A perceived difficulty in comparing variable products is deciding what a reasonable assumed illustrated return on your investment should be. Whether you decide that your aggressive investment mix warrants a 12% assumption, or your conservative approach is at 4% or even 0%, the use of assumed rates to compare policy performance often doesn’t matter.
The purpose of looking at variable life projected values is twofold: to look at the nonguaranteed (expenses, cost of insurance), and contractual (surrender charges, guaranteed values). The most important function an illustration can perform is to show what impact current and guaranteed charges and expenses have on your assumed rate and consequential gross (before expenses) values.
When it comes to nonguaranteed illustrations, it obviously doesn’t make sense to use a 12% assumption for a client whose risk profile warrants a money market or Treasury bond subaccount investment mix (they probably shouldn’t have a VL policy anyway). The only thing we may have learned from the last year or two of equity subaccount performance (where investors who realize positive long-term gains invest) is that the current assumed rate just doesn’t matter. The impact of your expenses and charges on whatever rate you use is the most important function of the illustration. Actually assuming, or worse, influencing a client to assume the rate on the illustration is close to what they will experience in the near to mid-term, flies in the face of historical fact.
For quite a while when gathering illustrated values for inclusion in the Full Disclosure VL databases we requested values based on a 10% net of average subaccount expenses and current (nonguaranteed) policy expenses. When investment experience started to decline for many subaccounts we were encouraged to drop the assumption to 8%, which we did last year. It is reflected in the charts included with this excerpt. When a class of subaccounts is experiencing annual returns in the negative double digits, it reinforces the fact that it usually doesn’t matter what your assumption is, as long as you accept the fact that it’s not real.
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 September 1, 2009). There are charts for current illustrated values and a scenario with maximum retirement income-an ideal use for VL. There is also a 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. Subaccount expenses can be either arithmetic, or more likely, weighted to the largest subaccounts available in the policy. Look at the footnotes at the bottom of the main chart. More details regarding how illustrations are derived and other information, such as the number of issue classes available for each policy, are available in the software release of Full Disclosure.
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 contracts issued of each policy.