(Depiction of an increasingly rare manner of selling life insurance. Image: Shutterstock.)

How will life insurance be sold in the future? Agent Phil Quinn posed the question at LinkedIn and referred to a recent Wall Street Journal article, “Struggling Life-Insurance Companies Look to Middle-Class for Revival,” to serve as context for discussion. Responses to Quinn’s query suggest that drastic measures may be required to reverse the decline of individual life insurance sales to the middle class and working poor, about which I will make a modest proposal.

Quinn dropped his question fairly casually, but it floated like blood in the water and quickly became drew a frenzy of (life insurance agent) sharks to the scene — none of whom showed any sign of bothering to read the WSJ article itself. Their unanimous answer, therefore, was: face-to-face, of course! A pity, because the article contained a few facts that might occasion a modicum of concern about the evergreen relevancy of face-to-face life insurance sales.

First let’s take a look at some fundamental assumptions of Quinn and his commentators:

• Life insurance is not a “commodity — as is everything else in Walmart. Life insurance is a spoke in the wheel of life.” Not a commodity? Really? Of course it is, but what’s meant here is that it is not something that should be bought — or sold, for that matter — on price alone. Fair enough.
• “Face to face is the only way to effectively initiate the relationship between the clients and agent.” Uh, yeah, but who said there must be such a relationship, or that every other mode of transaction must be somehow invalid?

More on that later, but first, here are a couple of facts our agents missed in the WSJ article:

• Industry-wide sales of life insurance are down 45% since the mid-1980s. About 30% of American households have no life insurance of any kind — meaning not even non-portable employer-provided or group policies — a decline of 19% from 30 years ago.
• Households with average annual income of $50,477 need $166,000 more life insurance than they have, even after counting other financial assets and Social Security survivor benefits they may have.

Here are some additional facts from other sources:

• The number of affiliated (“captive” or near-captive) insurance agents has shrunk from ~244,000 in 1983 to ~174,000 in 2008. (I don’t have current numbers but all parties agree that the slide has continued apace. See next point, below.) Independent agent numbers are similarly down, in this case to ~149,200 from ~163,400, from 2007 to 2010.
• The average retention rate of new agents over their first four years is 15%; that is to say, 85% of new agents fail out of the business or are fired within their first four years.

A Correlation Only the Blind Could Miss

Let’s take a short break to note the obvious parallel between the declining ownership of individual life insurance and the declining number of life insurance agents. There is a correlation here that only the blind can miss: And thus we have what has become the magic bullet for the remaining dedicated captive agent and self-identified life insurance companies: More Agents! (Indeed, at my former employer, the sole Agency strategy is summed up in three words: Recruit! Recruit! Recruit!)

However, correlation is not causation, as the dozen or so agency companies have so hopefully convinced themselves. Unfortunately, there are other factors involved in the declining individual ownership of life insurance:

• Of all affiliated (i.e., captive career) agents, 83% earn from less than $49,999 to less than $15,000 in their second year. (You can see why so few guys and gals ever see their fifth year in the biz! There’s a lot of money in this “career,” but only for a few.)

There are at least five other correlations directly relevant to this discussion: the rise, respectively, in 1) mutual fund sales; 2) individual ownership of stocks and bonds ; 3) variable annuity sales; 4) contributions to individual 401(k), IRAs, and 529 plans; and 5) “payments” of the Tax on Mathematical Illiteracy, a.k.a. Lotteries. Americans have been putting less and less of their disposable income into life insurance policies and more and more of it into investment products (and other forms of gambling). Life insurance, as every life insurance agent and life insurance company will proudly (and perversely) tell you, is “sold, not bought.” Investments and lotteries, however, are, clearly, “bought, not sold.” We’ll see why, below.

• Oh, and that disposable income that pays for life insurance and investments? In 2005, the median income of American households was $51,739. In 2010, median income was $49,445. So you begin to see more clearly why life insurance must be increasingly “sold,” and investments — and lotteries and flat-screen TVs, for that matter — are eagerly “bought.”)
• And what of the life insurance companies themselves? “When I came into the business in 1974 as an agent, there were in excess of 50 companies that religiously hired and trained new agents each year,” says Insphere President Phillip Hildebrand, a former New York Life [Agency] executive. “Now there are roughly just a dozen…” Which just points to:
• Demutualization. MetLife, Prudential, Equitable, John Hancock, MONY, and Principal, just to mention the most well-known, have all demutualized over the past three decades. As those companies became public, among the first things they did was jettison their affiliated agents, to greater or lesser degree, and farm out, or attempt to farm out, life insurance sales to securities brokers and independent financial advisors. Hancock (in)famously told its agents, You can prospect in the Middle Market if you wish; just don’t expect any support whatsoever from us. Then the demutualized companies either bought international companies to diversify their revenues and earnings or, as in case of Hancock and Equitable, sold themselves to international buyers eager for U.S. business.

