Whole Life Insurance Complex Drivers behind the Growth
July  2017

Whole life insurance has logged steady growth since the Great Depression, providing life insurers a reliable source of income stability and growth. Moreover, following the 2008 financial crisis, whole life began to experience heftier growth rates.

In 2016, the whole life (WL) market recorded another strong year of growth, with annualized premiums up 3% and new face amount issued increasing 7%, according to LIMRA. This was the 12th consecutive quarter of positive growth for WL, the longest growth streak in the survey’s history dating back to the 1980s.

 Figure 1 - U.S. Individual Life Sales Trend by Product and By Annualized Premium ($000s) 2006 - 2016


The Question Now: Will this Trend Continue?

Experts believe many families favor WL today for safety and guaranteed annual dividends. The low interest rate environment is also cited as a driver of the growth. If that is correct, as the economy goes back to a growth phase and interest rates start to climb which we are seeing now, will WL performance return to past eras of slow and steady growth? Should life insurance companies shift strategies in anticipation of a changing market environment?

Maybe not. The recent growth of WL may contain more complex factors than in traditional product cycles. This trend may indicate a longer-lasting fundamental market shift that favors continued growth in WL sales.

New Growth Factors

A number of factors beyond the low interest rate environment are contributing to the growth in WL.

WL Is Increasingly Popular as an Investment and Supplemental Retirement Income Tool: WL has always been popular for its protection and wealth transfer benefits. While these remain the primary reasons for buying WL, people now see additional benefits. For the first time, supplemental retirement income was given as a top five reason for purchasing WL, according to a 2017 LIMRA survey.

Guaranteed investment returns in the capital market overall remain on the low side. In this environment, insurers can offer returns that are relatively attractive within a tax favorable vehicle. Many insurers have higher portfolio rates backing the return on their products, enabling them to offer an insurance buy that is appealing to consumers. This is especially true for limited payment WL products such as 10-Pay WL, which offers shorter premium periods and therefore better accumulation potential.

Shift in Buyer Demographics: In the past decade, the buyer demographics of WL shifted towards the senior generation, especially to Age 65 and above. In 2007, 21% of WL buyers were 65 years old and above. In 2015, this percentage increased to 30%. Why is this age group attracted to WL products?

It could be that affluent seniors find WL a good option to include in a retirement plan, both to protect income during economic downturns and/or to supplement traditional plans when they have maxed out their contribution level. In addition, concerns over rising healthcare costs and a fear of becoming a financial and/or physical burden on adult children may help explain the growth of WL combination products, especially with critical illness and long-term care (LTC), as discussed next.

Combination Products: Traditionally, WL products offer coverage options, such as juvenile and final expense. Additional varieties have gained popularity in recent years, particularly Critical Illness (CI) and LTC accelerated benefit riders. WL-CI products have been especially increasing in popularity, recording 16% growth in 2017 compared to 2% growth in LTC riders, according to the LIMRA study. The study also shows that WL accounts for 32% of total combo products in policy counts, 22% in premiums and 22% in face amount. Even though still smaller than UL combo products as a percent of products sold, WL combo products saw the fastest growth (+33% in premiums in 2016).

Simplified Issue: Although still small in proportion and not as common as simplified-issue term life, more insurers are selling simplified issue WL products, contributing to the overall growth of the product. Simplified WL is sold primarily through independent or multiline producers, in contrast to traditional WL that is mainly sold by tied agents. This means that simplified WL rarely interferes with sales through more traditional product channels, leading to a positive long-term future growth perspective.

Innovation and Data Analytics: Big data, predictive analytics, digital technologies, and other innovations are enabling faster and more efficient underwriting, better pricing, and innovative new products. This trend applies to life products overall including WL.

Figure 2 - Age Group Distribution of Whole Life Policy Sales 2007 - 2015


Changing Consumer Preference and Marketing: Changes in the societal structure and consumer sentiment are also potential drivers for stronger WL sales. A 2015 survey by PRRI shows that growing numbers in the U.S. population are concerned about health care, terrorism and jobs. In addition, many Americans continue to be anxious about the economy, believing the country is still in a recession and maintaining a pessimistic outlook on the future despite recent economic growth. These fear factors may be driving their sense of need for proactive and personal protection. Additionally, many Americans believe that the younger generation is not financially outperforming and/or outliving parents and average households are not accruing income and wealth. This may motivate parents to purchase WL insurance in order to leave death benefit proceeds to adult children.

Life insurers appear to be effectively implementing a more customer-centric and cross-industry sales approach to reach their target markets. As a result, they are offering WL products that are simpler in design and more flexible compared to the past.

The Future of WL Sales

How long will this strong WL growth period continue? It depends on the various factors examined above, especially interest rate and market trends. If interest rates move up quickly, this streak may come to an end. The recent government statistics, however, appear to indicate that interest rates will remain low. The U.S. Fed Funds Rate is projected to trend around 2.25% in 2020. It is therefore possible that WL sales will continue to grow unless unpredicted and influential incidents occur.

Impact on Life Insurers’ Capital Strength and Reinsurance Needs

What will be the future impact of the continuing WL sales growth on insurers? Increased WL premium revenues will boost top-line revenue, but result in increased reserve strain and acquisition costs which may pose a problem. Carriers’ capital management strategies could include seeking ways to free up capital if necessary. Inforce transactions that release reserves on existing blocks, as well as financing options using reinsurance as a base may become increasingly attractive. Also, large term writers that offer conversion provisions may see higher conversion rates, especially as products reach the end of the level-premium period. While this may result in greater retention and sustained revenue growth, anti-selection risk – and the pricing implications that these options carry – may need to be carefully evaluated.

The long-term growth of WL sales is driven by multiple factors, which tell us a lot about the changing dynamics surrounding our industry. It is imperative that life insurers implement their own product and risk management strategies to maximize the opportunities while minimizing the risk associated with it.