When gauging how sales of variable universal life (VUL) insurance policies are faring, one need only look at equity market performance. As the equity market has rebounded over the past year, so, too, have VUL sales. According to LIMRA International, the life insurance trade group, VUL sales through the first three quarters of 2004 were up 1%. A small percentage, but it’s good news for the industry, since VUL sales have fallen steadily over the past three years. Sales declined 10% in 2001, 23% in 2002, and 33% in 2003.

VUL sales are on the mend not only because the equity markets have recovered, but also because insurers are creating products with extended guaranteed death benefits. Clients “want equity growth within their life insurance policy, [but] they also want a baseline of [insurance] coverage,” says Roland Fawthorp, second VP in the life product development department at MassMutual. That’s why MassMutual is seeing phenomenal sales of its hybrid product, VUL Guard, which offers a “very competitive no-lapse feature,” he says. If the client overfunds the VUL policy, “no matter what happens in the interest-rate environment or if expenses go up, the client’s base of the pyramid of the life insurance is guaranteed not to lapse.” Total VUL sales at MassMutual were up 36% in 2004, and sales of VUL Guard were up 130% in 2004, the company says. In September, MassMutual launched another hybrid product on the survivorship life insurance side called SVUL Guard.

After the bear market, “consumers are concerned about downside protection, or losing their life insurance policies if they don’t put enough money in” or if the markets take a nosedive, adds Steve Welton, VP of individual marketing at AmeritasAcacia Companies in Lincoln, Nebraska. The trend among some insurers now is offering a lifetime guaranteed death benefit, which “requires a certain predetermined premium to be paid and a certain asset allocation requirement, whether it’s a fixed account or some method of asset allocation,” he says. “If [a policyholder] meets those requirements, their death benefit will be guaranteed for life regardless of the investment performance.”

By design, VUL policies “have a significantly higher death benefit” than variable annuities, says Welton. While AmeritasAcacia doesn’t currently offer a VUL with a lifetime guaranteed death benefit, sales of its VUL product sold through registered reps, Ovation, as well as its No-Load Variable Universal Life product available direct to consumers and through fee-based planners are way up, the company reports. As of November 2004, No-Load VUL sales jumped 40% over 2003 sales, and sales of Ovation are up 15% over the same period. Unlike Ovation, the No-Load VUL “doesn’t have the compensation built into” the product.

Jackson National Life Distributors in Lansing, Michigan recently entered the VUL market with two new products: Ultimate Investor VUL and Jackson National Life Advisor VUL. Ultimate Investor gives policyholders lower surrender charges and higher cash values, as well as a tiered compensation structure for advisors that is similar to an A share mutual fund. “When clients buy life insurance products, they have high surrender charges and don’t have good cash value,” says Bruce Wing, senior VP in Jackson National’s Denver office. “Ultimate Investor is for advisors who are still looking to earn a small up-front commission as well as a trail over time.” Because VUL is built like an A share mutual fund, it has breakpoints and the client pays premiums over time. “Ultimately, it provides the client with a terrific cash value,” Wing says.

A VUL policy offers a great tax advantage because it allows the policyholder “to grow their cash values tax deferred and then access their money through what’s known as a zero-net-cost loan,” Wing explains. Unlike other companies that require long waiting periods, Ultimate Investor allows the policyholder to take a loan out “at the end of the 5th policy year,” he says.

Jackson National Life Advisor VUL has no commissions built into it, and is specifically designed for advisors that work on a fee basis. “It’s a low-load design where the advisor and client negotiate how the advisor gets paid,” Wing says. “Often it’s based on a trail arrangement where the advisor might charge 70 basis points or 100 bps of the assets in the product. The advisor would be able to pull those fees from other assets that might be in the brokerage account the advisor is managing for the client.”

The typical VUL policyholder is looking for a combination of life insurance protection and tax-deferred cash accumulation. Welton says AmeritasAcacia believes “the most appropriate use” of VUL is the latter. A VUL “works very well as a retirement supplement,” because the buyer of a VUL policy–usually someone in their mid- 40s–can overfund the policy to accumulate cash, and, “if done properly,” the money is tax-free at withdrawal. “The caveat is that you need to keep enough money in the [VUL] policy to keep it in force; you don’t want to let it lapse because there are some adverse tax consequences.”

Neal Kerins, assistant VP of life product management at John Hancock in Boston, says about 70% of variable single life sales are geared toward “cash accumulation purposes.” Kerins says 30% of variable life sales “are of the protection variety, where the insurance provides an insurance benefit at an economical premium.” Rather than trying to address both needs with one product, John Hancock–which was acquired by Manulife Financial Corp. last year–plans to replace both companies’ variable life offerings with two distinct products–a COLI and a survivorship VUL. Both products will carry the John Hancock name and are set for release around the middle of 2005.

Inadequate funding of a VUL policy is “very dangerous,” notes Fawthorp, because the policy needs sufficient funds to weather the ups and downs of the equity market. The policy could lapse if it’s not properly funded, and without adequate cash, “the goals that the insurer is trying to achieve won’t be achieved,” he says. “If there isn’t enough money in the policy, there is more insurance risk in the contract, so [the insurance company] has to charge more, which eats away [policy] values quicker.”

When recommending VUL, advisors must always illustrate how fluctuations in equity market returns will affect the value of a client’s VUL policy. Like most other insurance companies, MassMutual requires its agents to show an 8% return versus a 0% return to all clients, Fawthorp says.

To download Investment Advisor’s most recent directory of VUL policies click here

Washington Bureau Chief Melanie Waddell can be reached at mwaddell@ia-mag.com.