Charles Arnold

Variable universal life sales have declined at the start of 2023 to the tune of about 15 percent off the previous year. This can be expected as equity markets have turned volatile and a gradual increase in interest rates has made other products more appealing. Whole life, term, and IUL have seen marked increases, and the rush to sell IUL before the new actuarial guidelines were implemented in May was a big factor for IUL in the short term this year. The VUL market has continued to innovate, giving agents and customers increased flexibility and I suspect we would have seen a larger drop in VUL sales without these enhancements. As an example of this, many VUL carriers have integrated IUL sub-account options within the VUL chassis, allowing upside potential with downside risk protection. VUL is now a great alternative sale to IUL, which it had never been before, offering similar options with arguably more flexibility for customers. Other VUL carriers have created buffer strategies like what we have seen in the registered indexed-linked annuity or RILA marketplace. There has even been a new product launch into the fee-based VUL market, with the introduction of a new product geared towards the growing RIA market. All these aspects make VUL more attractive to a wider audience of financial professionals than before. Underwriting and processing times have also vastly improved for many carriers across the board, with one carrier offering a VUL product specifically geared towards efficiency and ease of issue, hoping to entice reps and advisors who normally shy away from insurance sales.

Let’s start with the innovation of RILA-like buffered strategies within VUL. Those in the industry refer to them as “buffer” strategies because they typically offer options that provide a certain percentage of market downside protection over a determined period. The client takes on calculated risk to the downside in exchange for more upside potential than they would get with traditional EIA/FIA or indexed strategies. The RILA segment has been the fastest-growing segment of the annuity marketplace with north of $10 billion in quarterly sales. Carriers such as Brighthouse, Lincoln, and Athene all have top RILA products. Due to the possibility of loss tied to the markets, this product is a registered product and agents are required to have a FINRA securities license to sell it, like VUL. Given the success of the RILA market, it is a natural evolution for these options to migrate into VUL products.

There are two carriers in the VUL space with these types of solutions: Prudential and Equitable. Prudential’s FlexGuard IVUL bridges the gap between the indexed and variable worlds, and they took it upon themselves to give this new product category a name: Indexed Variable Universal Life, or IVUL. There have been and will continue to be VUL products with traditional IUL sub-account options within them, which FlexGuard also has, but FlexGuard is a dedicated product with a focus on buffered strategies like what we see in RILA products. Equitable needs credit for the first “buffer-like” VUL option to market with their Market Stabilizer Option (MSO) years ago and they have made enhancements to it with their new MSO II option across their VUL products. So unlike Prudential that has created a separate product for this, Equitable has this available across their VUL products as a sub-account option among their robust traditional investment lineup. Given the current market volatility, FlexGuard IVUL or Equitable MSO II gives agents and consumers another tool to protect, or at least limit their downside risk. For added peace of mind, the FlexGuard product offers a range of no-lapse guarantees that can be ratcheted up from a standard five-year guarantee to an age 90 or age 120 guarantee with two available riders.

The real value of these strategies is controlling volatility. Why would one need or want to control volatility? Is it to minimize sequence of return risk for income withdrawals or fees? That could certainly be and makes sense. I would argue the major benefit to controlling volatility is to manage client expectations and protect them from their own emotions. Big swings in the market create emotional reactions that can potentially lead to financially damaging choices being made by customers. Significantly negative markets will impact cash values, especially as COI and other product fees are being charged, creating a double whammy. The buffer options allow a financial professional to frame client expectations with more certainty. Not to mention they still have the option to allocate portions of the cash value to traditional investment or fixed options depending on the situation. The value of this is hard to quantify, but ask any financial professional and they will say managing client expectations and emotions is their priority and the hardest part of their job.

