Some carriers are refashioning their variable universal life products to underscore VUL’s retirement security role.
They’re not dousing VUL’s primary role of providing death benefit protection, but they definitely are strengthening VUL’s functionality in retirement planning.
This is happening in several ways. A few have added living benefit options comparable to those found in variable annuities–e.g., guaranteed minimum accumulation benefit (GMAB) options and guaranteed withdrawal benefit (GWB) options. These inject a known value into policy accounts that then can be used to supplement other retirement funds. Some are offering “overloan provisions,” as well–to keep VULs from lapsing due to the impact of policy loans. A few are offering long term care riders that accelerate the death benefit in event the insured needs LTC.
People are living longer, so they really need to have larger retirement nest eggs than previous generations, explains Thomas H. Coffey, vice president of the Independence Financial Network of Penn Mutual Life Insurance Company, Philadelphia, Pa. Accessing VUL funds helps the money go further, and the newer features should help, adds Coffey, who is also vice president of Hornor, Townsend & Kent Inc., Horsham, Pa.
“Time was when industry professionals could not even mention the words ‘variable’ and ‘guarantees’ in the same sentence,” he recalls.
Now, guarantees inside of VULs are being offered as a means of enhancing financial security, especially in the retirement years, say industry executives.
Coffey cites Penn Mutual’s decision to start offering a GWB rider with its Cornerstone VUL IV. The rider guarantees a minimal amount of supplemental retirement income, taken as partial withdrawals, no matter how the stock market behaves. This way, the VUL has the flexibility to meet both life insurance and retirement needs, he says.
The feature is suited to buyers in their 40s or younger, who have time to accumulate funds and benefit from growth in equities, Coffey points out. Many younger boomers saw their first stock market crash in the early 2000s, he recalls, so now they value VULs that not only provide fundamental life insurance protection and access to supplement retirement income on a tax-favored basis but that also offset concerns about future market declines.
Actually, he says, the newer VULs should be viewed as senior market products for the coming generation of retirees–not for today’s retirees and near-retirees who “have little time left to maximize returns.”
This view resonates at other insurers.
At Nationwide Financial, Columbus, Ohio, for instance, the “sweet spot” for its flagship VUL in the Best of America series is ages 35-55, says Peter Golato, senior vice president, individual protection. Most buyers are in the small business or executive benefits market. Some people in their early 60s are buying, too, but Golato says they are sophisticated, high-net-worth investors looking for upside to make the product more efficient.
At Pacific Life Insurance Company, Newport Beach, Calif., 54% of 2005 sales for the flagship single-life VUL (Pacific Select Exec II) were in the 30-49 age range, says Mike Tinsley, vice president-strategic marketing. Just 20% were in the 50-59 group, most likely 50-55, he says.
Developers believe the newer features will encourage younger boomers to factor VUL into their retirement planning as well as their estate planning.
Pacific Life always has sent that message, says Tinsley, but in recent years, that focus was “pushed away” by the industry’s heavy emphasis on no-lapse universal life. Now, though, the no-lapse UL tide has run its course, he says, and VULs that meet retirement planning as well as other needs are getting more attention.
In keeping with that, Pacific Life has added a suite of riders to its VUL that underscore that message. One such rider, overloan protection, ensures the VUL will not lapse due to a series of policy loans such as those taken for income, says Tinsley. “You don’t want it [the policy] to lapse before you do,” he says. The other two–minimum earnings benefit and guaranteed minimum distribution–were added in response to the success with similar riders inside of VAs, he says.
Together, the three riders help redefine what clients should expect from a VUL, he says. That is, “they can use it, with comfort, for their retirement income.”
VULs are effective for this, because they have no mandatory distribution at age 70.5, and they do not penalize anyone if death occurs before taking the money out, says Alyce Peterson, vice president-marketing services at Pacific Life.
Because of this, the VUL is a “great complementary financial vehicle” for people concerned about living too long, worried about exhausting other resources or wanting some “padding on top” of other retirement income, she says.
It’s multidimensional, Peterson says. “That’s a story we all need to reinforce.”
