Q&A: Middle market trends for retirement planning needsArticle added by Mark Fitzgerald on June 19, 2014
Ranked: #5032 (37 pts)
What trends are being observed in the middle market when it comes to planning for retirement, and how can advisors adapt to these changes and still meet the needs of their clients? The implications of these trends are addressed in the question and answer below.
Q: What are key trends in the middle market for individuals planning for their retirement needs?
A: The most consistent trend over the last few years has been the growing popularity of putting guarantees around lifetime income. This certainly has to do with the concerns that the middle market has about longevity, market and income risk and running out of money in retirement. More recently, we’re seeing this guaranteed income being purchased alongside a combination of features, such as enhanced care and death benefit riders.
Also, in the last couple of years there has been a renewed focus on accumulation. In these accumulation crediting strategies specifically, there have been a lot of new risk-managed indices that allow a client to have either an uncapped or a high participation rate-type of structure. Part of that has to do with how the market is performing and where interest rates are going.
Q: How are these trends different from a few years ago?
A: These trends are very similar to a few years ago except for the re-engagement on accumulation. For a period of time following the downturn in 2008 and 2009, we saw a great deal of focus on protection and a focus on “what can I do to address the concerns of market losses?” After a few years of the market performing more favorably, folks have really started to change that mentality and ask, “Now that I have my protection component in place, what can I do to leverage this to get some more accumulation benefits associated with it?”
What is also becoming more prominent is the multi-layers of protection available within one product. Whereas a few years ago the focus was primarily on generating guarantees around income, we are now seeing growth around the packaging of other features and benefits such as an enhanced income feature for chronic care assistance or a death benefit component to take care of a spouse. And now on top of those protective features, we’re seeing more accumulation strategies that can be incorporated.
Q: What types of product features and/or riders are insurance companies developing to meet these needs now?
A: There has been a very rapid increase in both new riders and new crediting strategies. Insurance companies have always been in tune with putting guarantees around products and at the same time give an additional upside opportunity from an investment perspective. When interest rates were lower, it was more difficult to provide all those factors. Now you’re seeing companies trying to be more diverse in terms of balancing guarantees as well as growth opportunities.
Q: How do interest rates and other economic factors impact the products that are being developed?
A: Economic factors impact product development in several ways. Specifically, interest rates will certainly impact the component required for underlying guarantees. The market as it relates to the volatility behind the equity indices, and whatever index being benchmarked on a product, is also going to play a role in underlying option budgets, related expenses and ultimately the end benefit to the client.
From an economic standpoint, and even more broadly a demographic standpoint, we have more individuals moving from the accumulation phase in their lives to a distribution and income-generating phase. This is going to encourage insurers to put a greater focus on guarantees of income. There are also fewer pension offerings out there, so more individuals are looking at securing guarantees for themselves versus relying on an employer-sponsored plan.
The overall market sentiment also comes into play. When the market is performing well, individuals will start to shift their focus on how to take advantage of some of that upside, and alternatively, when the market performs poorly, individuals will focus on “What can I do to protect myself?” As a result, insurers have to be very conscious of the products that we are building to make sure that we are covering both ends of the spectrum and accommodate a variety of opportunities for coverage and growth.
Q: What do you expect insurance companies to do to meet retirement needs over the next five years?
A: Over the next five years, there will be continued enhancements and fine-tuning of products. Products will really start to be multi-dimensional in nature but also offer a portfolio that starts to really dial into what is most important need for a client, knowing that there is not just one answer but potentially multiple solutions required. We’ll probably start to see more focus on income while still covering the other components of protection, and some focusing on growth while still covering income and care concerns.
Q: How must financial professionals’ strategies for their clients shift in the coming years to reflect these trends?
A: Financial professionals are in a position where they have a lot of products that weren’t available just a few years ago, which offers a whole new dimension to the planning process. We will see a broader penetration of the types of financial professionals who are doing all lines of products, whether they are annuity products, life insurance or pure market based products — there will be a lot more overlap. There are a lot more opportunities to create a true solution-oriented portfolio from a client’s perspective rather than compartmentalizing into life insurance, investments and annuities. Also, as products now offer more features that cross-pollinate those paths, financial professionals who once just focused purely in the registered investment world are also looking to offer client’s life insurance and income protection opportunities, and vice versa.
In order to stay aware of product changes, financial professionals should work closely with distribution partners like insurance marketing organizations keeping informed and educated on products available today. There is a major responsibility and opportunity to educate the marketplace on what is available. A lot of clients don’t realize these products exist; they have limited or dated experience and might not realize there are other pieces to the puzzle that can benefit them in their retirement planning efforts.
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