The Remaking Of Variable Universal Life Insurers are considering adding variable annuity and universal life touches

By Linda Koco

It seems as if every industry conference that Jerry Patterson goes to these days, life insurance people are talking about variable universal life insurance.

Specifically, they are watching the annuity space, says Patterson, who is vice president and chief marketing officer of the life and health segment at Principal Financial Group, Des Moines, Iowa. They are taking apart various features in variable annuitiessuch as the guaranteed minimum income benefitto see how these might be leveraged to the VUL space.

National Underwriter interviews indicate many experts are exploring different ways to refashion VUL to meet modern-day and future needs. Some of the current thinking follows.

Insurers are trying to see the pain points in VUL and whether bringing in newer featuresfrom VAs, saywill make sense, says Patterson. Already, he notes, there has been a lot of development around no-lapse guarantees and extending policy maturity beyond age 100.

Now, he says, people are looking at the income guarantees in VAs, to see if we can replicate that in a life insurance contract.

This requires putting a guarantee on the accumulation component and, if certain conditions are met in, say, 15 years, then the owner might have guarantees something like those in annuities. These might be select income withdrawal options.

The carriers are focusing on what these guarantees might look like and what protection would be afforded the customer, in view of reinsurance, cost and similar issues, he says.

One thing Principal already has done is to roll out an automated income distribution option for VUL. This allows partial surrender automatically, on a monthly, quarterly, semiannual or yearly basis. It is a back-end solution that we borrowed from the annuity side, says Patterson, adding, now, our VUL owners wont need to do withdrawals manually anymore.

The insurer also has launched a consumer education program, called From Here To Security, that aims to build understanding of life (and also disability) insurance and how to use the products to meet needs, including supplemental income needs. In a few months, the insurer also will launch a new productcalled VUL Income.

VUL is not just about maximizing the death benefit, stresses Patterson. Its also about what happens in those out years of a policyholders life.

A number of VUL insurers are borrowing feature ideas from fixed universal life insurance, too. For example, some now offer secondary lifetime guarantees similar to those made popular by UL policies in the past 3 to 4 years, says Paul Strong, vice president-life products in the Boston office of John Hancock Financial Services.

Industrywide, VUL sales have taken a backseat to UL since the stock market fell in the early 2000s, Strong points out. That resulted in an exploding focus on guarantees and their importance in life insurance, he says, and VUL carriers want to build on that.

Marketers at Hancock still are strong believers in the benefits of VUL, he stresses. Over the long haul, it should be the most economical choice for someone looking for death benefit.But we want to adopt some of the features that are hot now in UL for the VUL, in order to get the VUL product back on the plate for consideration.

The firm does not view this as an effort to prop up use of VUL for retirement income purposes, Strong says. Rather, our goal is additional security. That is, to ensure that even if the market does poorly, the VUL owners who have such guarantees will not see their coverage lapse.

Four carriers have brought out new VULs that are built to provide both the long-term secondary guarantees of a UL and the investment opportunities of a VUL, points out Thomas Norton, an actuary and president of Norton Consulting Group, Emerson, N.J. The companies are National Life, MassMutual, Hartford and Lincoln. (For more discussion on this, see the July 26, 2004, National Underwriter article by Roger L. Blease, Full Disclosures Variable Life Report.)

Some product observers describe this design as putting a UL inside a VUL.

These products vary in features and complexity, Norton says. However, their common thread is that they use money in the fixed account to support a no-lapse guarantee that is competitive with ULs, which have cutting-edge secondary guarantees. These new VULs do accept money in the separate accounts for market-based accumulation, as in traditional VUL, Norton adds. However, investment accumulation is a secondary priority in these designs. Furthermore, the loadings used to compensate for the additional reserves (related to the VUL guarantees) serve to hurt the relative performance of the investment accounts.

In the past, says Norton, VUL death benefit guarantees were fairly weak, primarily due to onerous reserve requirements. But the new designs have a strong guarantee, coupled with some potential for investment buildup, he says. This may be superior to the death benefit-oriented VULs of the past, he suggests, noting that older VULs relied on favorable projected investment returns to maintain the coverage.

For traditional VULs without secondary guarantees, Norton adds, the thinking today is to be sure the policy is adequately funded and monitored annuallyespecially if the owner intends to make loans and withdrawals.

Jack Desemar Jr., founder and president of The Future Group, a Baton Rouge, La., financial planning and product development firm, is coming at VUL from still another direction.

The no-lapse guarantees in UL and VUL are now available, he says, but the guarantees are pushing up the cost for coverage. In fact, the annual premium for a UL with such a guarantee runs about the same as that for a whole life policy at the same face amount, he says.

That just blows away the VUL concept of inevitable gain and leverage at death if you live too long, Desemar says.

And, the people who live to very old ages can gain more death benefit as well as cash value in a VA rather than a VUL or UL. Thats because of the greater cost of the VULnamely, its at-risk death benefit and cost of insurance charges.

What Im saying is, the value of owning a VA and a VUL invert over time, if the policyholder lives long enough. Then again, if you die with a nonqualified annuity in force, the heirs face a giant tax problem.

A better solution, Desemar says, would be to have a life policy that works somewhat like an annuity in calculating the at-risk death benefit. In annuities, this death benefit is calculated as a one-to-one ratio to cash value every day. The life policy also would calculate the death benefit every day but at a different ratio to cash value.

This way, the life policy is priced like an annuity without being one; it has very little at-risk death benefit and it retains the tax advantages of life insurance.

And, says Desemar, such a policy cant lapse. The reason, he says, is it uses a ratio to determine death benefit instead of a guaranteed flat amount (as is found in traditional VULs and ULs). Also, he says, the application of this ratio means the policy does not require the additional cost of no-lapse guarantees.

A few other trends in VUL thinking:

There is robust product development around lapse protection in VUL, says Patterson. Principal now offers a lapse protection rider which provides that, when the owner has exhausted the contract for income purposes (via loans or withdrawals), the policy goes into a reduced paid-up status. This way, the policy will not lapse up to age 100, at which time the policys extended maturity provision kicks in, ensuring the policy stays in force until death, says Patterson.

Adding VA-type guarantees to single premium variable life policies seems to make sense conceptually, says Norton, the actuary. However, he says, these SPVLs, as they are called, have never become big sellers. In the wire houses, those products tend to be seen as too complex in comparison to VAs, he says. Meanwhile, life insurance specialists tend to view them as dumbed-down life policies, because they lack the flexibility and options of a fully-underwritten flexible-premium VUL.

Dont expect the traditional UL policies to vanish, just because the VULs have added UL-type guarantees, advises Strong of Hancock. I think we will always have a group of producers who may not be registered who like UL, or who see it as a less expensive policy for their clients to maintain. There are a lot of wild cards in that, he allows, such as regulatory developments. But, as things are now, ULs will remain available.

Some VUL insurers do not want to borrow UL guarantee concepts, says Norton. The companies must pay the cost of the reserves on the guarantees, he explains. That means the performance wont be as good as on a traditional VUL. So, some developers are saying, Keep the UL with secondary guarantees separate from the VUL.


Reproduced from National Underwriter Edition, August 19, 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.