What better insurance vehicle could offer upside equity return potential while promising a floor on death benefit protection? Variable universal life policies incorporating a guaranteed minimum death benefit could fit the bill.
Historically, VULs with GMDBs have been thought to be weaker than universal life policies with secondary guarantees and equity-indexed life guarantees, but that trend seems to be reversing slowly. Lately, there seems to be more competitive GMDBs emerging in the market.
UL contracts are generally long-term in nature, with some contracts expected to remain in force for 20, 30, even 40 years. This long-term chassis, particularly with a level pay premium pattern, would seemingly be well suited to the potentially volatile but generally long-run superior performance of a VUL contract.
In the not too distant past, a common approach in developing premiums for VULs with a GMDB feature was to utilize a low-growth assumption for the account value, such as 2% to 4%. Here, the aim was to solve for the level-pay premium that would allow the account value to last to the end of the GMDB period (e.g., age 85).
This low-growth assumption seems very conservative, even relative to moderate historical long-term equity market return experience. This makes it very challenging to develop competitive premiums, as compared to recent ULSG levels. Still, this method was used for a number of reasons, including simplicity, conservatism and the lack of focus on competitive long-term GMDBs in the VUL market.
But now VULs are taking a page from the variable annuity playbook.
It is well known that product guarantees have become a cornerstone in the VA market, particularly in the last several years. Managing the risk associated with offering these guarantees has therefore become a core competency of many companies. Leveraging these capabilities can help insurers incorporate more competitive GMDBs into their VUL products, too.
Here are some applicable strategies:
Dynamic hedging: this is used in some form by the vast majority of VA writers. Since many of the significant VUL issuers also offer VAs, these insurers could conceivably leverage their hedging expertise to help manage the VUL GMDB risk. Hedging programs generally benefit from diversification, so combining VUL GMDB hedging with existing VA hedging programs may improve overall hedge results.