Is there really a perfect life insurance contract?
That is, is there a life policy that can solve everyone’s needs whether it be low-cost death benefit protection, premium flexibility and/or solid cash value accumulation potential with decent contract guarantees? Is there one that fits everyone’s investment horizon and risk profile? Is there one that can satisfy a customer in a low interest rate environment when commodities such as oil are at record levels and the stock market remains extremely volatile?
No. There isn’t one contract that can do everything. There are trade-offs with each.
But an emerging contract design–the equity-indexed universal life (EIUL) policy–may come very close to being the ideal contract for most consumers in today’s interest/overall market environment.
Granted, EIUL has been around for about a decade, with a few companies offering it. But now this marketplace is about to become very crowded with many more companies seeing opportunity here.
What is EIUL? It is traditional universal life insurance that credits interest to the customer’s contract based on movement (if any) of an index (such as the S&P 500 Index) over a given period of time. The contract is not registered (no prospectus or equity licensing required), and the customer never buys the index directly. The insurance company uses most of the premium to buy bonds and mortgages to cover the policy guarantees and a small part of the premium to buy call options on the index.
This type of life insurance is certainly different than traditional UL, in which interest credited is based on performance of the insurance company’s general account bond/mortgage portfolio.
It’s easy to see why, in today’s low interest rate environment, EIUL has appeal for many customers–i.e., the possibility of providing greater upside potential to the customer than offered by relying on regular fixed interest rates.
Why not just sell variable life to provide the customer upside potential? Market research is revealing that most customers today really do want some contract guarantees in their life insurance contract–and an EIUL contract does contain guarantees. Admittedly, these guarantees are at lower levels than those found in traditional UL policies, but given that EIUL contracts offer greater upside potential than traditional UL, this is not a deterrent to sales. (See chart.)
Who are the perfect customers for EIUL? These are people who:
o Are somewhat moderate with their risk profile;
o Want to share some of the risk of policy performance with the issuing insurance company and are willing to give up some guarantees for the potential of additional performance;