The VUL market has also attempted to appeal to two different types of markets, with two innovative products as of late. One being the growing RIA marketplace with an advisory VUL and another being the long list of financial professionals that don’t traditionally sell life insurance for a variety of reasons. The RIA market has grown by leaps and bounds with currently approximately 35,000 RIAs registered nationally, and over 14,000 registered with the SEC meaning they have over $100 million in assets under management. Nationwide has entered this market, previously only occupied by Ameritas and TIAA, with the launch of their Advisory VUL product to appeal to RIAs. It is a great option for investment advisors to receive a fee for managing the underlying investments along the lines of what they would normally charge for managing other types of accounts. They can write it themselves if properly licensed or utilize an outsourced insurance department (OID) from a BGA or IMO to serve as the writing agent. For those reps and advisors that don’t normally sell life insurance, Lincoln has launched a product called LifeGoals VUL that streamlines the underwriting and application process to a matter of hours, has no surrender charges with a single underwriting class, and features automated income along with a powerful overloan protection feature triggered when the client starts taking distributions. It is the traditional overfunded VUL design built for tax-favored growth and income distribution. The product features an asset-based compensation package of 60 basis points and is as close to “dropping a ticket” that the insurance industry has gotten to make it as transactional and simple as it can. The biggest challenge to the success of both products lies in the distribution model. How will these advisors hear of these solutions and what group will take this on for mass-market advisor education and implementation? Perhaps the responsibility lies with those BGAs and IMOs that have developed outsourced insurance departments (OIDs) to market to advisors. Or will another, more wholesale-orientated group or FinTech company take it on that perhaps sits outside the normal BGA model? Maybe it will turn carrier-direct for distribution like variable annuities. It is hard to say, and time will tell if either product finds significant traction.

With the enhancements we have seen in the VUL space, it is my opinion that VUL now provides some of the most flexible, enhanced options for customers and agents we have ever seen from both an accumulation and protection design viewpoint. With the continued stress that the IUL market has weathered from multiple efforts to curb dishonest illustration tactics, one would think it is only a matter of time, and perhaps lawsuits, for that market to merge into VUL under the fold of the registered product realm. The biggest barrier to entry for agents to offer VUL is obtaining securities licensing and being subject to broker-dealer oversight, which many will resist for as long as humanly possible. Regardless, VUL is going to continue to evolve to become even more attractive, more versatile to a point where it will be very difficult from an opportunity cost perspective to ignore.

The number of registered investment advisors, or RIAs, in the industry continues to grow along with the percentage of overall assets they manage. As they become more relevant, so does the attractiveness of their business model for many financial professionals currently at broker-dealers and wirehouses. Advisors can join an existing RIA team or form their own. Most of them go “all-in” on the fee-based model, dropping their FINRA licenses along with any reliance on commission-based products. They are regulated by either their respective state or the SEC, which is considered by most as less burdensome than complying with FINRA, but they must adhere to a fiduciary level of care. The world continues to vilify commission-based products prevalent in the insurance marketplace; however, it is hard for anyone to deny the benefits they provide or the solutions they bring to the client planning process. RIAs will continue to have a need for annuity and life insurance products, it is just how they choose to gain access to those products for customers. On the flip side, many distribution organizations are looking for ways to work with the RIA community in a more effective manner. These two forces colliding create opportunity but also some confusion.

Several carriers have begun aligning themselves to this trend by offering fee-based products. At The Leaders Group, we mainly see this with variable annuities, registered indexed-linked annuities (RILAs), or variable universal life insurance (VUL), but there are several fixed solutions as well. Currently, there are numerous advisory annuities with a limited number of life insurance products available. These products require a licensed insurance agent and, if it is a registered product being sold, will also require that agent be FINRA licensed and registered with a broker-dealer. Typically, the RIA doesn’t have anyone on staff that is insurance licensed, let alone FINRA licensed, so they need to outsource that service. That is where this concept of an OID comes into play, or an outsourced insurance division, where sales professionals of an annuity IMO or insurance BGA can engage RIAs in the sale of these products for customers.

The most straightforward method is for the representative of the OID to be the writing agent and offer the traditional commission-based products to the RIA customers. Retail and/or wholesale compensation is paid to the OID. The RIA can become comfortable with this if they don’t view that relationship as a threat to their business and trust the expertise of the sales individual and organization. Since most IMOs or BGAs don’t engage in gathering assets or managing money for a fee, this is usually a short hurdle to overcome. In this case, the RIA isn’t interested in being compensated for this transaction but can be added as a third-party authorization following the sale to help monitor or manage the product. They may charge a fee-for-service or incorporate another planning fee within the normal dealings with the customer for their time if desired.