A Bright Spot amid the Darkness

Now, there is one big, really big, bright spot here, and it’s largely although not exclusively correlated to this abandonment of the tradition career agency sales force and the concomitant farming out of life sales to independent brokers and advisors. These guys and gals tend to have mostly or exclusively well-to-do, affluent clients, and life insurance turns out to be an especially attractive product to them, one they are eager to buy for its 1) tax free death benefits and 2) tax free “inside” (investment) “build-up.”

• Thus, families in the bottom 50% of net worth percentiles — that’s a net worth of $126,000 or less — own a mere 6.5% of the tax-free build-up of life insurance policies. (For those families mentioned earlier with average disposable incomes of $49,445, their share is, obviously, minuscule, if not “less than zero,” as one wag put it.) Not at all minuscule is the amount of tax free inside build-up owned by the top 50 to 90 of net worth percentiles; it’s 38.5%. Oh, and the top 10 percentiles? The top 10% owns 55.1% of tax free inside build-up.

As you can see, the problem of declining life sales in the U.S. is a mite more complicated than a declining agency sales force. In fact, I think those who propose that the latter causes the former should rightly be challenged with the obverse contention, that the declining sales force — said otherwise, the growing un-attractiveness of the “life insurance career” — may be caused by, or at least exacerbated by, the unwillingness/ inability of the career agent to sell to working Americans. We have here a nice instance of the Pareto Principle in action, 80% of career agents chasing the 20% of wealthy America — or perhaps it’s closer to 90/10.

Sales of $20 million whole life and universal life policies to the wealthy, whether for estate planning or business continuity purposes, are doing just fine. Sales of “cheap term insurance” — for final expenses (a coffin and a funeral); for income replacement in case of death; for paying off the mortgage in case of the same — by career agents — not so much: Career agents simply cannot make a comfortable living — especially if they are part of the lucky (and, admittedly and admirably hardworking) 15% who manage to survive through Year Four — selling smallish term policies, with mathematically small commissions, to the middle market. The life companies certainly understand this math and, to protect their considerable investment in newly recruited agents — which runs anywhere from $100,000 to $150,000 over those first years — actively discourage prospecting in this, consequently, more-and-more uninsured/underinsured market. (Recall the directive given by Hancock to its career sales force: Go ahead and sell here if you wish, just don’t look to us if you go broke in the process.)

• Thus, 60% of middle market households have not been approached by a life agent in the past two years; a whopping 80% do not have a personal life insurance agent and never have had one. However, despite their declining disposable income, as noted above, working Americans recognize, value, trust, and want life insurance: 73% identify life insurance as “a necessity you cannot do without, versus an extra that you can do without.” (Life insurance for them ranks behind only retirement savings at 90% and Health Insurance at 96% as things you can’t do without.) And they also prefer to buy “in person” (67%). Just as strongly as career agents are convinced that life insurance should be sold face-to-face, so do (or would) the people who make up the middle market prefer to buy it that way.

So here is where the declining life sales force does in fact re-enter the picture, or at least an aspect of it: There simply are not enough career agents, and will not be enough career agents in the foreseeable future, who are willing and able to make a living selling to the middle market. Ergo, in the absence of some solution(s) other than career agents selling face-to-face to the middle market, the people who fall into that traunch are effectively doomed to become ever-more increasingly uninsured or underinsured.

Or life insurance companies could offer attractive alternatives to face-to-face buying opportunities… That, at least, is what MetLife is attempting with its Walmart experiment and also with its TV commercials touting final expense insurance via the telephone. It’s what Prudential is trying with Term Life sales in smaller regional banks. It’s what New York Life is attempting in its squeamish, virtually hidden, direct online sales channel. We needn’t here go into other non-traditional life insurance purchase opportunities based on the forgotten concepts of mutuality and cooperation.

