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Life Health > Life Insurance

Full Disclosure's VL and VUL Report

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As part of the Full Disclosure policy analysis series, Blease Research surveys leading variable and variable universal life upper market insurers twice per year.

The charts in this report are an excerpt of our latest findings on products for sale in April, as well as those released on May 1, when many variable products’ prospectuses are released.

Full Disclosures findings reveal that even amid a slowdown in sales at many companies due to fallout from declining equity subaccount returns, insurers are busily adding new policies to differentiate themselves from others in the market.

These excerpts of illustrated values are designed to show how companies are illustrating their products in the marketplace, and provide an overview of the specific strengths each brings to market.

Variable life illustrated values (the majority in this report are built on a universal life chassis) are based on a Male Age 40 paying a $3,000 annual premium and a $250,000 policy. If our specified premium of $3,000 is too low to illustrate the policy for this age and face amount, the policies are blended with term insurance, if available. The class specified is best nonsmoker as long as the class represents at least 15% of the contract issued of each policy.

Companies were asked to employ a 10% gross crediting rate that is then net of average fund expenses. Not all companies use the same averaging method. Some use a regular arithmetic average and others weight the average according to assets allocated to the various investment options available under each policy.

The death benefit type is level; however, a column is included with a true increasing death benefit for each policy.

Internal rates of return (IRRs) indicate which products are designed to be more efficient in producing cash values or death benefits, or are an all-around solution. The IRR can be applied to cash values as well as death benefits, and we have chosen to measure both at a policy duration of 30 years.

Those seeking to analyze the relationship between cash values and death benefits will find the IRR measurement a useful tool. The final two columns in the chart illustrate what the death benefits would be under an increasing death benefit option. Its easy to see, using the provided IRRs, which policies are built to generate death benefits, which is why it would be unfair to compare them under a level death benefit only.

Variable life is marketed as a tool to supplement retirement income by surrendering accumulation values to the contracts cost basis and using policy loans thereafter to provide maximum income.

In the retirement income table, companies were asked to illustrate policies using a $10,000 premium starting at a males age 40, selecting an increasing death benefit option until age 65.

At retirement age 65, the death benefit type is switched to level as values are liquidated.

A residual value of $100,000 was requested at the policy maturity age, and companies tried to come as close to that as their illustration systems would allow. Again, certain policies are designed to do certain things, and a high cash value at age 65 does not necessarily translate into high retirement income. Ones that do typically have low later insurance charges and low, or no, cost loans.

One of the obstacles to performing adequate variable life comparisons is that much of the material available publicly is subaccount-oriented. Competition and proliferation of accounts has led to an environment in which there is not as much difference between funds in terms of costs as there may have been 10 years ago, and many policies offer subaccounts managed by the same fund manager.

The real product differentiation is at the policy level in the features, limitations, and current and guaranteed cost structure of each. A contract that is policyholder-friendly (catch up provisions on secondary guarantees, for example) or that matches the goal of the policyholder (cash, death benefits or flexibility), is much more relevant to a comparison between contracts than that of whose “superstar” fund has had the best returns over the last few years. As we have seen over the last six months, returns come and go. Yesterdays star is todays laggard, but the fundamentals of the policy remain.

The Full Disclosure approach is to look at all of the aspects of the policy that translate (or dont!) value to the policyholder. We champion the fact that policies are designed to accomplish certain objectives. And while these illustrated values are helpful, a comprehensive analysis is the only reasonable way to draw comparisons. A policy may shine at issue ages, face amounts, issue classes we do not cover. To that end, we have also included the strengths, as stated by each company, that each policy brings to market in this report.

Reproduced from National Underwriter Life & Health/Financial Services Edition, June 11, 2001. Copyright 2001 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.

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