Nationwide’s VUL offers an overloan provision, too. In addition, it has a GMAB; this targets “clients who are skeptical of the market and so want upside potential with downside protection,” says Golato.
Another retirement-minded feature in Nationwide’s VUL is an LTC rider, which accelerates a client-selected percentage of death benefit in event of care. Available for two years, the LTC rider is proving “very popular,” says Golato, noting that 20% of Nationwide VULs now have it.
Yet another new feature is Nationwide’s no-cost “automatic income monitor,” which provides active monitoring of the VUL when money is taken out, and notifications and “re-proposals” to client and advisor if risk is detected. The value? It helps determine how much money can be taken out safely for retirement income or other reasons, says Golato. It’s available even if the broker leaves, he says. The clients still decide what to do, he adds, and the broker-dealers still retain ultimate liability. But both know it’s there.
In recent years, VUL has not picked up much new money industrywide, observes Lisa Plotnik, a senior analyst at Cerulli Associates, Boston.
This is fueling insurer efforts to have consumers and advisors look at VUL in new ways via the new features, she says. It is also spurring them to reposition VUL to be increasingly suited for retirement planning as well as for estate planning.
It is too early to tell whether these initiatives will drive new sales, she says. But they definitely are giving VUL increased versatility, “sending the message that it can provide both income to the beneficiary [upon death of the insured] and income to the owner [if funds in the contract are needed before death occurs].”
That should ring bells with certain advisors. One Cerulli study found that 80% of insurance agents identified living benefits as “highly important” in selecting a VUL provider. That is well ahead of investments options, death benefits and pricing features, each of which were named as very important by only 60% of producers.
Since not many VULs yet offer living benefits, “that surprised us,” Plotnik says. “But it shows that agents are seeing VUL’s versatility…It’s a very positive step.” It suggests that the new features are helping give VUL a “powerful dual benefit–a hedge against dying too soon, and also for living too long.”
The new living benefit guarantees probably won’t take off as rapidly as they did inside of VAs, she predicts, due to a myriad of challenges that VUL providers must meet. These include tax issues, advisor training and education on VUL versatility, and developing VUL wholesaling forces.
Also, Plotnik says, marketers will need to “tread carefully” so as not to let VUL’s retirement capabilities overpower its primary purpose–life insurance.
Still, she believes VUL products will “absolutely” have more guarantees in the future. “Anything that protects the principal is important, especially after the stock market crash of 2001-2002,” she explains.
But “how VUL is positioned, sold and maintained will be as important as having the features available,” she adds.
Michael Kitces, director of financial planning for Pinnacle Advisory Group, Columbia, Md., says VULs can work well for retirement income purposes when certain conditions are met (see box).
That narrows the potential market, unless the product is also sold for its protection and estate planning purposes, says Kitces, who recently co-authored “The Annuity Advisor” with John Olsen, which was published by The National Underwriter Company.
He recommends advisors “use VUL for retirement purposes in specialized situations” and more generally position the retirement benefits as “something extra,” in addition to the life insurance.
He also says advisors should be careful in structuring the policy. For example, weigh whether the policy expenses and the cash flows in and out of the VUL will hamper performance. “You have to watch the order of returns,” he cautions. With Monte Carlo modeling, “we’ll see better understanding of the order or returns,” he allows, but “even with good long-term returns, there can be problems.”
The guaranteed withdrawal provisions will help to some extent, he adds, “but that’s no excuse for setting up the VUL so it won’t succeed in the first place.” The same goes for the new guaranteed accumulation benefits, he says.
As time goes on, predicts Tinsley, boomers will become even more concerned about income planning as they respond to messages about not outliving their income. They’ll want “to be sure the money will do for them what they need it to do when they need to do it.” The new features in VUL should help them do that, he indicates.
–Guaranteed minimum accumulation benefit options.
–Guaranteed withdrawal benefit options.
–”Overloan provisions” that keep policies from lapsing due to the impact of policy loans.
–Long term care riders that accelerate the death benefit in event the insured needs LTC.
–A minimum earnings benefit.
–Guaranteed minimum distribution.
–An “automatic income monitor” that provides active monitoring of the VUL when money is taken out, and notifications and “re-proposals” to client and advisor if risk is detected.