If you have been following these universal life excerpts from the Full Disclosure policy comparison software series for any amount of time, you may have noticed how different certain policies have become in relation to others, particularly regarding illustrated values. It’s not because one policy is necessarily “better” than another. Universal life is an inherently flexibly policy design chassis that insurers can customize–and have increasingly been doing so–to meet various design objectives. Products can be modified via options (such as adding a long term guarantee) or riders, but design objectives are more likely to be inherent in the basic makeup of the contract.
When looking at a relatively small amount of information, such as these excerpts present, a certain level of confusion can arise regarding what is actually being compared. To make things a bit clearer, the editors of Full Disclosure have added a code appearing next to each policy name in the following charts. We have always included a section titled Policy Design Objectives, but these codes are designed to place what we feel the product is designed to do right up front. This is especially important, as the number of different types of policies is expanding. The codes are:
o GMDB–Guaranteed Minimum Premium/Death Benefit. These are policies that generate little cash value and are designed for long-term (lifetime) death benefits with a guaranteed minimum premium outlay.
o DB–Maximum Death Benefits. These are policies that generally cost little to carry on a current basis and whose primary purpose is to provide maximum death benefits for a given premium.
o AV–Maximum Accumulation Values. These policies are designed for maximum cash value accumulation with more of the premium going towards building values as opposed to growing death benefits. They usually are also designed for maximum retirement or other income and may feature “zero-cost” policy loans to do so.
o F/G–Flexible/General Purpose. A policy with a Flexible/General identification may be constructed to achieve different objectives by selecting different options. For example, it could be either made to be a Guaranteed Minimum Premium/Death Benefit policy, or an Accumulation Policy depending on options chosen or funding level. An F/G designation could also mean that it is what is sometimes called a “balanced” or “all around” policy. That is, it generates cash values and death benefits in somewhat equal measure.
o S–Specialty. These are policies that do not fit in the above categories. For example, there is one policy so listed in this excerpt from Full Disclosure that is not medically underwritten.
These identifications are designed to help you fairly compare policies that share common designs.
There are 3 excerpts in this report taken from the latest Full Disclosure UL/indexed UL edition. (The indexed UL excerpt will be published in an upcoming issue.) 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 (or age 121). A final table features retirement income from policies generally designed for maximum accumulation values and resulting income streams. The parameters of the illustrations are included with the charts.
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. Also included at the end of the current illustration chart are the minimum level premium on a current basis to endow the policy (cash value equals death benefit at maturity) and minimum premium to carry it (cash value equals lowest cash values at maturity). Please see the footnotes for this chart for greater detail. All of the data is current for products for sale on July 1, 2008.
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 automatically, 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. 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.
Internal rates of return (IRRs) figures included in the main chart indicate which products are designed to be more efficient in producing cash values, death benefits, or providing an all-around solution. The IRR can be applied to cash values as well as death benefits, and we’ve 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. 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 UL plans are being illustrated on the street as a way to gauge their relative positions for our sample policyholder.
Also included at the end of the current illustration chart are the minimum level premium on a current basis to endow the policy (cash value equals death benefit at maturity) and minimum premium to carry it (cash value equals lowest cash value at maturity).
The real product differentiation is at the policy level in the features, limitations, and current and guaranteed cost structure of each. In a separate section we have included 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 for what market many of these policies are meant. Some are built for low premiums, while others may be aimed at the business market with accounting benefit riders or high early cash values. These will help round out the new codes next to the policy names and help these policies stand out in the marketplace.