The market freefall of recent memory was a shock to the system, which obviously has a lot to do with why variable universal life has not recaptured its rightful market share for new life premiums.
In its most recent quarterly survey of U.S. individual life insurance sales, Limra International reported that variable life scheduled premiums were down in the first quarter of 2004 from the first quarter of 2003. However, half of the top 20 variable life companies reported increases in the first quarter of 2004.
Nearly all were double-digit increases, compared to just one of the top 20 VUL companies reporting an increase in the first quarter of 2003. Also, both the number of policies and total face amount increased during the same period, which are promising signs.
Therefore, it appears that insurance companies are getting the word out again to the marketplace, and producers are passing it on to customers: No other life product can deliver the death benefit protection and potential for cash value accumulation that variable universal life can.
You may ask, what is it going to take to rejuvenate VUL sales? In my opinion, you need these 4 elements:
? Products that reflect the current environment;
? Training and education of producers and clients;
? Communication with clients; and
? Market and economic stability and growth.
Products that reflect the current environment. Although VUL sales have struggled in recent years, companies are re-tooling variable life portfolios and creative product development efforts to make VUL “hot” again.
These activities have led to a greater number and variety of products, riders and benefits, all of which help make the VUL purchase less commoditized in terms of design, structure and cost. These changes will help correctly position this valuable product in the marketplace.
Some of the changes include offering longer guarantees, creating hybrid UL/VUL products and providing ways to access accumulated cash values efficiently.
One recent innovation is the introduction of flexible no-lapse guarantees (sometimes referred to as “shadow account” guarantees) on VUL products. This feature, which was previously found only in UL products, allows clients to invest at least a portion of their assets in the variable investment options while also having a flexible guarantee.
Whether or not customers will find this innovation attractive is still undetermined. In fact, some carriers have fought the urge to add the guarantees because they come at a cost (to either the consumer or the carrier) and therefore tend to impact negatively the cash accumulation potential.
Training and Education of Producers and Clients. Financial professionals who sell variable products may consider VUL a “high maintenance” or complex vehicle compared to other solutions. However, once producers and clients understand that VUL requires a long-term commitment, that market volatility will occur and that the product needs to be funded properly, many of the high maintenance issues are mitigated.
Without this understanding, clients may be disappointed by, and more likely to abandon, the product. So, producers should take a proactive role in educating clients and providing them with ongoing monitoring and management of their policies.
Producers also should make clients aware of the flexibility and features that exist in their VUL product. Examples of features that help protect the client during periods of volatility are tax-free transfers between investment options, automatic rebalancing and allocated/directed charges.
Dollar cost averaging also can help manage risk, but the tool does not guarantee positive performance and requires continued purchases through periods of low price levels.
Producers need to understand and be comfortable with these features so they can make appropriate recommendations to clients based on the individual clients risk tolerance, time horizon and financial goals.
Communicating with Variable Life Purchasers. One of the most important elements of the variable life sale is to communicate, communicate, communicate with clients. Here are the key points to make:
–VUL is a long-term commitment that needs to be funded properly. In fact, paying more may actually help reduce the risk of a policy lapse that comes with down markets while providing greater accumulation potential during up markets.
–Asset allocation needs to be reviewed periodically. VUL contracts offer a wide range of investment options across asset classes and investment styles that allow the policyowner to choose an allocation that is suitable for their risk tolerance and time horizon.
While it is difficult to predict the markets course, maintaining a well-diversified portfolio can help clients live through volatile periods.
The combination of an income tax-free death benefit with the potential for long-term, tax-deferred cash accumulation make VUL a viable life insurance product, even during a down market.
If there is sufficient cash value in the policy, policy loans and withdrawals generally can be taken at any time during the life of the policy. For loans, clients usually can take 90% or more of the policy surrender value.
As to withdrawals, clients can take the cost basis first without paying taxes, followed by the gain (which would be taxed). Of course, withdrawals and loans reduce policy cash values and the death benefit, increase the possibility of lapse, affect policy guarantees against lapse, and may have tax consequences.
More restrictive tax rules apply if the policy is a modified endowment contract or MEC. Clients should be told to discuss any loans or withdrawals with their advisors.
During periods of market volatility, it is even more important for financial professionals to communicate with clients. And it is generally good advice to deliver a stay-the-course message and explain that VUL is a long-term commitment. Producers need to reinforce the fact that poor short-term performance alone should not lead clients to abandoning their variable products.
Market and Economic Stability and Growth. No matter what guarantees or investment management features a VUL contract offers, the equity market and economy will need to stabilize and grow for the product to attract a larger percentage of new business premiums.
The good news is that in its revised quarterly estimates in national income and product accounts (NIPAs) released July 30, the U.S. Department of Commerce, Bureau of Economic Analysis has reported increasing real disposable personal income (DPI) from 2000 through 2003. Separate forecasts by the Prudential Equity Group are projecting additional real DPI for 2004 and 2005.
I expect that some of these dollars will find their way into a permanent protection product like VUL because of its cash value accumulation potential.
You may say that its been 4 years since the VUL market peaked, but VUL is intended to provide a long-term solution. VUL can be the right product for clients who:
? Obviously have a need for life insurance;
? Understand the market and the risks associated with investing their net premiums among various investment options;
? Intend on funding the contract appropriately; and
? Are likely to take advantage of the investment management features that can be found in many VUL products.
Based on the recent activity, the current marketplace and the positive forecasts for disposable income growth, its time to revisit VUL. Experience tells me that the increasing number and variety of recent VUL product changes is a precursor to stronger sales.
Thomas E. Beresford, FSA, is vice president, product management at Prudential Insurance Company of America, Newark, N.J., where he is responsible for individual life insurance product management. His e-mail address is: firstname.lastname@example.org.
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.