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Life Health > Life Insurance

Full Disclosure VL Report

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While international and domestic equity market returns have been very strong over the last year, variable universal life and variable life sales are mixed. According to LIMRA International, Hartford, Conn., first quarter variable universal life premium volume was off 5% in 2007 compared with the same 2006 quarter. Variable life premiums were up 7% over the same period. The number of policies issued declined from 5-7% respectively. While we would expect somewhat better figures in light of some great performance in many sub-account sectors, these results are tempered by the fact that first quarter 2006 results were very strong compared to those in 2005.

Full Disclosure surveys variable insurers twice each year and tracks illustrated values as well as other benefits each bring to the marketplace. While it is tempting to try to compare products using sub-account 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.

Comparing products hasn’t gotten any easier as insurers continue to add new features to not only appeal to potential policyholders, but as importantly, the wholesalers, wire houses, brokers and agents who distribute them in this competitive environment. As important as the ability to generate cash values are 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. Additional policy features are designed to cushion the risk associated with a variable product such as guaranteed income and/or guaranteed death benefit options.

One new development we are seeing is the adoption in variable products of the new 2001 CSO Mortality Table. Companies are required to adopt the new table by 2009 and those that have done so, with at least one variable product, include Ameritas Life, AXA Equitable Life, John Hancock Life, and Northwestern Mutual Life. These policies will have much later maturity ages and other pricing differences because of the adoption of the new table that takes into account that people are living longer.

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 May 1, 2007). There are charts for current illustrated values, guaranteed minimum premiums and scenario with maximum retirement income – an ideal use for variable life insurance. 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. There is also a separate guaranteed minimum premium excerpt for long-term (age 100 or lifetime) guaranteed premium and death benefit.

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 (IRR) 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.

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’s 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 whose leading fund has had the best returns over the last few years. To help clarify what each product in this report is designed for, we have included information under Product Design Objectives.


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