Full Disclosure's Variable Life And Variable Universal Life Report

In addition to illustrated values, we have included summaries of the strengths and designs of these products. The 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.

However, 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. 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.

As previously mentioned, newer products may include death benefit guarantees–via a rider or policy feature–that help insulate the death benefit and required premium commitment from market volatility.

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 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, which is why it would be unfair to compare them under a level death benefit only.

With variable products, avoid comparing products using subaccount performance alone. The same subaccounts are available through many policies, and competition has put 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 and 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 return over the last few years.

The Full Disclosure approach is to look at all of the aspects of the policy that translate value to the policyholder.

Reproduced from National Underwriter Edition, June 23, 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.