What Advisors Say They Need

In The Current Variable Life Marketplace

As everyone knows, sales of variable life insurance slumped badly when the bull stock market run of the 1990s came to an end. The product has yet to recover, despite the recent upturn in equity markets.

If you ask advisors what lies behind these trends, as was done in a recent Million Dollar Round Table survey of members who are most active in VL markets, youre likely to hear a variety of explanations. Some say the product was oversold during the boom market, while others see consumers overreacting to investment swings in either direction.

Regardless of the cause, however, top agents seem to agree that the targeted consumer market for VL products has narrowed. It is now limited to somewhat younger clients and is less likely to be considered the answer in pure protection cases, such as estate and charitable giving. And it has moved upscale to markets having the kind of disposable income necessary to fund the contract conservatively.

Variable life business also has suffered because of relative improvements in fixed permanent life products. Highly competitive universal life products with secondary guarantees have become particularly attractive as alternatives.

The MDRT panel generally was satisfied with VL products available on the market today. Many noted the dramatic improvement in plan designs and options compared with earlier generation offerings. They also had good things to say about recently introduced “hybrid” VL products that offer death benefit guarantees, subject to specified premium funding levels.

Looking beneath the hood, advisors often disagree on the relative importance of various VL product features. For example, some see guarantee provisions as increasingly important, although not as important or as common perhaps as has been true in variable annuity markets. This would include minimum death benefit or interest rate contract provisions or riders.

There is, however, some disagreement on this point, as others prefer to manage risk the old-fashioned way, encouraging clients to fund the product properly and diversify fund allocations.

Advisors generally see loan, surrender and withdrawal provisions of VL products as crucial in niche markets for VL, such as corporate owned, deferred compensation and retirement supplement markets. Some believe clients often are attracted to plans allowing easier access to cash values. They believe at least some consumers like seeing cash values accumulate early and are more comfortable knowing they have access to policy values even if they have no specific plans to use them. These features mitigate some of the bad press insurance and annuities face in comparisons with mutual funds.

There is, however, a dissenting view on this: Some advisors have a problem with sales approaches and uses that suggest the primary purpose of the VL contract may be something other than protection.

Expense charges generally are not seen as a major factor differentiating products and carriers, according to the interviews. Advisors see variations in how these are structured across companies, but they appear less likely to notice differences in combined expenses. Transparency is an issue here. Many admit it can be difficult for professional agents, let alone their clients, to understand expense differences across products. Some see carriers playing “games” to avoid highlighting loads.

Subaccount options are the defining characteristic of VL products. A range of options is needed to cover major asset classes. Advisors find at least some clients comforted by having “brand” funds to choose from. Beyond that, however, producers often view having too many options as confusing to clients and believe that 40-50 funds offered by many carriers is probably “overkill.”

To some advisors, automatic fund rebalancing capabilities have become more important, again as a result of changing markets. But there are others who prefer reviewing VL fund allocations personally with clients.

The use of constant-return assumptions in product illustrations may be another casualty of the bear market, according to the survey. Advisors see this as giving clients an inherently unrealistic view of the product. It hides risks to clients associated with adverse short- or medium-term swings and leaves consumers ill-prepared for the realities of financial markets.

Also mentioned was the issue of reporting results to in-force policyholders. Respondents report difficulties in getting updated reports. Some advisors actually encourage clients to use one of the available model investment allocations because otherwise carriers are unable to provide reports on customized allocations.

Many advisors see life insurers lagging 401(k) or mutual fund providers in the area of reporting variable account information. Fluctuating markets of recent years appear to have fueled the demand for more sophisticated illustration and reporting capabilities to help producers and consumers make better decisions on when to choose variable products, and about proper funding and diversification.

Overall, advisors describe VL as having become a more difficult sale as a result of recent financial market trends.

How should VL carriers respond? Enhanced guarantee features in VL products do seem helpful to advisors in some cases. However, advisors seem most interested in carrier help providing information and tools to help educate clients about the product. Better policy in-force reports and updates appear to be a particularly pressing need. There is also considerable interest in illustration and simulation tools that move away from the grossly unrealistic straight-line return assumptions. At another level, simpler and more transparent VL products would also help.

Joseph A. Gareis, CLU, ChFC, is a consultant specializing in market research at Milliman Inc. in Hartford, Conn. He can be reached via e-mail at joe.Gareis@milliman.com.


Reproduced from National Underwriter Edition, April 16, 2004. Copyright 2004 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.