Are consumers diversifying their long-term financial planning?

There has been a growing push from the life insurance industry for people to work on their long-term financial planning, and it seems the novel coronavirus pandemic helped spur them to action. There may have been a lot of ups and downs in 2020, but one trend held true for pretty much the entire year: People were more interested in life insurance. The question is, how much did they look at other aspects of their financial futures?

There was an interesting dichotomy at play for life insurers over the course of last year: The total number of policies across the country increased 2% on an annual basis, but new annualized premiums actually slipped 3%, according to LIMRA's latest U.S. Individual Retail Life Insurance Sales Survey. The latter issue was largely driven, however, by the fact that sales were so strong in the fourth quarter of 2019 (when the industry set a record for new premium growth) that even with heightened activity, 2020 just couldn't keep up. Here, too, policy sales ticked up 2% in the final three months of last year.

Perhaps not surprisingly, this was driven by growth in term life insurance, which ended 2020 up 4% year over year, and policy count rose 7%, marking the highest level of growth on this front since the turn of the century. Whole life sales were also on the rise, with premiums rising 5% and new premiums up 1%, both on an annual basis.

Are consumers doing enough to protect their financial futures?

What about annuities?
Life insurance is, in some ways, a straightforward way for people to think about their long-term financial flexibility. It's a well-known product that people know has a clear value proposition for them, and that is made evident by numerous polls that show people think it's a great option, even if they don't have coverage themselves. Annuities are a bit trickier to figure out because, by and large, it's not as obvious or readily available to them.

For instance, a recent PLANSPONSOR poll asked whether their employers' direct contribution plans offered annuities as part of the investment options available, and whether people would take advantage. Only about 4.5% indicated that annuities were available to them as standalone investment opportunities, while 90.9% said this was not the case. The rest did not know one way or the other.

Interestingly, of those to whom annuities investment opportunities were available, the vast majority took their employers up on it. In all, more than 4% said they already invest in annuities. Beyond that, more than 1 in 4 said they would be interested in investing in annuities if the option was available, and 40.9% indicated that they likely would not.

Sales figures reflect the disconnect
While people may like life insurance and, potentially, see the benefit of annuities as well, when it comes to the latter, it seems there are some potentially significant issues. For instance, while 2020 was largely a success for life insurance underwriters, annuities sales truly struggled, according to the latest full-year data in the Secure Retirement Institute U.S. Individual Annuity Sales Survey. Nationwide, annuity sales fell to $219 billion, down 9% year over year, but did tick up 2% on an annual basis for the fourth quarter of the year, when sales hit $58.6 billion.

The reason why is relatively simple: The pandemic and its resulting impact on the global economy caused interest rates to take a big hit, dimming the long-term prospects of getting a good return on investment in annuities. Indeed, sales of income-related annuities slipped 28% over the course of 2020, largely because of those low rates, and both immediate-income and deferred-income annuity sales fell 30% each as well. Income-focused annuities sales only came to $59.7 billion for 2020, the smallest figure seen for this type of product since the recent low of $73.6 billion observed in 2017 — but because of the low rate environment that has persisted for years, things have largely been on a downward trajectory since 2014.

A look at long-term care insurance
Another type of coverage people may have been thinking about more seriously due to the pandemic is long-term care insurance, which can cover a host of costs associated with a serious illness or injury. However, there seem to be some impediments here, as well. For instance, a Nationwide Financial survey conducted in late 2020 found that more than 2 in 5 consumers weren't sure when they should start considering long-term care, and more than half said they couldn't figure out how much such care would even cost them.

When it comes to these issues, fewer than 1 in 10 have talked to a financial professional about them, and even among those who typically rely on such a professional's advice, almost 2 in 5 haven't brought it up because they assume it's too expensive.

This presents the perfect opportunity for insurers that offer life, long-term care coverage, and annuities to start a conversation about what all these issues might look like for them, and how acting sooner than later can help people set themselves up for success.