New Design Combines Best Of VAs And VULs
The complexity of life insurance–especially variable universal life with its myriad charges (e.g., cost of insurance, etc.)–has been a major impediment to expanded sales.
Another key impediment has been the complexity of the fulfillment process.
The rather daunting nature of these two factors has kept many producers away from VUL, even though they recognize its superior benefit structure and tax advantages.
One resolution to this conflict is emerging, however. It is a new type of product that combines the simplicity of a variable annuity and the tax advantages of a non-modified endowment VUL. It provides the best of each type of policy and mitigates the factors mentioned above that keep producers away from life insurance sales.
Before seeing how that happens, its helpful to review the relevant issues.
Many producers and investors are attracted to VAs sold by stock brokerage firms because they are easily understood, the contract owner can readily manage the fund mix or use asset allocation models, and the asset-based charges are similar to those of other investments.
Other attractions: the fulfillment process is quite simple for VAs; the investment gains, even when moved from one fund to another, are tax deferred; and the products are one-ticket sales (i.e., no need to resell each year as the premium comes due).
Yet VAs do have major downsides that limit their effectiveness in a number of sales applications. For instance, at death, the annuity value is subject to income tax on the gain. Also at death, the annuity value is includible in the estate.
Furthermore, as a retirement vehicle, VA distributions (other than as annuity payments) are taxed on a very unfavorable last in, first out (LIFO) basis.
And, although VA owners who annuitize are assured of not outliving their assets, the possibility of potentially losing all the assets is a big obstacle.
Contrast this situation to a life insurance contract, especially the VUL contract. Is that product ever complex! As noted earlier, the complexity is what keeps so many fine producers away. (A typical estimate is that 80% of producers dont write life insurance.)
In addition, the sale is a multi-year sale, as future premiums need to be collected to maintain the policy; income tax is not payable on the death benefit; and contract ownership can be suitably structured so that ownership can be outside the estate.
Finally, and importantly, a life insurance policyholder can draw on the policys value and defer, perhaps indefinitely, any tax on distributions.
Wouldnt it be great if a product could be developed that combines the positive attributes of both offerings, while eliminating the negatives?
In fact, a VUL product with design and charge features similar to VAs is on the drawing boards of a number of insurance companies. Whats more, it is being packaged with advanced process fulfillment procedures to truly simplify the sale for the producer and allow him to do what he does best, to sell business.
Although this product was originally designed to address the needs of bank and wirehouse distribution for retail product, it has been viewed very positively by private placement distribution. Why? Because these high-end producers prefer its outward simplicity and accumulation focus. (Of course, simplified issue would not apply to these generally very large sales.)
Here is a review of the critical considerations:
In terms of tax law, this product fully complies with relevant sections of the Internal Revenue Code.
Insofar as state law is concerned, the product structure does not impose any obstacles to state approval.
Although this vehicle presents some new administrative issues, systems should generally speaking be easily able to be modified to handle this product. (This assumes the systems can already handle more conventional VLs.)
From a marketing perspective, the attractiveness of this vehicle to current annuity producers means that new distribution will be writing much of this business. Training and appropriate marketing materials will be required to maximize understanding and consequent production opportunities.
In conclusion, this product combines the best features of annuity and life products in one simple-to-understand and simple-to-sell life insurance vehicle.
, FSA, MAAA, CLU, is president of Actuarial Strategies, Inc., Bloomfield, Conn. E-mail him at [email protected]
Reproduced from National Underwriter Life & Health/Financial Services Edition, December 10, 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.