The latest Full Disclosure policy excerpts feature a record 107 universal life insurance policies, including 25 indexed varieties. This is 8 more than we have ever had, and it’s a good indication of both the enthusiasm with which companies are embracing indexed UL and the vibrancy of the traditional UL market.
As product analysts, we are continually challenged by the complexity of these products and the design evolutions caused by underlying industry shifts, such as the adoption of the new 2001 CSO tables.
From the standpoint of complexity, no product out there rivals indexed UL. To begin, crediting rates are typically based on the historical performance of the underlying index at various durations. Then, the methods used to credit value back to the policy can vary widely, as can the participation rates or caps that can limit credited values. Add to that the fact that more and more policies offer numerous indexes beyond the traditional S&P 500 index. Some policies also offer blending between indexes and even blending with current assumption interest rates like a traditional universal life policy. This enables the policyholder to “dial-in” a current interest rate to varying degrees.
With all of these permutations, how can a reasonable apples-to-apples comparison be obtained? In the latest edition of Full Disclosure, we asked companies contributing illustrations to base them on the S&P 500 Index, which most would have. We also requested that they use an annual point-to-point crediting method (if available). This is a fairly straightforward crediting method that we assumed most policies would offer. What we got back was a somewhat mixed bag of numbers, as not everyone did–or could do–what we requested, and there was also some unhappy feedback from companies who indicated their products were not being allowed to perform to the best of their capabilities.
Use these indexed universal numbers with care, as the policies will perform differently under different combinations of indexes and crediting methods–a seemingly infinite number of combinations if other factors are brought into play. In the future, we are going to ask the companies to provide values as each policy is typically illustrated in the field. Full Disclosure software features information on policy mechanics and how their assumed illustration rates are calculated. If you would like to sound off on this issue, I would love to hear from you.
There are 2 excerpts in this report taken from the latest Full Disclosure universal life 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. In this chart, if the minimum premium to endow or carry the policy seems low, it may be that the policy uses the 2001 CSO mortality table. These policies will endow at age 121.
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 $1,000,000 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 to indicate which are designed to generate maximum death benefits. All of the data is current for products for sale on January 1, 2007.
The guaranteed minimum premium excerpt is for long-term (age 100 or lifetime) guaranteed premium and death benefit. Whether automatically, by rider, or by a minimum premium level, 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 and 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 how 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 universal life 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, Full Disclosure also 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 which markets many of the policies are meant to target. 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, using accounting benefit riders or high early cash values.