The latest Full Disclosure policy excerpts feature a record 99 universal life insurance policies including 19 indexed varieties. While traditional UL policies are expanding in number as companies seek diversification in the marketplace, much attention is being given to the resurgence of indexed policies. We used to call them Equity Indexed policies, but the new generation of these plans can be based on numerous indexes – not all of them the tied to stocks.
Traditional universal life is based on a current crediting rate that may or may not be directly based on a company’s investment experience (expense charges are also involved in what the policyholder’s policy performance actually is). Indexed UL crediting rates are a different story. They are typically based on the historical performance of the underlying index (usually the S&P 500 Index) at various durations. Complicating this is the crediting method that can have various durations looking back, an assumed participation rate and a hypothetical cap on the gains of the index credited to the policy.
If all this seems a bit cloudy, it is, but over time given the gyrations of the underlying index, these assumptions create an assumed rate that can create a current policy illustration that performs quite well. The challenge is to identify what goes into creating the assumed numbers. The indexed UL illustrations in this excerpt are a snapshot of how these policies are being presented in the market. Full Disclosure features information on their mechanics and how their assumed illustration rates are calculated.
There are 3 excerpts in this report taken from the latest Full Disclosure UL edition. 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. Another chart features 19 indexed policy illustrations.
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 million 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. All of the data is current for products for sale on July 1, 2006.
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 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 of each. In that spirit, we also include 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 what market these policies are meant for. 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.