As my colleague and friend, Terry Golesworthy (@TerryCRG), brilliantly posed the question: Do life insurance companies really want to sell life insurance? The answer is an unequivocal Yes and No. Yes, of course, because life insurance is the most profitable product that life insurance companies sell. In many life companies, it is the one product whose revenues and profits effectively subsidize the manufacture, marketing, and sales of all the other products available for agents, brokers, TPAs, and advisors.

But, of course, the answer is also No, because it’s just too damned expensive to spend to recruit, recruit, recruit — and then spend, spend, spend on the continual training and support of career agents who, by definition, cannot make a living except by targeting their marketing and sales efforts to the affluent.

And let’s be clear that this is not a matter of product, as such. The myth that term life is a “loss leader” useful only to prodding an eventual conversion to permanent insurance, is just that, a myth. Term life is actuarially-manufactured to be quite profitable to the company. It’s just not (that) profitable to the career agent.

So, maybe Terry’s question should be reformulated: Do life insurance companies really still want a career agency sales force? Unfortunately, however, the answer is the same unequivocal Yes and No. Yes, because this is what life insurance companies know best, i.e., how to recruit, train, and support career agents selling above all else life insurance, and above all else within that category, permanent life insurance. No — we’ve already answered this — because the model is God-awful expensive and, as we’ve seen, it’s broken and already been abandoned by the largest portion of the life insurance industry. Which leaves a lot of recruiting and, yes, sales opportunity to Northwestern Mutual, MassMutual, New York Life and, perhaps, Mr. Hildebrand’s Insphere, but is this anything but another niche strategy – albeit a very lucrative one for that chosen few?

Life Insurance Becoming a Niche Market

This is prognosticating, of course — although doing do on the basis of the only available reliable statistics — that life insurance is increasingly becoming, in itself, essentially, a niche market. Now even presuming we no longer maintain even a speck of concern for the millions of Americans apparently doomed to remain uninsured or underinsured, this still presents a real problem, not least of all to the life industry itself. Because what makes good ol’ Whole Life so attractive to that 20%, 10% , or 1% niche of the wealthy is its tax privileges. Permanent life insurance is a long-ago approved tax shelter, but a tax shelter so approved because it was presumed to be a social (and moral) good, and a social and moral good preeminently for the Middle Class and the Working Poor.

So says, unashamedly, the industry: “Life insurance needs to be free from income taxes… because of its special social function. It keeps survivors from a life of penury when a chief breadwinner dies.” The coup de grâce: “We protect widows and orphans.”

Oh, yeah? Really? That’s what those $20 million Survivorship Variable Universal Life policies are for?

I suppose I’d be thought a really brilliant guy if I were pointing to all this as a radically new development in our society and for the industry. Alas for my ego, no, this is not the case. (Nor is my hair on fire, as one friend suggested.) Let’s go back to 2003, 2004 when the Bush administration was busily looking for ways to ways to replenish a massive shortfall and to “ramp up revenue” to help pay for its expensive foreign adventures. Could Lawmakers perhaps be revisiting the life insurance industry’s tax privileges? Not coincidentally, it was just during that time that the industry’s main lobbying body, the ACLI, formed a Task Force for the Future to study the reasons for, and possible solutions to, the industry’s declining number of career agents, the increasing number of uninsured and underinsured Americans, and the painful reality that permanent life insurance had “become a tax shelter for the very rich.” Charlie Smith, Chairman of that Task Force, continued on to say: “If the industry no longer has a significant presence on Main Street, it loses its political clout in Congress and can’t defend the tax benefits.” (My italics.)

Okay, we needn’t belabor the point, but it’s now 2014, and what in the situation that the Task Force took upon itself to study over a decade ago, has changed, or rather changed for the better? There is no other answer than: Nothing. All hail MetLife’s in-store experiments, Pru’s offering to banks, New York Life’s direct online sales channel, and all the yet-to-take-off nontraditional challenges, but the answer remains: Nothing.

