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Life Health > Life Insurance

Full Disclosure Variable Life Report

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The newest variable life excerpt from the Full Disclosure software series features 62 policies, including 13 new ones. Most year-to-date subaccount returns are down, which really isn’t news to most of us. What you may not know, and what our latest research reveals, is that the number of policies emphasizing long-term guaranteed premiums has soared. The timing couldn’t be better as this policy-level “flight to safety” in product design offers a whole new comfort level for producers, distributors, and consumers.

Driving the newly competitive guaranteed premiums is the adoption of the new 2001 CSO mortality table, which 17 of the policies in this excerpt now use. Age 121 maturity means a longer term (compared to age 100) to stretch mortality costs, resulting in lower cost premium guarantees for companies wishing to go this route. And they are. When we gathered data in late 2007, there were 23 policies in our long term guaranteed premium sections. This time there are 30, and we are expecting many more in the fall as companies are required to use the new table by 2009.

While very popular with traditional universal life plans, guarantees on premiums and death benefits on VL are a welcome development for producers who have built their practice around VL but are dealing with resistance as investments struggle.

Full Disclosure surveys variable insurers twice each year and tracks illustrated values and the 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 May 1, 2008). There are charts presented for current illustrated values and a scenario with maximum retirement income-an ideal use for VL. There is also the aforementioned 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 million 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 illustrated under an increasing death benefit option.

Variable life is also marketed as a tool to supplement retirement income. This is done by surrendering accumulation values to the contract’s cost basis and using policy loans thereafter, or increasingly, by using only loans 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 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 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 variable life 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.


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