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;
o Focus both on cash value accumulation and death benefit protection with the possibility of accessing policy cash values at a later date, if available;
o Are willing to accept limited upside interest-crediting potential in exchange for downside risk protection; and,
o Generally shy away from the pure equity markets.
Proper selling of this contract not only requires the advisor to have an understanding of terms such as cap, participation rate and floor (much like selling equity-indexed annuities). But the advisor also needs to know the proper positioning of this product, so the customer has realistic expectations.
EIUL contracts should be compared to straight universal life contracts. The goal for the customer (as with the index annuity sale) is hopefully to “beat” fixed interest rates by 2-4% long term.
This contract should not be compared to variable life. If the customer is enamored with unlimited upside potential, then variable life is the appropriate choice (as long as the customer understands the lack of guarantees in variable life).
EIUL can be the perfect alternative for customers really wanting upside potential with downside protection.
These products are riding on the success of equity-indexed annuities, which have enjoyed a tremendous sales run over the past few years during the generally low interest rate environment. Certainly, the EIUL guarantees aren’t as strong as those in indexed annuities (because of the EIUL’s insurance charges and other contract fees deducted from account values). However, EIUL offers much stronger security for customers than variable life. And, for the customer who really wants to maximize the amount payable to heirs, the EIUL is better. (Consider: How many annuities ever get annuitized? Very few. So, there are probably some index annuity sales that should be EIUL.)
Up to recent times, the insurance industry has really had 4 mainstream insurance contracts–term, whole life, universal life and variable life. For the reasons mentioned above, EIUL is likely to become another mainstream contract.
Michael S. Pinkans, CFA, CFP, CLU, ChFC, is a registered representative and investment advisor with Equity Services Inc. and vice president of sales and promotion at National Life Insurance Company, Montpelier, Vt. His e-mail address is [email protected]
Equity-indexed life insurance may come very close to being the ideal contract for most consumers in today’s interest/overall market environment