Variable Questions-And Some Answers

Is Variable Life here to stay?

These are questions many agents-and insurance companies-are asking themselves today. The answer to the first question is a resounding 'Yes!' The second question is not as easy, but if 'dominate' is the questionable factor, 'growth' is certainly not. Variable Life is today's fastest growing permanent policy and will likely remain so for several years.

Variable Life began its first rise in 1985-86, but then suffered a setback with the October 19, 1987 market plunge. The setback was not to be permanent, nor is it likely to occur again, even though another Dow Jones drop of this magnitude is almost certain to happen during the lives of most agents selling this product. The setback to 1987 Variable Life growth was mainly the result of nervous insurance companies applying the brakes to early development plans, using the market adjustment as an excuse to coast on implementing policy design and costly administration of a product whose distribution required a whole new paradigm-a paradigm they had not yet figured out.

In 1987 two insurance companies, Prudential and The Equitable, accounted for more than 45% of the Variable Life market share in the United States. Their sales were slowed only temporarily by the severe market drop.

Other 'career' agent companies continued their slow, but sure, entry into the field while the 'brokerage' companies seemed to enter a permanent idle, uncertain of how to distribute the product. It was a natural for the 'career' carriers who for years had been struggling with agent control, trying through contractual captivity or coercion to rein in the production of agents who had become accustomed to moving more and more business away from their primary company based on contract competitiveness, compensation or service. What better way to control agents' business than with Variable Life whose distribution is dictated by the NASD. The Registered Rep must select a single Broker Dealer through whom all sales must be placed. Though dual registration is possible, it requires the consent of both BDs, which is seldom offered due to the extension of liability with no compensating advantages.

The insurance companies formed their own BDs and offered only one Variable Life (guess whose); their brokers could not place business elsewhere. The companies didn't create the exclusivity rule; they only lived by the rules established by the federal regulation applied to all registered investment sales including Variable Life and Variable Annuities. No wonder these career carriers pushed their Variable policies. It locked in their agents and locked out competitors.

But Variable Life has, and will continue to, succeed for its consumer credibility, not just because it is being promoted for the good of these career agent companies. It will also grow because now the 'brokerage' companies are coming into gear, out of their idle position, having realized that there is an answer to the distribution dilemma. As these new Variable Life 'manufacturers' emerge, the same thing will happen that happened when brokerage companies entered the fixed policy arena: mortality and expense factors will be improved; the consumer will be presented with a better buy.

Why is it so obvious that Variable Life is here to stay? Because it is a policy good for the insurance company and the insurance consumer. Insurance companies who invest in the administrative systems required of the variable product and who solve the new distribution paradigm, avoid investment risk and can concentrate on mortality risk. Historically, insurance companies have profitably managed mortality risks, but have been vulnerable when it comes to investment risks.

The customer comes out ahead because he/she can dictate personalized investment objectives and select investment managers based on their track records rather than relenting to the debt instrument investing of a total portfolio management team employed by insurance companies.

Why is this better? Look at the long-term investment return of two mutual funds with managers of comparable skill. One fund invests strictly in bonds (debt instruments) while the other invests in a combination of bonds and equities. The blended fund outperforms the bond fund without fail on a long-term basis. Short-term investors or those requiring current income would probably do better with bonds, but permanent life insurance seldom falls into these categories.

The principal of 'dollar cost averaging' works especially well with Variable Life since most policies are paid for on an installment basis as opposed to a single premium. And, at least at young ages, the premium installments will be paid over many years, which gives dollar cost averaging time to work for its ultimate advantage.

This simplistic description of the advantages of Variable Life, of course, overlooks a very important consideration: expense loads. Insurance companies and money managers must charge more to administer the complex Variable product line than is required of a fixed policy portfolio. But as technologies improve and more competition enters the field, those expenses will no longer be dictated by two carriers monopolizing 45% of the market. The pencil is being sharpened. Our great free market place is driving costs down and performance up. Variable Life is a serious consideration for everyone with permanent insurance needs.

Becoming licensed to sell Variable Life and Variable Annuities is a necessity for any insurance agent who intends to serve the total needs of a cross-section of markets. Obtaining an NASD Series 6 and 63 registration is essential to provide professional, objective insurance sales recommendations if one is to receive a commission from those recommendations.

The question then becomes how to select a Broker Dealer with whom to affiliate. Remember, the Broker Dealer selected becomes the agent's only source for registered products. He cannot broker an occasional Variable Life sale with another outlet because the selected BD's carrier(s) don't provide acceptable underwriting for an impaired risk; or don't have the money manager a client wants; or don't give attractive guaranteed death benefits; or don't offer contractually guaranteed zero-cost preferred loans.

The same will be true of Variable Annuity accessibility. What the Broker Dealer has is what the agent gets.

Mutual funds will also be a consideration, since the Series 6 and 63 authorize their sale. But with the exception of a few proprietary funds, all BDs offer every major mutual fund and each fund provides direct support for registered reps through wholesalers. So mutual fund availability/support is not a criterion upon which to select a BD.

Payout (compensation) must be considered, but if a rep's primary purpose for becoming NASD licensed is to sell Variable Life/Annuity policies, then the Broker Dealer's Variable policy selection and support services should probably be the rep's major selection criteria.

Signing up with a BD that offers only one Variable Life company will ultimately place the agent in a compromising position that will either cost sales and/or client credibility. No one company will be able to serve all the needs of all clients. So the agent must analyze his client/prospect base and determine if the BD's variable policy selection will properly fill their needs.

Unlike mutual funds which provide wholesalers to support the sales activities of BDs and their reps, most manufacturers of Variable Life insurance do not directly provide such a support network. Instead, the BD is the rep's only resource for sales illustrations; advanced case design; medical and financial underwriting; expertise and status reports. Determining a BD's experience in this support position is therefore very essential.

Until recently, Broker Dealers available to the NASD licensed life insurance agent fell into two general classes. They were either controlled by insurance companies offering only the Variable policies of that insurance company; or independent BDs having selling agreements with more than one insurance company. The company-controlled BD provided professional support services, but no product selection. The independent BDs provided product selection, but didn't know how to spell 'insurance' let alone provide sales and underwriting support. These two BD types still exist-with the same shortcomings. But now there are more choices. Some of the insurance company-controlled BDs have added a few products of carefully selected competitors. More significantly, a few life insurance marketing organizations have formed or purchased BDs. These BDs offer a broad selection of multiple company Variable Life and have the aforementioned support experience.

LifeMark Securities Corp is one such organization, and its local Office of Supervisory Jurisdiction is located at Flynn Associates in Encino, CA.

Some career companies are still holding to the one-company approach and will not allow their agents to transfer to a multiple-company BD and still maintain a career contract for nonregistered policies. When this happens, the agent is faced with a difficult decision: to leave that company as a career representative and become an independent, or to continue with a restricted product line.

These are difficult questions, which can only be answered by each individual agent after deciding how important Variable Life will be to his/her future.