Full Disclosure's Variable Life Report

The media is filled these days with mentions of “anxiety” among investors. Are buyers of variable products as anxious as we think they are right now?

When markets plummeted in 2008, people were worried about their personal financial liquidity (as evidenced by the sharp increase in savings bank deposits soon after). This was reflected in a first quarter 2009 LIMRA report noting that VUL sales had been cut in half since the quarter a year before that.

That’s truly bad, but not as bad as if they kept declining. A new LIMRA report notes that variable universal sales in the first quarter of 2010 were up 10% over the same period in 2009.

Fresh crises, such as the European Union’s financial meltdown, seem to come out of the woodwork as soon as a previous calamity is put behind us. Despite this, there is good news. Based on LIMRA’s findings, and the current state of the world’s economic affairs, I would (cautiously) assume that the bottom for VUL has already been reached and that its future growth will be steady if not fast. Bad things will keep happening, of course, but the rich diversity of investment choices available through VUL policies, the increasing role of guarantees, and the continuing thickening of investor skin, mean that it will remain the option of choice for educated buyers.

We are seeing that insurers (particularly public ones) are being cautious in the products they are offering. Full Disclosure surveys variable insurers twice each year and tracks illustrated values and the benefits each brings to the marketplace. Based upon our recent findings, a few companies have opted to no longer offer policies. However, there is still a wide diversity in product design, with something for nearly everyone. You can tell by looking at the Policy Design Objectives, included with this report, that companies are not only still offering choices between accumulation and death benefit oriented policies but are also including innovative riders and indexed account options.

This new edition of Full Disclosure features information for 40 individual variable life policies. 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). 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 the aforementioned guaranteed minimum premium excerpt for long-term (age 100 or lifetime) guaranteed premium and death benefit.

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 very 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.

Current illustrations are based on a male age 40 paying a $7,500 annual premium and a $1,000,000 policy. We requested values based on an 8% net of average subaccount expenses and current (nonguaranteed) policy expenses. Subaccount expenses can be either straight arithmetic, or more likely, weighted to the largest subaccounts available in the policy. Look at the footnotes at the bottom of the main chart. Details on how illustrations are derived are available in the software release of Full Disclosure, as are the number of issue classes available for each policy.