The major attributes of variable universal life policies include: 1) their ability to provide death benefit protection, including protection that can grow with favorable investment returns; 2) the tax-free nature of the buildup of such investment returns; and/or 3) the potential of such contracts to provide attractive cash flows to enhance ones retirement income.
With adoption of the 2001 CSO Mortality Table, the amount of money per dollar of death benefit that can be invested in the VUL policy will be reduced. Rather than bemoan the greater mortality costs associated with accumulation-oriented vehicles, why not focus on maximizing the opportunities to use VUL insurance as an investment and protection instrument?
To do this, try viewing the VUL as a life cycle policy that addresses more than the accumulation and life protection features noted above. Here are some suggestions.
Start by recognizing that the VULs basic protection provides a benefit in event of death of the insured. In addition, insureds can use their VUL polices as an accumulation and income savings vehicle, by arranging for periodic withdrawals from the cash value. They can use these withdrawals for various purposes. In retirement years, for example, the withdrawals can supplement pension, Social Security and other post-retirement income.
However, the reach of the modern VUL policy can be much broader. Consider:
Critical Illness: Given todays economic environment, a key area of concern for many people is maintaining ones financial security. An insured counts on being healthy enough to earn a living during the working years. Thus a critical illness such as heart attack, stroke or cancer would cause loss of earnings on either a temporary or permanent basis. Such an illness may also create significant needs for cash to address extraordinary medical costs, child care issues and other funding shortfalls.
The VUL policy can be designed to cover this financial need. This can be done with a CI rider that accelerates part or all of the VUL policys death benefit.
Long Term Care. Insureds face a related financial issue, too. This is the risk of experiencing a chronic illness, which is a persistent condition that may require ongoing care. Chronic illness means the insured may need additional funds to pay for a nursing home stay or assistance with the activities of daily living in the home.
VUL policies can be structured to address this need, as well. This can be done by attaching a long term care rider to the VUL that pays benefits via acceleration of the death benefit. Such riders are substantially cheaper than those providing LTC coverage in addition to the life insurance death benefit.
Extended care. Sometimes, people need care for prolonged periods. These periods can extend well beyond the typical two- to four-year period during which a VUL policy could pay accelerated benefits before exhausting the amount available. Concern about this financial need increases as people age and begin experiencing various medical events.
A VUL policy can be built to respond to this need by offering an extended care rider. Such a rider would pay additional benefits, over the death benefit acceleration amount, to insureds who qualify.
In fact, a VUL policy can be designed to address all the life cycle needs mentioned above. The accompanying chart shows the elements necessary to do that.
Consider this example: A VUL product could be designed so that it includes a CI acceleration rider, a LTC acceleration rider and an extended care rider.
The CI rider would be active during the insureds working years up to age 65. If at age 65 the insured has never received any CI benefits under the policy, the policy would return all CI rider premiums to the VUL account value. These monies could then be used to help pay for the LTC rider, which is activated by the termination of the CI rider.
During the insureds working years, the insurance company would not deduct charges for the LTC rider. But once the LTC rider is activated, the insurer begins deducting LTC rider premiums at then current rates.
What happens if the policy accelerates the full VUL death benefit? This is where the extended benefit rider comes into play. One could design the policy so that, if the insured still needs care, the extended benefit rider would continue care payments until an additional 100% of the VULs initial specified amount is expended.
Not all VULs currently have all three riders, but designers are looking in this direction. The point for now is to start approaching the VUL as a life cycle contract.
It goes without saying that the VULs flexibility of premium payments and wide choice of investment subaccounts remain key marketing features. But in periods of economic downturn, the protection components available in newer VULs are excellent talking points, especially when positioned as life cycle features.
Cary Lakenbach, FSA, MAAA, CLU, is president of Actuarial Strategies Inc., Bloomfield, Conn. E-mail him at [email protected].
Reproduced from National Underwriter Edition, April 7, 2003. Copyright 2003 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.