In view of the continued improvement in equity market returns in the past few years, many life insurers had expected universal life sales to level off and variable universal life sales to begin to increase.
However, as Chart I shows, producers (and therefore their clients) are still focused on traditional universal life insurance. In 2004, with new annualized premium up 14%, UL sales continued to show healthy growth. This was driven in large part by ULs with long-term no lapse guarantees.
There are several reasons why traditional ULs still have considerable appeal over their VUL counterparts, even in the recent equities market upturn. First, for death benefit focused sales, producers are not yet comfortable advising clients to get back into the market. By sticking with the no lapse guarantees available in many ULs today, producers believe they can avoid the need for “policy rescues” (requiring the policy owner to dump in additional unplanned premium).
Second, although VULs with long-term death benefit guarantees have emerged, with the exception of a small number of UL/VUL hybrids, lifetime premiums are expensive when compared to a similar guarantee offered through a UL.
Finally, UL death benefit returns currently are illustrating at around 6%. It isn’t that surprising that clients who are focused on guarantees are not being tempted by VUL’s potential for higher returns.
Based on a recent UL study by LIMRA International, policies providing long-term competitive no lapse protection now represent just under half of UL first-year recurring premium (see Chart II). On a total collected premium basis, the percentage is probably higher due to the amount of excess premium stemming from 1035 exchange rollovers of VUL and older UL values into the newer long-term guarantee UL plans.
However, from a carrier perspective, the sales success of secondary guarantee UL creates some challenges. For instance, because questions regarding reserving for these ULs under Actuarial Guideline 38 will likely be answered this year, companies will need to respond quickly to any required changes. In addition, the complexity of these products has forced companies to look more carefully at disclosure and communication of what is required to maintain the death benefit guarantee within the framework of a flexible premium product chassis. Also, the continuing growth of the life settlement industry has called into question whether current pricing will hold up for products like UL with no lapse guarantees that are prime targets for settlement.
On the other hand, ULs are being developed and sold in several markets. Most large individual life writers have both a competitive secondary guarantee UL and a competitive current assumption UL.