VUL Persistency Opportunities: Is The Industry In Denial?
New clients are buying complicated variable universal life insurance contracts in ever-increasing numbers.
For instance, preliminary industry reports from LIMRA International, Windsor, Conn., tell us that 34% of all 2000 premiums paid for new life insurance products were directed to VUL. This is up from 6% in 1990.
By comparison, annualized new premium market share for other products in 2000 was as follows: traditional whole life, 24% (down from 54% in 1990); term life, 22% (up from 13% in 1990); and universal life, 17% (down from 26% in 1990). (See chart.)
These figures clearly demonstrate the enormous popularity VUL has gained in the past decade. However, as VUL policies age, many may suffer from persistency problems, unless carriers make major changes to address this problem.
Here is why VUL is at risk: these complex VUL contracts are designed to stay in force to age 100 and beyond. To meet that objective, they need regular attention and, like an automobile, adequate fuel (read, premium reserves).
When a proud car buyer is handed the keys to a luxury automobile, he or she also receives a maintenance manual and a service schedule. But, in most cases today, the VUL buyer receives few post-sale service options. I am talking about information systems that will help the client and agent manage such benefits as surrender to basis and loans for supplemental retirement income. A lapse could trigger phantom income.
There are a number of things that could be done to improve the post-sales situation, and thereby reduce the risk of lapse. For instance:
Compensate the producer for post-sales service work. Right now, the commission structure for a life agent is front-end loaded. Servicing old policyholders pays little or no compensation. Modification of the VUL commission schedule should include a trail for assets under management. This would benefit the client, the agent and the carrier over the long term.
Provide policyholders with real-time Web site information. Point-of-sale proposals are designed using linear projections. Of course, the reserves move up and down based on the daily market close. Actual values are never linear. Real-time Web sites are critically needed so policyholders can check their values on a 24/7 basis. Most 401(k) and IRA services already afford this benefit. VULs should, as well, so owners can participate in managing their accounts.
Supply materials to clients and producers that support policy management. Remember, registered representatives must receive compliance approval before they can even write a service letter to a VUL customer! As it is today, critical post-sales issues, such as the benefits of paying off VUL policy loans or the consequences of not repaying policy loans, are generally not explained in broker/dealer literature.
Recently, a few post-sale innovations have been introduced that should help improve VUL persistency. Here are two examples:
–MassMutual has redesigned its VUL billing statements for plans sponsored by corporations and professional organizations, complete with reminders to send in additional deposits, graphic displays of cash value, and asset allocation pie charts.
–Pacific Life now offers a free automated income option to provide automatic distributions of VUL cash values via planned policy withdrawals and loans. The significance of this is that it provides an administrative system for tracking contract values that are being paid out for supplemental retirement income.
In summary, I believe that the profit potential of retaining existing clients as compared to the cost of adding new business needs to be examined.
With a few changes, particularly in post-sale service, VUL could grow to become larger, in asset base and people covered, than present 401(k) plans. This would be very good for the financial health of the carrier, and it would also help cement customer loyalty.
, president of the Teas Company, Inc., Colorado Springs, Colo.; founder of the Colorado Springs Telecommunication Study Group; and organizer of the VUL Information Institute for research on nonqualified retirement income options. His e-mail: firstname.lastname@example.org.
Reproduced from National Underwriter Life & Health/Financial Services Edition, September 17, 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.