Another avenue is for the OID to work with the carrier(s) on a specific fee-based annuity or life product for distribution to the RIA community and engage in an agreement. That agreement can allow for a marketing or distribution allowance to be paid to the OID for business conducted which is not drawn from the product itself. Fee-based products, by their nature, are largely designed without commission structures. Instead, a fee is charged and paid to the RIA for management of the underlying portfolio or product. However, the sale still requires a licensed insurance professional and may require a registered representative. If it requires a registered representative, suitability at the broker-dealer level will occur for the sale which does place a degree of liability on both that BD and the writing agent and is something worth pointing out. Many IMOs and BGAs have a wholesale mindset because that is how they typically operate, and they are somewhat removed from direct liability of the sale. Whereas, in this instance, they are acting directly with the customer as the writing agent (or will be perceived as such by regulators). The considerable volume of registered product sales from some of the more established OIDs can be a challenge at times to manage, but the evolution of technology processes, such as RedTail with a LUMA integration as an example, can provide product comparisons and the necessary customer information electronically for proper suitability review processes to take place. Additionally, education provided to the OID and RIA on the necessary processes and their respective responsibilities is paramount to a successful engagement.

Over the past five years, The Leaders Group has helped many wholesale organizations set up OIDs as well as helped individual carriers set up internal/external sales desks for product distribution. The carriers usually have their own broker-dealers, but they are not built or designed to facilitate the necessary retail suitability review on the individual sales, so they outsource that component to a BD that can take that on for them such as ours.

Some RIAs have staff members who are insurance licensed and/or registered with a broker-dealer. They may have made the proper additions to their Form ADV to disclose the ability to receive commission-based compensation. In such an instance, the BGA or IMO can work with them simply as a wholesale entity as they typically would with other downline agents. For fixed sales, the carrier compensates the retail agent and the wholesale entity separately. For registered product sales it is similar, but the carrier pays the respective retail and wholesale broker-dealers compensation to then pay the associated parties. The dynamics of having both a broker-dealer and an “outside” RIA relationship can be tricky to manage for the RIA organization itself, but there are ways in which to properly navigate those waters. If an independent RIA would like to approach a broker-dealer to get someone on staff registered, there are a very limited number of broker-dealers that would be “friendly” to this relationship without oversight fees or revenue sharing.

The end game is to get to a point where RIA customers have access to the best solutions available, regardless of how the logistics of the sale take place. To do that, the RIA community needs to feel comfortable with engaging OIDs. It is a confusing marketplace but, with proper guidance, it can be a fantastic collective effort operating within the regulatory guardrails. In our review, it is common that a commission-based product may be more advantageous than a fee-based product for a particular customer, so it is important to have an open mind to both configurations. We find this particularly with living benefits or lifetime income product attributes or riders. Of course, the advantage of the fee-based product design is that it allows for the RIA to receive a fee, which aligns incentives to do what is best for customers on an ongoing basis. For the variable life insurance space, we have seen limited product in the fee-based arena, outside of Nationwide’s Advisory VUL which has garnered a vast degree of interest. The VA and RILA space have many solutions available, as well as fixed solutions, which we suspect will continue to expand in scope and quality.

In May, I attended a VUL academy meeting hosted by John Hancock where we talked about positioning ideas, illustration best practices, and resources available to BGAs and insurance agents when utilizing VUL products. Variable universal life insurance has experienced a strong resurgence in recent years for a variety of factors, but mainly market-related, regulatory, and tax changes. The lifetime no-lapse guaranteed VUL products have been popular in recent years, and there has been a resurgence in accumulation VUL with the recent changes to IRC 7702. For the start of 2022, the markets have had a rough start with persistent inflationary pressures and whispers of a potential recession from the various talking heads on CNBC and FOX Business. What does this mean for you as you position and sell life insurance products in the marketplace?

