refund Term policy for $100,000 and withdraws 3% each year to pay the Refund Premium and taxes on the withdrawal. Total coverage (annuity maturity value plus Refund Term death benefit) equals $200,000 from day one – twice the amount invested. At the end of 20 years, the term premium refund added to the accumulated annuity investment is just under $200,000 – even with the loss of the life insurance protection in the 20th year.

The Total Family Benefit in Year 21 reflects the Year 21 Annuity Accumulation Value of $152,965 plus the Refund of $45,500 in term premiums (20 years x $2,275 annual premium). One could argue that the yield would have been greater not buying the Refund Term and allowing the entire original principle to accumulate tax deferred within the annuity. The point here, however, was to have the Total Family Benefit at or near $200,000 from the first day of the plan – a goal greatly facilitated by the dynamics of Refund Term.