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Is Variable Life The Next Betamax?

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Variable universal life sales fell to 12% of total life insurance premium for 2005, according to the 2006 report on U.S. Individual Life Insurance Sales from LIMRA International. That is down from VUL’s 14% level in 2004.

Meanwhile, universal life saw its best sales year ever at 40% of premium, surpassing its previous best years which tied at 38% in 2004 and 1985.

What happened? Variable life commanded almost 40% of all new premium in 1999 as the red-hot stock market continued its unrelenting ways. Now that the market actually has rebounded, at least to five-year highs, why haven’t VUL sales followed suit?

There are two primary reasons for this:

o Agents are feeling they were “burnt” by selling VUL when the market declined, and customers became very unhappy with their subaccount performance; and

o Companies are increasing their focus on indexed universal life designs, which are sold as providing upside potential with downside protection.

So, should the industry write off VUL as its own form of Betamax?

Absolutely not. VUL still holds a tremendous place in the industry, especially since insurers have taken steps in the past couple of years to update the product. In particular, VUL insurers have:

o Instituted better positioning of the risks of variable life in general; and

o Developed contract riders providing something that was unheard of in previous VUL versions–guarantees.

Granted, better positioning of risks of variable life hasn’t been an easy road for insurers, given the previous market experience of many consumers.

But with variable annuities and mutual funds also delivering consumer unhappiness and coming under scrutiny after the market crash, customers are now actually receptive to obtaining more information when considering purchase of a financial security such as VUL. That facilitates the risk discussion.

Also, many VUL companies have sought to make their prospectuses easier to read. That certainly helps contribute to understanding–not only of the customers but also of the advisors who sell the products. (Corporate lawyers aside, even insurance people found it hard to do a cover-to-cover read of past prospectuses.)

Providing some level of guarantees within the contract also has been a difficult road. After all, if some types of guarantees are provided within the contract, there is a cost of some sort that dampens the argument that VUL provides unlimited upside potential.

But the rewards will come for companies that have provided some sort of longer term guarantee protection, cash value accumulation protection or even no/low-cost professional-type money management for VUL subaccounts. (The management feature enables the average policyholder to receive services formerly available for the very large size policies.)

Some dual-licensed agent/reps reportedly are giving up their equity licenses, the intent being to focus on selling indexed universal life. They view the indexed product as a viable alternative to VUL, with the added bonus of not having to worry about broker-dealer compliance.

This is a huge mistake for them and their customers. There’s certainly a place for both indexed universal life and VUL. In fact, there should never really be a comparison between indexed and variable products. Quality companies that market the indexed product position it as an alternative to a fixed universal life product, not VUL, since that is exactly what an indexed universal life policy is–a fixed product, not variable.

Remember the old Betamax vs. VHS tape discussion from years past? There was little disagreement that Betamax was actually the superior technological design. Its tape picture quality shone above its competitor. It was just outmarketed by the VHS industry players.

VUL is no Betamax. It fits the needs of its intended audience in a way that no other life insurance product can do. Only VUL can offer unlimited upside potential to the customer. But it should be marketed that way, too, so its function and purpose are clearly understood.

For customers who have a higher risk profile and a long time horizon, VUL makes perfect sense.


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