SCHWAB SET TO PEDDLE INSURANCE NATIONWIDE: A FORCE IN DISCOUNTING, IT SHOULD SHAKE UP NEW FIELD

Brokerage giant Charles Schwab & Co. is about to bring its brand of discounting to the life insurance business.

Yup, life insurance that low-margin commodity offered by more than 1,600 companies in the U.S.

After eight months of pilot-testing a new product to California clients, the San Francisco-based firm is planning to roll out its life insurance offerings to the rest of the country with the help of two strategic partners: Great-West Life and Annuity Co. and Zurich Life Insurance Co. of America.

The move comes only weeks after fellow discount brokerage Jack White & Co. abandoned its own two-year effort selling term life insurance.

Schwab has secured regulatory approval to sell insurance in the vast majority of states, but won’t launch a major marketing campaign until later this winter, officials say.

With its latest effort, Schwab could revolutionize the insurance business by bringing its brand of low-cost, low-touch services to an industry that has thrived on personal contact and the accompanying hefty commissions.

“Our cost model is a lot different than the traditional life insurance company,”says William J. Clipp, Schwab executive vice president of annuity and life insurance. “We don’t have a commissioned sales force and we hope to do a substantial part of our business electronically.”

The only prospecting Schwab will pay for is direct mail pieces and statement stuffers. “We’re not sending an agent knocking on people’s doors,” Mr. Clipp adds.

Schwab Life Insurance Services, a 12-person business unit established in April of 1996, is offering five-, 10-, 15- and 20-year term policies, and universal life and survivorship universal life products. The products carry only the Schwab name and may be purchased at one of Schwab’s 271 branches, over the phone or via the Internet.

overcoming low margins

The insurance Schwab is selling is called low-load by the industry. While salesmen receive no commissions, administrative costs are factored into the premiums
so the product cannot legally be called a no-load policy.

Schwab, which has a reputation for throwing various strategies against the wall to see what sticks, insists the insurance product is not a flight of fancy. “We consider it a serious business with a lot of potential,” says Schwab spokesman Greg Gable.

Then again, it could stumble. In fact, San Diego-based Jack White yanked its term life insurance product after a brief two-year run.

“It wasn’t moving along as much as we liked,” says Jack White spokes-man Barry Boyte, who wouldn’t disclose the number or dollar amount of policies sold. Schwab also wouldn’t release the sales or client count for its pilot program.

Life insurance is viewed by many as a low-margin business. While Mr. Clipp acknowledges that underwriting is a drain on capital to all but the largest insurers, Schwab’s focus is solely on distribution and customer service, which can be very profitable ventures, he says.

And if anyone can turn term life insurance into gold, it’s Schwab, industry sources say.

the schwab touch

“I would be amazed if Charles Schwab would expand a losing operation,” says Kenneth McClure, senior vice president of life and health marketing for San Antonio-based USAA Life Insurance Co.

Schwab’s plan could work because it’s compatible with Schwab’s existing businesses, says Dick Weber, a certified life underwriter and principal of Ethical Edge Inc. of Safety Harbor, Fla.

“It makes a lot of sense,” Mr. Weber says. “If you’re the kind of customer who needs help, you’re not a Schwab customer.” Schwab, however, says clients will receive, upon request and free of charge, a call from a Schwab representative who will help them choose a policy.

It still puts the onus on the consumer to know what they’re buying, says Peter Sullivan, president of Providence, R.I.-based Arlen Corp.

“What matters is the policy you hold when you die,” Mr. Sullivan says. “If you buy a 15-year term policy and you die in t
he 16th year, what good is it?”

Schwab’s prices are from 25% to 70% lower than comparable policies sold in the industry, Mr. Gable says. In a hypothetical example, a 40-year-old non-smoking, healthy man would pay $645 a year for a $500,000 20-year term policy.

Schwab’s low-load offerings will join a relatively small group offered by companies like USAA, Ameritas and American Express, which have been gaining in popularity in the past decade, at the expense of full-commission policies.

“Term insurance is so inexpensive today that it doesn’t have to be a big issue for consumers,” says USAA’s Mr. McClure. “They can solve the problem and get on to something that is more fun.”