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Full Disclosures UL Report

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Major universal life companies remain committed to minimum premium long-term death benefit guarantees even as regulators are struggling with the question of adequate reserving levels for these products.

You may recall that the last time we analyzed minimum long-term guarantee premiums, average minimum premium levels dropped about 3%. New data suggests this pricing trend has reversed slightly even though more companies are adopting the new 2001 CSO mortality table resulting in lower illustrated mortality costs. By any measure, even though minimum premiums have started to rise, they are still a bargain at many companies.

We expect long-term guaranteed minimum premium prices to firm up even further now that reserving changes for long-term guarantees have evolved and now are being considered within the National Association of Insurance Commissioners. Companies already are looking to balance policy risk in a number of ways such as tightening underwriting and making guarantee durations more flexible. It also will be interesting to see where and how far pricing changes go as more companies implement the new mortality table. Eight products in the latest release of Full Disclosure utilize the new table, up from four in January.

A trend we have observed is that Equity Indexed UL products are receiving a lot more attention than they have for the last five years or so. Some companies, such as AmerUs and Conseco, have made EIUL a cornerstone of their marketing efforts, but there are products in the pipeline at companies that have never had one. Full Disclosure features information on their mechanics and how their assumed illustration rates are calculated, but the illustration excerpts are contained in this report for your review. Some of the numbers look like anomalies compared to straight universal life, but this is, in fact, how they are being illustrated on the street.

There are three excerpts in this report taken from the latest Full Disclosure edition featuring 87 UL policies for sale on July 1, 2005. The largest chart includes illustrated values on a current basis and is accompanied by one featuring select minimum premiums necessary to guarantee the premium and death benefit to age 100 or for life. A third chart features a retirement income scenario to show maximum income from policies with a high equal premium.

Current illustrations are based on a Male Age 40 with a best nonsmoker class (representing at least 15% of the contracts issued) paying a $7,500 annual premium and a $1,000,000 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 to indicate which are designed to generate maximum death benefits.

The guaranteed minimum premium excerpt is for long-term (age 100 or lifetime) guaranteed premium and death benefit. Whether by rider, a minimum premium level or automatically, mechanisms to include the guarantee may differ. Other guarantee variations include duration, pre-payment discounts and other nuances that help differentiate products in a crowded marketplace and serve individual customer needs (in addition to making the jobs of product wholesalers a little more exciting). If a policy is not also featured in the minimum guaranteed premium chart, it does not offer a long-term secondary guarantee but may offer shorter guarantee durations as specified in the main chart featuring illustrated values.

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 providing 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, and columns are included to show you what the death benefits would be illustrated under an increasing death benefit option. It’s easy to see, using the provided IRRs, which policies are built to generate death benefits, which is why it would be unfair to compare them under a level death benefit only. These values are meant to be a snapshot of how individual UL plans are being illustrated on the street as a way to gauge their relative positions for our sample policyholder.

The real product differentiation is at the policy level in the features, limitations, and current and guaranteed cost structure. 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 objectives may be listed, you can see for what market many of these policies are meant. Some are built for low premiums, for example, while others are meant to generate major league cash values. Others may be aimed at the business market with accounting benefit riders or high early cash values.


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