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.
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, 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 what the death benefits would be illustrated under an increasing death benefit option.
Variable life is also marketed as a tool to supplement retirement income by surrendering accumulation values to the contract’s 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 Male 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 have this, 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 Objectives. While not all of a product’s design objectives may be listed, it can be seen for what market many of these policies are meant. Some are built for low premiums, for example, while others are meant to generate short- or long-term cash values.