Full Disclosures Variable And Variable Universal Life Report
Full Disclosure surveys leading variable and variable universal life upper market insurers twice a year. The charts in this report are an excerpt of our latest findings on products for sale in September or released soon after. And while many variable products and their prospectuses are released in May, there is no shortage of new material in this latest installment.
These values are meant to be a snapshot of how individual life variable plans are being illustrated on the street as a way to gauge their relative positions for our sample policyholder. We champion the fact that policies are designed to accomplish certain objectives. And while these illustrated values are helpful, a comprehensive analysis is the only reasonable way to draw comparisons.
There are 51 contracts featured in this report, with all but two having a universal life chassis. The others, Northwestern Mutuals Variable CompLife and Guardian Life & Annuitys Park Avenue Millennium series feature level guaranteed premium structures.
Illustrations are based on a Male Age 40 paying a $7,500 annual premium and a $1,000,000 policy. If our specified premium of $7,500 is too low to illustrate the policy for this age and face amount, the policies are blended with term insurance if available.
The death benefit type is level, however, a column is included with a true increasing death benefit for each policy. The class specified is best nonsmoker as long as the class represents at least 15% of the contract issued of each policy.
Companies were asked to employ a 10% gross crediting rate that is then net of average fund expenses.
Not all companies use the same averaging method to calculate the fund expenses used to calculate the illustrated values in variable policies, so we have added a column at the end of the VL chart to delineate those using either a regular arithmetic average or a weighted average.
Under weighting, the average is tilted toward larger subaccounts with usually lower expenses, thus reducing the average expense charge and benefiting the final illustrated values of the policy.
We have also indicated what methods are available within each policys illustration system. Many now offer a choice, and a few of the companies have indicated which they have chosen. For those that have not, its a safe bet that they used a weighted average if they have it.
The averaging method used is only one factor of many including policy expenses and fees and cost of insurance in a policys illustrated performance, but is useful to see the approach used by each company.
Another change to this report is to the Product Strengths section. Full Disclosure includes editorial comment from our participating companies. In this report, however, we have standardized some of these answers and added them to a section of the regular report known as Product Objectives, which are also repeated here. While not all of a products design objectives may be listed, you can see what market many of these policies are meant for. Some are built for low premiums, for example, while others are meant to generate major league cash values.
Internal rates of return (IRRs) figures, included in the main chart, indicate which products are designed to be more efficient in producing cash values, death benefits, or are an all-around solution. The IRR can be applied to cash values as well as death benefits, and we have chosen to measure both at a policy duration of 30 years.
Those seeking to analyze the relationship between cash values and death benefits will find the IRR measurement a useful tool. Information is included to show you what the death benefits would be illustrated under an increasing death benefit option. Its easy to see, using the provided IRRs, which policies are built to generate death benefits. This is why it would be unfair to compare them under a level death benefit only.
Variable life is marketed as a tool to supplement retirement income by surrendering accumulation values to the contracts cost basis and using policy loans thereafter to provide maximum income. In the retirement income table (see opposite page), companies were asked to illustrate policies using a $10,000 premium starting at a males age 40, selecting an increasing death benefit option 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.
Again, certain policies are designed to do certain things and a high cash value at age 65 does not necessarily translate into high retirement income. Ones that do typically have low later insurance charges and low, or no, cost loans.
With variable products, one should avoid comparing products using subaccount performance alone. The same subaccounts are available through many policies and competition has brought the expense portion of the funds within a realistic range of one another.
When it comes to subaccounts the comparison stops where the risk level of the client does. What gets ignored when comparing VL & VUL policies is the policy itself–the “wrapper” if you will. This is where the real value is created and the basis for any comparison. Illustrations are tricky when comparing variable policies as average subaccount expenses may be incorporated into the net values differently. Also, besides being unfortunately unrealistic, that 12% assumed gross return can also cloak some hefty expenses.
The real product differentiation is at the policy level in the features, limitations, and current and guaranteed cost structure of each. A contract that is policyholder friendly (catch up provisions on secondary guarantees, for example) or that matches the goal of the policyholder (cash, death benefits or flexibility), is much more relevant to a comparison between contracts than that of whose leading fund has had the best returns over the last few years. The Full Disclosure approach is to illustrate all of the aspects of the policy that translate value to the policyholder.
Reproduced from National Underwriter Life & Health/Financial Services Edition, November 25, 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.