One of the challenges of analyzing universal life products of late is finding out how they should be grouped (and compared) by their fundamental mission.
Ongoing specialization in this market means that policies are likely to be in three different categories by design. These are cash value accumulation (and income), low guaranteed premiums with maximum death benefits and little cash value (sometimes referred to as “term alternative plans”), and those meant to provide a balanced approach to cash values and death benefits (the generalists).
These divisions primarily apply to fixed products as equity indexed UL products, which we also have included in this report, are designed for maximum cash values.
Full Disclosure looks at products from different angles to determine what they are designed to do best. For cash value products and those designed for maximum death benefits we assign internal rates of return on these values respectively based upon an assumed premium. For those designed to be sold in the minimum premium guarantee market, we’re not really concerned with values so we look at minimum premiums coupled with level death benefits. To get an idea of where the more general purpose policies fall, we gather data relevant to all of these aspects.
Increasingly, straightforward fixed UL products can be as different as night and day. When looking at an amalgamation of products in a large chart, such as we have included here, it is therefore imperative not to fall into the trap of judging products based on one or two criteria but to take the data and relate it to the mission of each product. For example, a guaranteed death benefit product may have low cash values in one chart but may shine on a minimum premium basis in another. The key is to look at all of the data together.
There are three illustration excerpts in this report taken from the latest Full Disclosure edition featuring 91 universal life policies for sale on Jan. 1, 2006. 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. For the first time we have separated the equity indexed products from the fixed interest ones. There is really too much design difference to put them together, and now that more companies are (rapidly) coming out with EIUL products, it is the ideal time to track them separately as the Full Disclosure software also does.
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, prepayment 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.
In the spirit of product differentiation, Full Disclosure also includes information on what each product is designed for under Product Design Objectives. In addition to the fundamental product designs we have discussed you will find some interesting tweaks and market applications that are more important to you than hypothetical illustrations. You may find some real gems.