The financial services industry has been undergoing an evolution over the past twenty years to more fee-orientated asset management and advice as opposed to commission-based products. The old stockbrokers of the past are few and far between, and the focus is predominately on assets under management, or AUM, for financial professionals. Many of these advisors also maintain an insurance license for the sale of variable annuities and some life insurance products, but the bulk of their income is tied to basis point fees on AUM. Regardless of what fee that is, their compensation will eb and flow to their client’s account balances. When we experience a 10 to 20 percent decline in the overall equities market, that will impact advisors’ income proportionately. It is the perfect time to speak with some of these professionals who are licensed for insurance but haven’t been engaged in those product lines previously to supplement their income. Many of these advisors don’t believe their job is to offer life insurance solutions and that their clients are better served going to, say, Northwestern Mutual for their insurance needs. In 2021, Northwestern Mutual announced they have over $200 billion in AUM and are now generating a third of their revenue from investment assets and that side of their business has been growing north of 20 percent per year.¹ So, the thought of just sending a client to them for insurance isn’t the case any longer as they may solicit your clients for AUM business. The adage, “If you don’t do it, someone else will,” is a very real threat.

As a simple example, if an advisor charges 100 basis points or one percent on AUM annually, a book of $200 million would generate $2 million in fee-revenue. A 10 percent decline in that AUM book related to market declines would have a $200,000 impact on their revenue if it were to remain suppressed for an entire year. Participating in a policy review program with you or simply working in the insurance planning questions during their next client review cycle could potentially generate income to help offset some of these losses.

Believe it or not, in a suppressed market environment, it is a good time to offer the enhanced VUL policies on the market today. The majority of VUL contracts now come with some degree of no-lapse protection from five years to lifetime. Electing monthly premium contributions or enrolling in the dollar-cost-averaging programs the carriers offer is a fantastic choice. Some carriers offer up to a seven percent DCA program, where the funds waiting for periodic investment make a handsome rate of return. Additionally, many of the VUL carriers have moved their popular IUL options within their VUL products as sub-accounts, allowing for a floor and a cap, which has been an important addition to VUL the past few years for added client flexibility.

Helping the advisor comb their book for either HENRY or LOUIS opportunities could prove beneficial. HENRY stands for high earners not retired yet and LOUIS stands for loved ones with unneeded income streams. A LOUIS may be age 60+ with excess income to plan or assist their children or grandchildren. It also creates a stickiness between an advisor’s clients and either their spouse or children, which is important in the retention of family assets. We all know the statistics associated with a primary client’s death regarding the propensity for the spouse or children to leave the advisor. Insurance planning is a way to hopefully thwart that risk and should be positioned as protecting AUM, not taking from it.

The way taxes are likely headed, income tax risk is something to also bring up with advisors. Developing that tax-free bucket of assets is an important piece of the planning process. It can be positioned as replacing the cost of tax with the cost of insurance. The changes to IRC 7702 have made accumulation products far more attractive, and I would advise you model some of those options, even as a potential alternative to investment-only variable annuities (IOVA) for an advisor. I think you will find the income potential with overfunded VUL is extremely competitive, if not more so, than an IOVA in a non-qualified account. Outside of the lack of education, the major objection around VUL compared to an annuity product is the underwriting process. It isn’t like dropping a ticket, but with the advancements in accelerated underwriting and paperless processing, partly thanks to COVID, it should continue to be a better customer experience. It is tricky and often runs afoul of FINRA regulation to show such a comparison of unlike products; however, providing the full illustration for each independently is generally an acceptable way to communicate this to a financial professional.

To conclude, financial advisors are heavily reliant on AUM for revenue, and when that revenue takes a hit, it can open the door for some to consider supplementing their practice with other products. Not to mention, offering insurance solutions to customers is something they should be doing anyway if they are truly acting in that fiduciary capacity—whether they are appropriately licensed to do so, or they outsource that to you as their trusted insurance professional that they know won’t solicit their clients’ other assets or accounts. 

Reference:
1. https://news.northwesternmutual.com/2021-02-18-Northwestern-Mutual-Delivers-Record-Results-Company-is-Exceptionally-Strong-and-Growing.

