Full Disclosures Universal Life Insurance Report

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Our comprehensive survey performed in January and July of upper market life insurers for inclusion in the Full Disclosure policy analysis and comparison software series affirmed what company competition analysts already knew: From the beginning to the middle of the year the trend toward offering so-called secondary guarantees of universal life insurance premiums and death benefits continued to accelerate.

Full Disclosures January release featured 57 policies, with 42% of them offering the assurance that no matter what happened to a policys nonguaranteed elements, such as the current interest rate, to at least age 95 the premium required would not rise nor the death benefit fall below the initial specified amounts (level death benefit option).

In July, 56% of the 63 policies submitted for inclusion in Full Disclosure featured the same guarantees.

Many of these newer generation policies, whether offering built-in long-term secondary guarantees funded by a minimum premium level or by rider, provide lifetime guarantees or periods up to age 120.

And while their pitch is that they enable whole life guarantees for about half the cost, the real picture is not as clear. The premiums that are developed to fund the guarantees are based upon the guaranteed values of the policy. Anything that affects the values may compromise the secondary guarantees of premium and death benefit. This could include switching the policy from a level to an increasing death benefit option (or vice versa), or increasing or decreasing the face amount of the policy.

Some companies provide a detailed list of what specific policy changes will negatively impact the guarantees. Many policies contain “catch-up” provisions that enable a restoration of secondary guarantees if the minimum premium to maintain them is paid. Generally this is a cumulative premium test within a given time period. While this doesnt help if there is a policy change, it is something most of the newest UL designs contain.

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 first chart on illustrated values contains the maximum secondary guarantee period available for each policy and the premium required to obtain it. The regular illustrations are based on a male age 55 standard nonsmoker paying a $7,500 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. The issue class is best nonsmoker.

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 or 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, but remember each policys value is built on the economy and quality of individual attributes that are often not apparent through any illustration. Only a comprehensive analysis can reveal its true nature.

Note: Due to a technical mix-up, Principal Financial Group was not included in this report or in Full Disclosure. Look for the companys data in the next UL edition of Full Disclosure scheduled for release in January 2003.


Reproduced from National Underwriter Life & Health/Financial Services Edition, October 7, 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.