Full Disclosures Variable Life Report

In the last installment of Full Disclosures variable life excerpt (see NU, July 26) I predicted that newly introduced policy designs featuring death benefit and premium guarantees paid from a fixed account would be exploding on the scene. So far that explosion has not happened as fast as I thought, although there are product development efforts at a number of companies.

Four companies currently sell products with this guarantee structure, the same as 6 months ago. National Life was the first company to introduce a product followed by MassMutuals slightly different design. Lincoln National and Hartford Life introduced policies soon thereafter.

The lure to the customer is simple in these designs: Invest a minimum amount in the fixed account option to guarantee the death benefit and no-lapse premium. Anything paid in above that is invested in separate subaccounts at the discretion of the policy owner. This makes for a long-term low guaranteed premium and death benefit, and upside exposure to investment options selected around a clients risk profile. Because the guarantee originates from funds set aside from those used for investment by the policyholder, the lowest premium necessary to secure the guarantee for life, the necessary premium is usually lower than a traditional guarantee. The downside of these designs (and what could account for their slow adoption) is their complexity, and the correspondingly complex illustrations that can come with them.

Full Disclosure surveys the leading sellers of variable and variable universal life insurance twice yearly. The charts in this report are excerpted from our latest findings on products for sale on Sept. 1, 2004. There are three excerpts from the latest Variable Life Edition of Full Disclosure for 64 contracts (up from 61 six months ago and 57 before that). 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 (IRRs) figures, included in the main chart, indicate which products are designed to be more efficient in producing cash values and 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 you 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 life variable 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. In that spirit, Full Disclosure also includes information on what each product is designed to do under Product Design Strengths. While not all of a products design objectives may be listed, you can see for what market many of these policies are meant (see page 38). Some are built for low premiums, for example, while others are meant to generate major league cash values.


Reproduced from National Underwriter Edition, December 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.