by Michael S. Pinkans

The stock market recently hit a 3-year high. Judging from the past, variable life sales tend to lag the market by about 6 months, so if this market upturn continues, VUL sales should be pretty good in 2005.

But lets hope the industry does not repeat the mistakes made in selling VUL in the past. Specifically, the business needs to examine how to enhance the value VUL brings to the consumer, to ensure continuing customer satisfaction. Thats important because, despite the recent market rebound, its likely that more than a few customers who purchased VUL in the late 1990s still arent too happy about subaccount performance.

The box summarizes key characteristics of the VUL buyer. The VUL industry always has touted that its product allows such customers complete controlfrom the initial investment decision-making process on to future subaccount allocations. But has this worked out in reality? Do customers really understand the equity marketplace and are most insurance agents well versed enough to provide detailed investment advice?

Lets remember that during the last 20 years, the S&P 500 index grew by almost 13%. However, one would be hard pressed to find an investor who actually earned 13% over that same period. Thus, though availability of customer-directed investments sounds like a great idea, actual performance appears to lag.

How can the industry help the VUL customer make more informed decisions?

The answer lies in offering professional money management services (also called active money management). Some VUL insurers already offer such a service, either for no cost or for very low additional cost above basic contract expenses. Either way, the insurer partners with professional money managers to develop asset allocation strategies and management tools that help the customer with decision-making. The service provides the customer with expert, unbiased advice on which subaccounts are recommended based on the customers risk profile and investment horizon. This service is ongoing, not just at point of sale.

To illustrate, lets assume the following: Mr. Jones has purchased a VUL from a company that we will call Sample Life Mutual. The VUL offers professional subaccount management, utilizing a well known outside investment firm, which we shall call ZZ Advisors. There is no additional fee for this service above basic VUL fees. Based on Mr. Jones risk profile and investment horizon, his money is placed in an asset allocation strategy thats 85% equity and 15% fixed; the portfolio consists of 6 high-performing subaccounts from 3 reputable fund managers.

Now, lets assume that a few months after the VUL was sold to Mr. Jones, a fund manager for one of the policys subaccounts gets in trouble over market-timing and late trading issues. Rather than risk having Mr. Jones worry about what to do, ZZ Advisors, the professional management firm, steps in. The firm decides to make an immediate sale of that particular subaccount and put the money into another subaccount that has similar investment objectives but is now deemed a better fit. Mr. Jones receives a confirmation of the trade with a reasoning as to why it was made.

Compare this to what would happen if Mr. Jones bought a VUL having no professional subaccount management. He or his registered rep must become and remain knowledgeable about the investment environment to maximize performance. The problem is that most customers dont have the time, or ability, to manage their contracts properly in this fashion.

Most VUL insurers provide this service for the initial asset allocation. However, very few provide ongoing, or “active,” subaccount management as illustrated above. The benefits for the customer are that someone is always watching over the portfolio, and subaccount changes will be made automatically based on macro and micro variables. Whats been so successful for the investment side of the house is now coming to life insurance contracts.

In sum, the overall benefits of VUL can be tremendous if customers really understand what they bought and if the policy offers active assistance in the subaccount management.

Michael S. Pinkans, CFA, CFP, CLU, ChFC is a registered representative and investment advisor with Equity Services Inc. and vice president of sales and promotion at National Life Insurance Company, Montpelier, VT. His e-mail address is mpinkans@nationallife.com.


Reproduced from National Underwriter Edition, April 1, 2005. Copyright 2005 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.