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November 12, 2006 at 02:00 PM
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.
