The saying goes that what goes around comes around. In universal life insurance, that is certainly truebut the product that is coming back is much better than before.
For instance, it has a new aggressive price structure. More importantly, it has guaranteed death benefits that really cast the product in an entirely different light than in its earlier days.
To grasp the depths of the change and its meaning for todays market, lets first review its rich history.
Up until the late 1970s, the life insurance industry sold whole life and term. Guarantees were important to customers back then, and guarantees were what insurers sold.
But when short-term interest rates shot up at the end of the decade, pricing became problematic. Thats because insurers generally invested in high quality long-term bonds and mortgages. This made it so their dividend rates couldnt match the new skyrocketing short-term money yields of 12% to 18%.
Policyholders, seeing those soaring rates, took out low fixed rate loans from their WL policies and invested the money in those double-digit short-term instruments. That produced near turmoil in the life insurance sector.
Thats when UL came to the fore. In 1978, a company called E.F. Hutton Life began marketing Completelife, which is widely believed to be the first UL contract in the industry. It was an ordinary life contract that “unbundled” the key features, showing all expense charges and monthly deductions, and offering “credited” interest rates that mirrored the current interest rate environment.
Soon, virtually every major insurer had its own version of UL, and UL policies became strong sellers through most of the early and mid-1980s.
But when interest rates fell dramatically at the end of the decade, UL sales hit the skids. Thats because UL guarantees were lower than those of WL, and in a lower interest rate environment, the product didnt illustrate well. In addition, many owners of in force ULs soon got the unpleasant news that their contracts could no longer perform as originally illustratedbecause of the lower credited interest ratesso they would have to deposit more premium or lapse their coverage. UL seemed doomed.
Fast forward a few years. In the 1990s, self-directed retirement accounts (401ks, IRAs, etc.) came into favor; the stock market was a happening place; and another version of ULvariable universal life, with its multiple investment optionssoon emerged as a strong contender. After all, what could be better and more contemporary than tax-deferred, self-directed investments wrapped in life insurance?
Many customers thought they couldnt lose with VUL. And for good reason: The markets were climbing, and self-directed investments were showing double-digit growth. Even many agents felt VUL had the power to solve any insurance need.
By the turn of the century, VUL had become the primary life insurance product of choice, capturing the majority of new premium dollars.
Then the inevitable happened, yet again. The markets adjusted for reality and so did VUL subaccounts. Policyowners came to the reluctant but inescapable realization that the death benefit protection they thought they had purchased with their VUL was not guaranteed. (They probably didnt understand it, perhaps because VULs were not explained as thoroughly as they should have been.)
Naturally, the resulting disappointment was reflected in the sales results at many VUL companies.
If we could take away any lesson from the comparatively short reigns of UL and VUL, it would be this: Though consumers generally have short-term investment horizons, when it comes to life insurance, they really do want to be certain the protection they originally purchased is protection they can count on for the life of the contract.
Its a simple concept, and one that typified the industrys marketing thrust for a great many years. Now, not surprisingly, its back again.
But its back with a twist. Its back in the form of ULs which include a provision or rider that guarantees premium levels to age 100at about half the cost of WL. And for those who believe they will live past 100, the products often offer full death benefit guarantees past age 100even, in some products, for the insureds lifetime.
Selling these ULs with no-lapse guarantees simplifies things. It doesnt matter what happens in the interest rate environment or in the equity markets. A customers premium (payable until age 100) will never increase, and the customer is assured of having coverage for life.
But customers need to understand that access to cash values may immediately eliminate the no-lapse guarantee. So, if such access is important to a client, VUL or WL may still be the products of choice. The new ULs work best for customers who want a “term” plan with guaranteed premiums to age 100.
Apparently, the market appreciates the new features. According to LIMRA, while individual life sales in the 1st quarter of 2002 saw a net 1% decline in annualized premium compared with the 1st quarter of 2001, fixed UL premium was up 27%!
Michael S. Pinkans, CFA, CFP, CLU, ChFC, is a registered representative and investment advisor with Equity Services, Inc. and vice president of sales and promotion at National Life Insurance Company, Montpelier, Vt.. His email address is Mpinkans@nationallife.com.
Reproduced from National Underwriter Life & Health/Financial Services Edition, July 15, 2002. Copyright 2002 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.