By Erick Deam
Imagine offering your clients a life insurance product that can accumulate cash at a rate rivaling many securities during periods of market growth, but that also provides a minimum guaranteed rate of return when the market is down.
This is equity-indexed universal life, a new generation of life insurance. It debuted in the second half of the 1990s, but its unique features are just now starting to shine. Here is why.
EIUL policies offer contract owners the opportunity to accumulate cash at a higher rate of return than most traditional universal life policies can deliver, while providing a minimum guaranteed rate. This result is achieved by linking the policys accumulation value to the performance of a specific index of securities. Currently, most EIUL products are linked to the Standard & Poors 500 market index.
Securities? Market indexes? Sounds like variable universal life insurance. But EIUL policies are not securities, nor are they VUL. In fact, no National Association of Securities Dealers registration is required in order to sell them.
Why consider buying (or selling) the products? Some clients and advisors may think EIULs are too complex, but producers who work with them find they sell like a traditional UL policy. Moreover, EIULs can generate returns that rival those found in VUL policies, even during up markets, while providing a guaranteed minimum rate to protect against periods of market decline–a feature not found in VUL.
How, you may ask, can an EIUL insurer do all that with this product? Following is a brief explanation of some of the behind-the-scene technicalities that make it all happen.
The insurance company provides for the guaranteed minimum rate of return by purchasing fixed income assets, such as bonds, with a portion of the premiums paid (minus policy charges and fees).
It uses the remaining EIUL premium to purchase stock market index call options, such as call options on the S&P 500. Any gain realized as a result of exercising the call options passes on to the policy owner.
The amount of the gain is a function of the gain in the chosen index, adjusted by the EIULs participation rate or cap. (The policys participation rates and caps are set each year, depending on call option prices and bond yields. See chart for a depiction of these relationships.)
It is true that the bear market over the past 20 months has kept EIUL returns at or near the minimum guaranteed rate of return. The returns of most growth-oriented sub-accounts within VUL policies, however, have actually been negative.
Consider, VUL sales in the 2nd quarter of this year were down approximately 20.2% from 2Q 2001 (based on data from LIMRA International for 2Q 2002 and 2Q 2001).
On the other hand, EIUL sales for 2Q 2002 were up by 36.9% over their 2Q 2001 levels (based on 2Q data from The Advantage Group for the two periods). Additionally, traditional UL sales were also up in 2Q 2002–by 39.9%–over the same period in 2001 (based on the 2Q LIMRA data cited above).
Most often, EIUL will outperform VUL in down or flat markets. Further, EIUL is more likely to outperform traditional UL in up markets.
Fortunately, UL insurance, including EIUL, is neither purchased nor sold for what it can do over the course of one to two years. Rather, these products are long-term protection contracts. Their object is not to generate the highest returns in a single period, but instead to provide long-term, consistent performance at a reasonable return, given the risk.
The steady growth of the S&P 500 since its inception in 1957 makes the S&P 500 an ideal market index on which to model a life insurance contract. It is the index most commonly found in EIULs and also equity index annuities.
Second-generation EIULs may offer additional choices, too. For instance, some allow policy owners to allocate premium between a traditional interest crediting account and an equity-indexed account.
Since its origination in 1995, EIUL insurance has grown to become a popular alternative to traditional UL and VUL. Now, in todays market, the opportunity it offers to earn market-index-type gains, as well as provide the stability of a guaranteed minimum rate, makes EIUL a viable product for many clients.
Erick Deam, FLMI, is a life product manager at Conseco Insurance Group, Carmel, Ind. His e-mail is firstname.lastname@example.org.
Reproduced from National Underwriter Life & Health/Financial Services Edition, September 16, 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.