Group UL And VUL Programs Muddle Through The Slump
Executives in the group universal life and group variable universal life markets are facing some serious obstacles these days.
“The stock market certainly hasnt helped our cause,” says Tony Trani, president of Paragon Life Insurance Company, St. Louis, a MetLife Inc. affiliate that sells group VUL programs.
Trani and Bill Gray, who is director of life product marketing at Principal Financial Group Inc., Des Moines, Iowa, report that year-end, bonus-related group VUL contributions fell in 2002, because of widespread cuts in bonuses.
Even many of the relatively well-paid, well-educated executives and professionals who still put cash in group VUL plans are warier of investment risk than they used to be.
Trani estimates that Paragon group VUL participants are putting about 40% of new contributions in a new investment option that pays a fixed return of 5.6%.
But Trani, Gray and other executives interviewed also agreed group UL and VUL products are doing better than outsiders might expect, under the circumstances.
Employees regular monthly contributions and sales of plans to employers are holding steady, executives say.
For the most part, “people arent bailing out of the market,” Gray says.
The American Council of Life Insurers, Washington, reports that, in 1999, U.S. insurers sold group UL coverage with a face value of about $36 billion and group VUL coverage with a face value of about $21 billion.
Trani estimates that group UL and VUL programs generate about $1.5 billion in premium revenue per year.
Although the group UL and VUL markets are much smaller than the group term life market, in the group UL and VUL markets, “theres some potential for growth,” says John LaPrade, manager of group UL sales at Massachusetts Mutual Life Insurance Company, Springfield, Mass.
Most employers that can afford and want group term life programs already have them, but LaPrade estimates that only about 25% to 30% of the employers that should have group UL or VUL programs have them.
A group UL insurance policy is a group policy with a flexible premium schedule. Returns may be fixed temporarily but depend indirectly on the returns the insurer earns on its own investments.
A group VUL insurance policy offers a combination of a flexible payment schedule and returns based on each individual plan members investment decisions. Plan members can choose from a menu of investment options that resemble investment vehicles such as mutual funds.
Both group UL and VUL policies provide portable, permanent life insurance, and an employee can get cash from either kind of policy during retirement by borrowing against its cash value.
Group UL and VUL programs vary substantially from carrier to carrier.
MassMutual offers the equivalent of group VUL policies by combining variable riders with group UL policies. About 25% of the group UL participants activate the variable rider, LaPrade says.
Some insurers serve executives at small employers by selling individual UL and VUL policies through worksite marketing programs, LaPrade says.
Insurers typically aim true group UL and VUL programs at large employers.
Many employers use group UL programs as a supplemental life insurance benefit for rank-and-file employees. Group VUL programs typically serve as supplemental life insurance and savings programs for high-paid executives.
Providers, producers and employers all emphasize that most employees should contribute the maximum amount to their 401(k) plans before thinking about contributing to group UL or VUL plans.
But group UL and group VUL plans may be suitable for employees who have made the maximum 401(k) plan contributions, advocates say.
When employers open group VUL plans to all employees, most of the participants are usually higher-paid employees and the overall take-up rate is only about 5%, Trani says.
Many employers that use VUL policies in executive compensation programs build the policies into corporate-owned life insurance programs or split-dollar life insurance programs.
VUL policies set up outside COLI and split-dollar programs tend to serve a higher percentage of employees than COLI and split-dollar programs, Trani says.
Trani, Eller and other executives interviewed say recent media attacks on corporate-owned life insurance programs and recent Internal Revenue Service notices about taxation of split-dollar plans seem to be increasing employer interest in VUL programs.
Some financial experts and employers say that properly designed COLI and split-dollar plans can still be a good vehicle for providing executive benefits, but Trani says Paragon has sold 12 group VUL plans to employers moving away from split-dollar programs since the beginning of the year.
Health insurance costs are another factor shaping demand for group UL and group VUL products, according to Ed Eller, national sales manager for group universal life products at Minnesota Life Insurance Company, Minneapolis.
Medical cost increases hurt sales to some employers by taking cash away from life plans, but the increases help sales to other employers by encouraging them to emphasize voluntary, employee-funded benefits, Eller says.
Reproduced from National Underwriter Edition, May 12, 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.