Term life and VAs top advisers' Rx list

Sep 11, 2006 @ 12:01 am

By Gary S. Mogel

NEW YORK - The vast majority of financial advisers recommend term life insurance instead of whole life to clients, and those who recommend annuities prefer variable over fixed.

Those were among the findings of the second annual "Use of Insurance Products in Financial Plans" survey, conducted last month by InvestmentNews.

The 115 financial adviser respondents averaged $124 million in client assets under management.

Many advisers apparently have embraced the adage "buy term and invest the difference." About 38% of respondents most often recommended term life to clients, while just 7% most often recommended whole life - comparable to last year's numbers.

Term is more popular than whole life because most clients have only a "temporary" need for coverage, said Keith Newcomb, an hourly rate financial planner and wealth manager with Full Life Financial LLC in Nashville, Tenn.

"Most clients need life insurance to replace earnings prior to accumulating the wealth needed to retire on," he said. "After the kids are grown and college is paid for, their need for the insurance declines."

For wealthier clients with more than $1 million in assets, universal life is popular right now, said Mitchell Smith, a principal of Gaines & Smith Financial Group in Boca Raton, Fla., which manages about $300 million. But for Middle America, term can be a viable option, he added.

There was a three-way tie for the most popular company for placing term life among American International Group Inc. in New York, Protective Life Insurance Co. in Birmingham, Ala., and West Coast Life Insurance Co. in San Francisco, which is owned by Protective.

Advisers indicated that these companies often offer the lowest premiums on the online term life quote comparison websites, which may account in part for their

popularity.

An insurer's financial stability rating trumped price as the main consideration for placing life insurance, and financials have become even more important than they were last year.

This year, 63% said an insurer's financial stability rating was most important, with 28% saying financials. Last year, it was 53% and 34%, respectively.

VAs trump fixed

About a third of the advisers said that they most often recommended variable annuities, while just 6% most often recommended fixed - including equity index - annuities.

"That finding surprises me, because we've found that people have been gravitating toward equity index annuities and away from VAs," said Christopher Casdia, chief operating officer of Raike Financial Group Inc. in Woodstock, Ga. The firm manages about $80 million in client assets.

"Participating in the upside of the stock market but guaranteeing they will not lose their principal is attractive to clients - especially the ones that got burned in the past when the market went down," Mr. Casdia added.

"The rising interest rate environment is favoring variable annuities," Mr. Smith said. "Fixed annuities are paying comparable to money market investments, and indexed annuities have trailed off due to pressure from NASD."

Some broker-dealers don't offer equity index annuities, so those advisers have to look outside and act as general agents and disclose the transaction as an "outside businesses activity," said a financial planner in Virginia, who asked not to be identified.

"For VAs, the advisers can simply go through their broker-dealers with no additional paperwork," the planner said. Despite equity index annuities' reputation as a high-commission product, the commissions paid by most reputable insurers are comparable to the commissions paid on VAs, the planner added.

The Hartford Financial Services Group Inc. in Connecticut was the most popular VA company in the survey; ING U.S. Financial Services in Atlanta was the top fixed-annuity company.

Guarantees were the most important VA feature, according to 40% of the advisers, followed by investment options at 36%.

Just 17% said they viewed VA surrender charges as the most important feature.

"Because of the guarantees added during the last five years, clients can assure themselves of a 5% to 7% compounded annual return even if they don't achieve their asset allocation goals," said Mark Chandik, managing partner of Financial Diligence Partners, a wealth management and life insurance firm in Irvine, Calif.

Variable annuities also offer a "robust allocation to equities," and tax deferral benefits, and are seen by many advisers as an effective way to plan for distribution of income in retirement, he added.

About 70% of the advisers said that regulatory uncertainties and bad publicity hadn't deterred them from recommending variable, fixed or equity index annuities due to recent regulatory uncertainties and bad publicity.

"Annuities can be more expensive to own than other types of investments, and the press has done a good job of pointing that out," Mr. Chandik said.

'Fallen off the map'

Despite recent legislation pushing health savings accounts, only a third of the advisers said that they were recommending that their clients open an account. And the same percentage indicated that regulatory developments weren't going to change their minds about the usefulness of HSAs.

While HSAs can greatly benefit clients who use them primarily as a savings vehicle, they aren't a good fit for clients with chronic health conditions that require consistent monetary outlays, advisers indicated.

"HSAs have fallen off the map completely," Mr. Smith said.

About 58% of the advisers said that increased prices for long-term-care insurance have deterred their clients from purchasing the coverage, about the same as last year, when 62% saw high prices as a deterrent.

John Hancock Life Insurance Co. of Boston was rated in the survey as the top LTC company.

"The LTC market has been commoditized, and consumers have gotten turned off by the pricing." Mr. Smith said.

However, "anyone with a decent net worth wants to self-insure this risk," he said.

"Clients tell me that by paying the LTC premium, they are giving up one major vacation per year," Mr. Newcomb said.

"It's not hard to convince clients of the need for LTC when presented as part of a basic financial plan, and a way of avoiding becoming a burden on children," Mr. Chandik said.

He recommends playing up the partial tax deductions of traditional insurance and considering policies that combine LTC with life insurance or annuities.

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