Brokerage general agencies in the insurance industry need to continue to transform themselves. Historically, they have been processing centers taking orders and spreadsheeting solutions. To remain relevant in the decades to come, a shift to becoming wholesaling and marketing engines is necessary. The reasons for this are many, but at the top of the list would be the exponential technological growth and investment we have seen, and will continue to see, at the carrier level that was put into hyperdrive with the COVID pandemic. Freeing up resources and time for the independent distribution network is a good thing because that means they can focus on becoming more effective in their messaging. Borrowing from our friends at Arby’s and their catchy commercials, an effective wholesale distribution organization needs the MEATS to be successful.

As I look at the factors that lead to a successful wholesale organization, I think of these primary elements:

Marketable Product(s): If you do not have something someone wants to buy, it will certainly be hard to sell it. Typically wholesale contracts for products are acquired three separate ways: Directly with the product manufacturer, under someone else’s contract (sub-contract), or through an aggregation group or professional organization. Without the right products, distribution is difficult.

May I suggest choosing a few primary products, as opposed to trying to be all things to all people with selective messaging? One of the solutions that has emerged as being quite popular is variable universal life (VUL). With the recent changes to 7702, the powerful equities market, along with added pressure on IUL from AG 49-A and a possible AG 49-B on the NAIC’s task force docket which is forcing many carriers to place their IUL sub-accounts within the VUL chassis, all are positive signs for VUL. Here is a stat from the most recent LIMRA article Life Insurance Sales Surge in Third Quarter 2021, December 1, 2021:

Variable universal life (VUL) new annualized premium doubled in the third quarter, up 104 percent, and recorded the greatest growth in terms of absolute dollars. While protection-focused product sales—which have driven growth earlier in the year—increased 46 percent in the quarter, accumulation-focused product sales growth was also strong, up threefold from third quarter 2020 results.

Year-to-date, VUL new annualized premium increased 78 percent. VUL market share was 13 percent in the third quarter, five percentage points higher than a year ago and nearly double pre-pandemic levels.

Experienced Leadership: As with anything, this is critical. If you don’t carry the necessary influence and knowledge to instill the required amount of trust in your partners, doors won’t open.

Access to Distribution: This can be a challenge, especially with registered securities products where there is an authoritative power between you and the agent. This would be the broker-dealer in which the agent is associated. Permission to work in the channel or on the case with the agent can be done either top-down or bottom-up. It is always advisable to gain permission top-down, when possible. Many broker-dealers have become restrictive as to whom their agents can do business with, and you may need to work with the broker-dealer’s back office so they may do their due diligence on your organization.

You may also choose to join a group that already has access points to the desired channels, or your IMO may have an institutional division setup that has done the heavy lifting for you. Sometimes these avenues are not clear, and you may only be interested in working with this agent and not the entire BD channel. In either case, you may attempt to work bottom-up with the agent and the agent’s OSJ, branch manager, or supervisory manager to obtain permission. At The Leaders Group, we have experience working with different broker-dealers. If a particular BD would like an agreement in place, we can help facilitate that agreement and have samples on hand for various arrangements.

Transparency of Sales Force: In the distribution world, having control over the sales force is important from a management standpoint. Are they transparent in the sense that you know what they are doing? Is your sales force separated by geographical territory or by distribution channel? Do you track activity levels and agent touch points? Do they operate with an internal person to assist? Do you train them in what they need to be saying in an agent’s office? They may be none of these things, and you may trust your sales force entirely to do what they think is necessary. Putting total command in the hands of your independent salespeople is also an avenue many organizations take especially in life insurance distribution. If the desired results or production follow, it works.

Sustainable Messaging: In this industry, if you live by the sword, you die by the sword. If you are leading with performance or product first, as opposed to concept or solution-based messaging, you will eventually find yourself at a disadvantage. Whatever that message ends up being, it needs to be simple, relatable, and repeatable for it to be effective.

Simple enough to be understood by any level of agent, the agent must be able to relate to the solution, believe in it, and apply it to their customer base. Lastly, they must be able to turn around and convey the concept to their customers. Turning your agents into extensions of your messaging is an ideal situation and will amplify results.

