Variable annuities and variable universal life insurance have many bona fide, substantive distinctions. But developers are exploring ways to incorporate features of one type of product into the other.
We will look at this convergent trend here.
One current distinction between the products is in how they are sold. VAs are sold as money purchase, single purchase (by and large) investment vehicles. VULs, on the other hand, are sold primarily based upon death benefit and as a multi-pay vehicle.
Distribution also is significantly different. VAs sell very heavily in financial distribution channels such as wire houses and banks. In these channels, there is relatively little life insurance exposure.
Product designs are rather different, too. As a practical matter, VAs have focused on providing certain kinds of guaranteed living and death benefits. This is done partly to distinguish the products from investments such as mutual funds and partly to respond to the renewed awareness of investment risk.
Going forward, the next wave of product development–which is, in fact, already under way–will likely see life products developed with marketing and product features similar to those associated with variable annuities.
Many industry commentators, including attorneys Norse Blazzard and Judy Hasenauer who write regularly for National Underwriter, have commented on the inherent advantages that life insurance products have over annuities. These advantages include income-tax-free proceeds to heirs for both Modified Endowment Contracts (MECs) and non-Modified Endowment Contracts (non-MECs).
The life insurance advantages also include, very prominently, the ability to structure living distributions so that the policy owner will not incur income taxation as well (only possible in a non-MEC). This latter feature is a compelling competitive advantage for properly structured life insurances that emphasize retirement income.
One of the big challenges facing writers and manufacturers of VULs (and other life products as well) is how to demonstrate their financial efficacy. With very few exceptions, the reality today is that such demonstrations are based upon the assumption of a level gross investment rate. The demonstrations rarely present the quantitative impact of investment volatility.