So I suggest a Modest Proposal. This is simply the latest of what must be thousands of such since Jonathan Swift gave us his Modest Proposal for Preventing the Children of Poor People From Being a Burthen to Their Parents or Country, and for Making Them Beneficial to the Publick (1729). Responding to widespread poverty in Ireland, Swift suggested that the poor might alleviate their parlous condition by selling their children, as food, to the well-to-do. He even provided preparation suggestions: “A young healthy child well nursed, is, at a year old, a most delicious nourishing and wholesome food, whether stewed, roasted, baked, or boiled; and I make no doubt that it will equally serve in a fricassee, or a ragout.”

My Proposal is much less bloody but still quite cannibalistic: Implore Congress to strip life insurance death benefits and inside investment build-up of their federal tax free status.

More precisely, I suggest we petition Congress to threaten the industry with a repeal of its most prominent tax shelters if it does not show demonstrable progress within the next, say, five years, in reversing the showering of those lucrative tax benefits on the well-to-do at the effective expense of the American middle class and the working poor. Justification for such a threat is, I would argue, no longer controversial: The industry itself has effectively admitted that, in the face of the now well-established and increasing non-provision of life insurance coverage to the mass of non-affluent Americans, it can no longer in good conscience defend the social and moral benefits originally imputed to its products. Grandfather in existing policies, of course, as well as any new policies issued after the official declaration but if, after five years, no clear and obvious and significant progress has been made in insuring the middle class and the working poor, kill the shelters.

Of course, if the threat is realized and the tax benefits cancelled, new revenue projections for the government would have to be dramatically lowered to some fraction of the billions wanted and expected, as the wealthy abandon the dilapidated tax shelters. The life insurance companies would take a big hit, to be sure, but actually they’ve been living high on the hog for a long time now, they’re well-capitalized with huge surpluses, so while many would suffer in their profitability none would necessarily fail. And life insurance would also become at least somewhat less attractive to the non-wealthy as well. But, hey, you can’t make an omelet without breaking some eggs, right? Besides, nobody is doing much to sell to the non-wealthy, anyway, which is what got us in this predicament to begin with!

Okay, it’s not likely that even our current Congress would jump at this Modest Proposal, so let me suggest an even more modest but much more realistic proposal, one addressed to the industry itself rather than Congress: Pretend that you are under threat of losing your vaunted and lucrative tax privileges: What could you do to prevent the threat from being realized? What could you do, in other words, to dramatically increase life insurance coverage of the 80% of Americans who have only 20% of its wealth?

• Different kinds of kiosks in stores other than Walmart?
• Direct online sales designed for actual interested buyers rather than for the designing sellers? (What’s wrong with our app? It’s just the way we want it!)
• New term products? New permanent life products? New hybrid products?
• New agent compensation schemes that (somehow) make it worthwhile for the mass of agents to sell?
• Creation of new mutual buying/selling, collaborative schemes?
• Collaboration with and support of mutual schemes like Friendsurance and freelancers Union?
• Leveraging your Social Media base that you’ve spend time and attention and money to build for some purpose other than likes and comments?

When I challenged the agents who had, in my opinion, simple-mindedly and in unison stood by the creed of “face-to-face” selling as if there were no problems with that today and surely no valid substitutes for it, I also freely admitted that I didn’t have the Grand Solution. Almost certainly there is no Grand Solution and it appears there is as yet no Napster on the horizon ready to disrupt the life insurance industry in its foundations, as Napster in fact pointed the way for others to disrupt the music industry. But one of the foundations of this industry is its tax privileges and, to the extent that those privileges are abused by arrogating to the wealthy what was meant for the non-wealthy, they might well deserve to be revoked. I’d like to think, however, that if we all acted as if this were shortly to be the case, we might well come up with some solutions that would re-justify those privileges and revive the moral and social imperative of life insurance.

To that end, please let’s conduct this little cannibalistic thought-experiment: How can we cannibalize our own industry so that others don’t cannibalize us first?

…

Note on Sources: For the interested, sources for the facts and stats cited here are: Three WSJ articles by Leslie Scism, “Shift to Wealthier Clientele Puts Life Insurers in a Bind“; “A Hot Job for Hard Times: The Life-Insurance Agent“; “Struggling Life-Insurance Companies Look to Middle-Class for Revival,” Peter Schneider, “Producer Licensing: It is Time to Innovate,” ACLI Annual Conference, 2013; Robert Baranoff, “Find Your Niche in the Middle Market,” LIMRA, 2011; PwC, Life insurance 2020: Competing for a Future,http://www.pwc.com/insurance, 2012.