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lk 05 Purushotham UL Appeal

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Banner–Cover Story–Life Insurance Products

What They Did Not Expect: UL Still Has Appeal

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 policyowner 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 hybrid, lifetime premiums are expensive when compared to a similar guarantee offered through a UL.

Finally, UL death benefit returns are currently 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 2). 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.

Looking at sales results for 2004, while the average issue age for a death benefit guarantee UL is around 65, the average current assumption buyer is closer to 45. Death benefit guarantee plans are commonly developed to be competitive in the affluent market and at ages 55 and older while most current assumption policies target both the middle and affluent markets and age groups 55 and younger.

Although sales of current assumption UL actually declined by about 10% in 2004, this product continues to be a major focus for some carriers, especially those serving the middle market through well-established affiliated agent channels. Based on supplemental data collected in LIMRA’s quarterly individual life sales surveys, 9 of the 10 companies that ended the year with double-digit growth in current assumption UL premium sell primarily to middle-income customers through affiliated or captive agents. If long-term interest rates begin to rise as predicted, current assumption plans may begin to look more attractive to affluent clients as well.

Like the return of premium policies now available in the term marketplace, there are some niche market ULs that have gained sales momentum over the past few years. Equity indexed UL has become a strong competitor for VUL among customers interested in participating in the equities markets in a limited way while retaining some downside protection.

There are also a small number of products that provide for both life insurance and long term care needs through the acceleration of death benefits or the addition of long term care riders. Typically, these pay out 2%-4% of the death benefit each month for qualified LTC expenses. To date, the majority of these policies are sold as a single premium UL; for a few carriers, the product has shown promise.

The fact is that UL insurance still has considerable appeal to both individual life producers and clients. However, over the past decade, the industry has seen the importance of diversification in both investing and product manufacturing. In light of this, individual life carriers are working to mitigate the risks to UL profitability while pursuing a diversification strategy both for their overall product portfolio as well as for their UL line.

Marianne Purushotham is a research actuary in LIMRA International’s product research center. She can be reached at [email protected].


UL policies providing for long-term competitive no lapse protection now represent just under half of UL first-year recurring premium


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