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Life Health > Life Insurance

Full Disclosure Variable Life Report

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Variable products are generally designed to generate maximum accumulation values through investments in numerous subaccounts varying in risk level and investment objectives of the policyholder.

But investment returns and risk are only part of the story. Not all products are designed the same way and each should be evaluated at the contract level to gauge its ultimate design objectives beyond simply accumulating cash. For example, 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.

Full Disclosure surveys variable insurers twice each year and tracks illustrated values and benefits each brings to the marketplace. 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, 2007). There are charts presented for current illustrated values and a scenario with maximum retirement income–an ideal use for variable life insurance. There is also a separate guaranteed minimum premium excerpt for long-term (age 100 or lifetime) guaranteed premium and death benefit. While very popular with traditional universal life plans, guarantees on premiums and death benefits are increasingly found as an option in VL.

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 what the death benefits would be when 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 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.

One ongoing trend that is shifting values is the adoption of the new 2001 CSO mortality tables. This is required by 2009 and new and repriced products are reflecting the lower mortality expense burden. Policies in this report that utilize the new table include Ameritas Life’s Protector hVUL, AXA Equitable Life’s Incentive Life Legacy, John Hancock Life’s Protection VUL, Lincoln National Life’s VUL One and Northwestern Mutual’s Executive and Custom VUL.

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 through a dedicated fixed account, mechanisms to include the guarantee may differ. If a policy is not 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.

The illustrations in this report are meant to show how individual life variable plans are being illustrated on the street as a way to gauge their relative positions for a sample policyholder. The real product differentiation is at the policy level in the features, limitations, and current and guaranteed cost structure of each. 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. To help clarify what each product in this report is designed for, we have included information under Product Design Objectives.

Clarification: The previous Full Disclosure excerpt on universal life current illustrated values, which ran in the Oct. 1 issue, should have included footnotes for Northwestern Mutual’s Custom UL Protector and Accumulator policies. The illustrations provided ignored the first year premium requirement of $25,000.


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