Full Disclosure surveys variable life insurers twice each year and tracks illustrated values as well as other benefits each brings to the marketplace. While it is tempting to try to compare products using subaccount performance, the real test of a product’s ability to create policyholder value lies with the contract, or the “wrapper” around the investment components.
Variable products are designed to generate maximum accumulation values, with the policyholder assuming more risk in exchange for potentially greater rewards, but not all products are designed the same and each should be evaluated at the contract level to gauge its ultimate design objectives beyond simply accumulating cash.
This task hasn’t gotten any easier, as insurers continue to add new features not only to appeal to potential policyholders, but just as important, to the wholesalers, wirehouses, brokers and agents who distribute them in this competitive environment. As important as the ability to generate cash values is in variable products, other product design objectives can come in to play. Some policies are designed for maximum death benefits while others may feature zero net cost loans and decreasing M&E charges for maximum retirement income.
This excerpt from Full Disclosure includes information on what each product is designed to do under Product Design Objectives. While not all of a product’s design objectives may be listed, you can see what market many of these policies are meant to do best.
Additional policy features are designed to cushion the risk associated with a variable product such as guaranteed income and/or guaranteed death benefit options. Policies can have up to 4 death benefit options to more closely align with specific policyholder objectives. Similarly, for example, we are seeing policies featuring an overloan provision to guard against lapsation, should policy values dip into the red after loans are considered. Sophisticated policyholders and advisors need investment tools such as automatic portfolio rebalancing, dollar cost averaging, and the ability to direct subaccount charges to be taken from a specific subaccount to limit volatility.
In addition to the contractual and qualitative data on each policy collected, we also look at how they are illustrating their products in the field (current as of Sept. 1, 2006). There are charts for current illustrated values, guaranteed minimum premiums and scenario with maximum retirement income-an ideal use for variable life. 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.
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 (IRRs) 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 you 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, such as Lincoln National’s VUL One, MassMutual’s VUL Guard, and Ameritas’ Protector hVUL (the ‘h’ is for hybrid), 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 is also 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 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.
The illustrated values in this report are meant to be a snapshot of how individual life variable 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. A contract that is policyholder friendly (catch up provisions on secondary guarantees, for example) or that matches the goal of the policyholder (cash, death benefits or flexibility), is much more relevant to a comparison between contracts than that of one whose leading fund has had the best returns over the last few years.