In the latest round of universal life data collected for the Full Disclosure policy analysis software series, we have seen many upper market insurers move to their “next generation” universal life designs.

These products are increasingly distinguished by features such as a lack of a fixed maturity age (or automatic continuation of coverage after maturity date), broad customization of secondary guarantees on death benefits and premiums, and issue ages up to 90-years-old.

Unique designs can also include the addition of living benefits and, for business applications, a third death benefit option that not only provides the face amount at death, but also premiums paid on the policy. See the Product Strengths section of this report (on page _) for other policy developments.

In an era of specialization, policy designs are being optimized for specific sales situations. One of the things we find particularly intriguing with the new generations of products is the adjustment of policy cost structure to fit the most probable eventual use of the product. For example, in the old days (and this is still true for many companies) the policys cost of insurance (COI) would rise every year, reflecting, of course, that the older an insured is the probability of their dying is slightly higher.

Policies that are designed for maximum retirement incomes, an increasingly popular solution in upper market sales, may have COI structures that are lower in years when maximum income (and the higher cash value to fund it) is needed. These charges, rather than appearing as a straight increasing line, can look like a comparative roller coaster!

As the policies targeted towards specific markets proliferate, the number of all-around policies designed for general purposes is decreasing or offered as part of a portfolio of plans. In the drive for market niche, it is obvious which are now designed to generate accumulation values, death benefit for a low premium outlay, or some other specific purpose (substandard or standard markets is a good example).

However, in a “Back to the Future” moment, we are seeing the return of guaranteed and nonguaranteed interest rates and other bonuses. Then as now, they are popular for promoting policyholder persistency by discouraging premature policy surrenders, and also for enhancing on-paper illustration performance.

There are two main parts of this report: current illustrated values and illustrations designed to show heavily funded policy performance when providing retirement income streams. The regular illustrations are based on a Male Age 40 paying a $3,000 annual premium on a $250,000 policy. The class specified is best nonsmoker as long as the class represents at least 15% of the contract issued of each policy. The death benefit type is level, however, a column is included with a true increasing death benefit for each policy. Accumulation values under an increasing death benefit option would be less but some policies are designed to generate increasing death benefits and it would be unfair to compare them under a level death benefit only.

In the retirement income table, companies were asked to run illustrations that, at retirement, surrender accumulation values to the contracts cost basis and use policy loans thereafter to maximize income. Our samples use a $10,000 premium starting at a males age 40 and an increasing death benefit 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. The death benefit was requested to be the guideline minimum at the $10,000 premium level as the goal of funding a policy for income places a high death benefit secondary in importance. However, other factors may influence performance and a high cash value at age 65 does not necessarily translate into high retirement income.

A comprehensive approach can lead you to the true nature and architecture of the contract. We recommend a policy analysis approach based on illustrations, current and guaranteed (contractual) costs, features (and their costs), as well as knowledge of what each product was designed to do.

While it may be designed with strengths at higher or lower ages or face amounts, a policy may be intended for a purpose/market as remote from illustrations as you can imagine. For example, it may have broad underwriting classes so more policies are issued preferred, or may be designed for the substandard market.

Use the figures in this report as a snapshot of how policies are illustrated on the street currently. However, only the complete policy picture allows a competent analysis.


Reproduced from National Underwriter Life & Health/Financial Services Edition, October 8, 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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