The new kid on the Variable Universal Life block that everyone seems to be talking about features guarantees by paying some or all the premium into a fixed account. The lure to the customer is simple: invest a minimum amount in the fixed account option and anything over that in separate accounts. This makes for a long-term low guaranteed premium and death benefit, and upside exposure to investment options selected around a clients risk profile.

Four companies now have this guarantee structure, an increase from only two 6 months ago. National Life was the first company to introduce a product followed by MassMutuals slightly different design. Since we last surveyed the market at the end of 2003, both Lincoln National and Hartford Life have introduced these policies.

For now, its only a handful of companies in the game, but a 100% increase in 6 months is something that should be noted. Barring any unforeseen regulatory constraints, we think the basic concept is the wave of the future for VUL.

The key to success is overcoming the learning curve associated with a complex product design and articulating its benefits to the buyer. They are all a little different, so when investigating these “hybrid” policies, look beyond the numbers at how they work. The Specifications section of Full Disclosure is a good place to start, as is the prospectus and sample policy.

Full Disclosure surveys the leading sellers of variable life (VL and VUL) insurance twice yearly. The charts in this report are excerpted from our latest findings on products for sale on May 1, 2004. There are 3 excerpts from the latest VL edition of Full Disclosure for 61 contracts (up from 57 six months ago). There are charts for current illustrated values, a sample case with maximum retirement income, and a small excerpt from our section on the minimum guarantee products mentioned above. Regular Lifetime/Age 100 minimum guarantee premiums are featured in the illustration chart.

Current illustrations are based on a Male Age 40 paying a $7,500 annual premium and a $1 million policy. If our specified premium of $7,500 is too low to illustrate the policy for this age and face amount, the policies are blended with term insurance if available. The death benefit type is level; however, a column is included with a true increasing death benefit for each policy. The class specified is best nonsmoker as long as the class represents at least 15% of the contract issued of each policy. Companies were asked to employ a 10% gross crediting rate that is then net of average fund expenses.

Internal rates of return (IRR) 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.

Variable life also is marketed as a tool to supplement retirement income by surrendering accumulation values to the contracts cost basis and using policy loans thereafter to provide maximum income. In the accompanying retirement income table, companies were asked to illustrate policies using a $10,000 premium starting at a males age 40, selecting an increasing death benefit option until age 65. At retirement age 65, the death benefit type is switched to level as values are liquidated. A residual value of $100,000 was requested at the policy maturity age and companies tried to come as close to that as their illustration systems would allow.

Again, certain policies are designed to do certain things and a high cash value at age 65 does not necessarily translate into high retirement income. Ones that do, typically have low later insurance charges and low, or zero, cost loans.

The illustrated values in this report are meant to be a snapshot of how individual variable life plans are being illustrated on the street as a way to gauge their relative positions for our sample policyholder. Some are built for low premiums or guarantees, while others are meant to generate cash accumulation values. As previously mentioned, newer products may include death benefit guaranteesvia a rider or policy featurethat help insulate the death benefit and required premium commitment from market volatility.

A major pitfall is trying to compare variable products mainly by subaccount performance. The real product differentiation lies 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 (minimum guaranteed premiums, cash values, death benefits or flexibility) is much more relevant to a comparison between contracts than that of whose leading fund has had the best returns over the last few years.


Reproduced from National Underwriter Edition, July 22, 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.