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Life Health > Life Insurance

Full Disclosure Variable Life Report

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Recently there was some good news regarding life insurance sales. According to LIMRA International, new annualized premium in the first quarter of 2006 rose 15% over the same quarter in 2005 with most of the gains coming from variable universal and universal life products. LIMRA went on to state that the increase included the second double-digit growth in variable sales in five years.

What I find remarkable is that this is a time when most agree that variable insurers are feeling the pressure from indexed life products, particularly with the relentless volatility we continue to experience in equity markets. While not all products have them, I believe that the foundation of the support for variable products lies in premium guarantees (also cited in part by the LIMRA study) that take the edge off consumer unease and that may, in fact, lead to larger policy sizes.

When it comes to looking at individual variable life products (the “wrapper” around the subaccounts if you will), Full Disclosure’s approach is to examine how products are being illustrated in the field but more importantly to look at the numbers with an eye toward what each product is designed for. There are charts for current illustrated values, guaranteed minimum premiums and a scenario with maximum retirement income–an ideal use for VL.

The main illustration chart also features the maximum duration the death benefit and premium can be guaranteed along with the minimum premium the policyholder would pay to obtain that guarantee. Our survey also features 56 specifications and features for each policy, but with the exception of a Product Design Objective section, this excerpt is about the numbers.

Full Disclosure surveys variable insurers twice each year (variable survivorship products are included in a separate survey). The data in this excerpt is current as of May 1, 2006. Current illustrations are based on a Male Age 40 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. The class specified is best nonsmoker as long as the class represents at least 15% of the contract issued of each policy. Companies were asked to employ a 10% gross crediting rate that is then net of average fund expenses.

Internal rates of return (IRR) figures, included in the main chart, indicate which products are designed to be more efficient in producing cash values, death benefits or are 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. Information is included to show what the death benefits would be illustrated under an increasing death benefit option.

The guaranteed minimum premium excerpt is for long-term (age 100 or lifetime) guaranteed premium and death benefit. Some of the policies in this report guarantee the death benefit through a fixed account that enables a competitive low premium guarantee. 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.

Variable life also is marketed as a tool to supplement retirement income by surrendering accumulation values to the contract’s cost basis and using policy loans thereafter to provide maximum income. In the accompanying retirement income table, companies were asked to illustrate policies using a $10,000 premium starting at a male’s age 40, selecting an increasing death benefit option until age 65. At retirement age 65, the death benefit type is switched to level as values are liquidated. A residual value of $100,000 was requested at the policy maturity age and companies tried to come as close to that as their illustration systems would allow. Again, certain policies are designed to do certain things and a high cash value at age 65 does not necessarily translate into high retirement income. Ones that do typically have low later insurance charges and low, or zero, cost loans.

Note: Earlier in the year Lincoln Benefit Life was inadvertently left out of Full Disclosure’s universal life edition and subsequent excerpt. Its products will be in the next UL product roundup.


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