Even though the stock market remains volatile and has lost some luster in recent months, variable universal life sales continue to grow steadily. Sales in the year 2000 easily outpaced 1999s sales, measured by new policies written, sales volume and total premium.

If producers are properly licensed to sell variable universal life products, they can participate in this growth and increase their income substantially. According to industry statistics, and supported by our own at Columbus Life, the average variable life premium exceeds the average fixed universal life policy premium by better than 30%.

To capitalize upon the variable universal life trend, producers should recognize that VUL buyers are sophisticated, upwardly mobile or affluent, already investing, often below the age of 55, and need life insurance protection to solve a host of personal, business or wealth transfer objectives.

Distinct Segments

Roughly based on age and life stage, three distinct groups of VUL buyers may be targeted: wealth builders, ages 35-55; pre-retirees, ages 56-66; and seniors, ages 67 plus.

Buyers between ages 35 and 55 with discretionary funds and a large need for insurance protection to meet family obligations demonstrate the highest tolerance for risk, for three reasons:

1. Due to job mobility, they rely less on their employers for their financial security; thus, they are saving and investing on their own.

2. They maintain a healthy skepticism about whether Social Security will benefit them upon their retirement.

3. They have a fairly long time horizon for wealth accumulation; thus, they can accept more risk in hopes of greater return.

On the other hand, pre-retirees ages 56-66 tend to be focusing on reducing debt and accelerating wealth accumulation to meet their individual retirement dreams and goals of financial security. While discretionary funds to invest may be greater than younger buyers, due to a shorter time horizon, pre-retirees generally prefer a less risky allocation of assets in their investment sub-account choices; in other words, they may express more aversion to potential loss.

Seniors, or the mature market, tend to be divided into four groups, largely measured by economic status: 1) fixed-income seniors; 2) still-working seniors; 3) comfortable seniors; and 4) affluent seniors. Many are still accumulating wealth and need additional life insurance protection. Their wealth accumulation and transfer objectives are varied, but may include estate liquidity for settlement costs, passing a business interest or equalizing estate shares; leaving bequests to family members outright or in trust; or endowing schools, churches or other charities.

One dominant reason seniors purchase variable universal life is to tax shelter their currently taxed investments–or reallocate their asset mix–during accumulation and upon distribution. The tax-deferred accumulation, tax-favored withdrawals or loans, and the income-tax-free death benefits of life insurance are attractive.

Service Clients Now!

It cannot be emphasized enough, however, that variable universal life isnt for every life insurance prospect. Furthermore, at this time, owners of variable life products may be understandably nervous about the erratic equities market. Such clients will benefit from a producers valued advice on asset allocation strategies and options.

Thus, this is an excellent time for producers to call on all clients owning VUL to update their policy. Clients should be questioned about their objectives and comfort level with the risk and returns of their current investment subaccount choices.

If theyve suffered significant losses in some, how do the chances of a rebound square with the clients stated time horizon for needing access to accumulated policy account values? Perhaps it would be prudent to suggest completion of another risk tolerance questionnaire.

Its natural for most of us to feel more comfortable accepting risk when there is a bull market stampeding rather than a bear market roaring! Are your clients taking full advantage of automatic asset rebalancing or dollar-cost averaging? Does their policy provide for numerous subaccount funds within an investment style category, whether international, large, middle or small capital equities, blended funds, or bonds? If your clients perceive that the current low interest rate cycle will remain for a while, would they be more comfortable shifting some funds from, say, all growth to a growth and income blend, or even adding some bond funds?

If an asset reallocation makes sense, a producers review and service will restore policyholder satisfaction and aid in sales persistency. A reassessment of likely returns in the VUL contract, due to reallocating funds either to a more conservative or riskier posture, would be prudent.

Also, run a new illustration. For example, if the asset allocation is spread among several risk classes and investment types, producers should provide an illustration that clearly reflects an interest rate return lower than the highest rate their company allows them to illustrate.

The Frank Russell investment house reminds us that over the long haul most investors should expect a 5% return for bonds and 10% for stocks.

Funding VUL

Certainly, VUL products are attractive because they offer premium payment flexibility as well as potential market-driven performance. However, because clients accept a larger share of performance risk in VUL contracts than they do in non-VUL contracts, producers should encourage prospects and clients to regularly overfund the contracts at levels well above target premiums, perhaps closer to the guideline annual premiums.

If no-lapse guarantee features or riders requiring a stated funding level are available to preserve the death benefits regardless of fund performance, thats a good funding objective. A life insurance contract that isnt in force when death occurs can hardly be classified as “life insurance.”

As an industry, weve just gone through a wave of costly and disruptive market conduct lawsuits. Why risk another round due to contracts not meeting clients’ objectives due to underfunding?

Occasionally we hear of agents trying to solve a “performance issue” of an older, underfunded universal life contract by switching clients to a VUL contract, with hopes that higher returns on the investment component will solve what is essentially a “behavior” problem.

We sometimes find that policyowners failed to regularly pay adequate periodic premiums, or suspended premiums for a time without a clear understanding of the consequences. Switching to a VUL is not a viable solution. Prudent producers will consider fully funding the current contract to avoid the suitability, replacement and market conduct risks inherent in replacing existing insurance contracts.

VUL is a complex product. It makes good sense to shift as much risk back to the life insurance company as possible by insisting that clients habitually pay higher premium levels–after all, accepting risk is the life insurance companys raison detre!

, CFP, is senior vice president and chief marketing officer for Columbus Life Insurance Company, Cincinnati, Ohio, a member of the W&S Financial Group.


Reproduced from National Underwriter Life & Health/Financial Services Edition, August 27, 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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