As great as the potential rewards for buyers of variable life policies are, there is always the risk of volatility within subaccounts, particularly those with aggressive growth or specialty objectives.
Naturally, one way to reduce the risk is to diversify between many investment objectives. This strategy works well with automatic portfolio rebalancing, which can adjust the investment mix when shifts occur, which lessens overall volatility to an even greater degree. However, for savvy buyers with a long-term view who seek maximum returns through greater risk there is also a way to reduce volatility without reducing overall gains.
Our latest Full Disclosure survey of top variable life insurers indicates that 80% of the policies on the market offer the ability to direct subaccount charges to be taken from a specific subaccount. By taking the charges, for example, from a safe and stable but lower performing money market subaccount rather than a more volatile aggressive growth one, the volatility of the aggressive fund can be blunted as there are no charges being deducted from it. One company in the market advertises it this way: “Having…charges deducted from the policy’s fixed account, or another stable value account, may help mitigate the effect of market volatility on policy value.”
Full Disclosure surveys variable insurers for this and other tools they bring to the marketplace twice each year. We also look at how they are illustrating their products in the field with an eye toward what each is designed for.
The charts in this report are excerpted from our latest findings on products for sale on May 1, 2005. There are charts for current illustrated values and a sample case with maximum retirement income–an ideal use for variable life insurance. The main illustration chart also features the maximum duration the death benefit and premium can be guaranteed along with the minimum premium the policyholder would pay to obtain that guarantee.