The subsidiary of a major corporation announced yesterday it has ceased selling whole life insurance because it considers the product "obsolete" in today's economic climate of high and volatile interest rates.
Whole or ordinary life insurance has traditionally been the bread and butter of the industry. It is true that in the past two years or so there has been a little less butter on the bread. Nevertheless, yesterday's announcement by ITT Life, a unit of International Telephone & Telegraph Corp.'s Hartford Insurance Group, was comparable to Ford abandoning the manufacture of large cars altogether.
Thus far, no major insurance company has publicly signaled abandonment of its primary product, although a number have introduced cheaper alternatives. The hottest new product, now offered by about 25 out of the 2,000 companies selling insurance, is universal life. ITT Life will offer a variant on it.
Like Detroit, Hartford has fashioned a more efficient vehicle that offers the customer a better performance. Yet, because universal life means about 50 percent lower commissions for agents, and because there is still some question about its tax status, many large insurance companies have refused to sell it. Alvin Vogel, chairman and president of Charter Security Life Insurance Co. of New York, went so far as to predict that if agents are not properly compensated, universal life could become the Edsel of the life insurance industry.
Whole life has a fixed premium for the life of the contract, but the cash value is low. The average return on such a policy in effect today is 3 to 4 percent. Renewable term insurance, with increasing premiums, offers death protection but no savings element. Universal life is term insurance with flexible premiums combined with a tax exempt or tax deferred annuity that pays near market yields, currently around 11 percent.
In 1980, 64 percent of every premium dollar went into whole life, compared with 69 percent five years earlier. The rest went into term insurance. E. F. Hutton Life was the first company to introduce universal life in 1979. Today universal life sales amount to about 2 percent of premium dollars industrywide, according to the Life Insurance Marketing Research Association. However, Hartford Life Insurance Co., another ITT subsidiary, reported that universal sales accounted for about half of its individual life insurance premiums after its introduction last May.
Eight out of 10 ITT Life policies in force are whole life, according to its president, Robert W. MacDonald, but sales last year were about the same as in 1980. "The day will come relatively soon when the public will not accept it," he said. "It would be poor management if I let the company get into a position where we have a product that won't sell."
ITT Life proposes that most whole life holders can exchange their policies for its new product without losing their investment. (MacDonald claims this product, which "looks, smells and tastes like universal," nevertheless packages its components separately so it would not be affected by an adverse IRS ruling.)
ITT Life offers policyholders an independent analysis so they can determine whether they can benefit from switching. Robert Hunter, who heads the National Insurance Consumer Organization, counsels the public as a general rule to buy renewable term insurance for a year and wait for universal life to become more competitive.