Keep these elements in mind as you evolve your distribution efforts. It is up to all of us to drive life insurance distribution efforts into the 2020s and beyond. One positive element that came out of the COVID situation has been the massive increase in technology adoption at the carrier level, not to mention it has also enhanced the general public’s interest in life insurance solutions across the board paired with potential tax increases on the horizon.

Private Placement Life Insurance, referred to as PPLI, continues to get a substantial amount of attention. A Bloomberg article with an eyebrow raising title written by Alexis Leondis in September got a lot of agents and BGAs interested in PPLI. I certainly appreciate the product and its place on the shelf, it just happens to be an extremely complicated offering for anyone looking to market it for the first time. It is advisable to ease into this space, learn the accumulation sale if you are not already using it, and then align good partners for your PPLI offering. It is crucial to understand that PPLI is a solution that will only apply to a subset of the ultra-high-net-worth population. It is not something that can be mass marketed to your entire pool of agents or clients but rather something to be very selective about. A good approach is to market with a general accumulation VUL story and have several non-PPLI solutions you can turn to for customers who don’t fit the accredited investor/qualified purchaser level needed for PPLI. You also need to understand that you will likely need help due to the complex nature of the products. It takes a large degree of “teamwork” between the writing agent, general agent (if there is one), carrier, trust company, underlying investment manager, and the client’s attorneys, CPAs, and other agents of influence. That process can be somewhat like herding cats if you are not adequately prepared.

The first step is understanding what type of sale this is and how to communicate it. Private Placement VUL is an accumulation sale and not a protection or death benefit driven sale. The idea of private placement VUL is to place advanced money managers or hedge fund style investments either structured as an insurance dedicated fund (IDF) or separately managed account (SMA) within the tax-advantaged wrapper of life insurance to maximize accumulation and then distributions. If the customer can’t qualify for life insurance due to their health, doesn’t need a death benefit, or prefers an annuity structure, a PPVA structure may also be deployed. Over 80 percent of the VUL sales conducted outside of career agencies are protection-orientated sales, which tells me most people don’t market accumulation VUL proactively. PPLI requires a shift in that protection mindset. I would suggest that if you have never marketed accumulation or overfunded VUL before that you start with the standard retail products first and keep that PPLI opportunity in your back pocket. It is easier to lead with broad concepts than it is to start with a niche product like PPLI (shotgun vs. rifle).

Whether you are still working to become comfortable with the standard accumulation VUL story or are already well versed, there are “bridge products” to help you move towards PPLI. These would be executive VUL products, or single-life COLI type products that are more institutionally priced—high early cash value designs that can get you closer to a PPLI type of mindset. Accumulation sales are investment focused, so becoming familiar with what the agent uses for money managers or what type of investments the customer uses will go a long way in determining what VUL product aligns with their investment philosophy. With the recent changes to 7702, a greater percentage of premium dollars can be invested in the cash value, versus what is required for cost of insurance, which will enhance the attractiveness of the design. Change brought about with AG 49-A forced many carriers to integrate IUL sub-account options within the standard VUL chassis, which offers great downside protection options not previously available and isn’t a horrible option given how hot this stock market has become.

From the cost perspective, PPLI basically resembles retail VUL products without the large upfront commission expense components. There are typically premium based commission payments that drop off after the customer stops paying premiums. Usually, several million dollars in total premium over multiple years would be the minimum amount required for PPLI. The premium-based commissions are in the neighborhood of 50 basis points. There is also an asset-based commission that runs throughout the life of the policy, typically starting at 35 basis points for the first decade, then reducing every ten years or so, generally flattening at around 15 basis points for the remaining duration. The combination of the premium and asset-based commission payments would equal the agent compensation outside of anything that may be upfront. In many cases, a first-year placement fee can apply as well which varies widely (50 basis points to 300 basis points). Without any built-in BGA overrides, if there is a general agent involved, the agent and the BGA split these fees which are largely negotiated. Right now Prudential is one of the few carriers that has a built-in override for BGAs that is paid separate and aside from the policy itself and is asset-based, which makes things straightforward if you are acting in that capacity. PPLI is custom built and, with that in mind, these fees can vary substantially depending on the size of the case, the carrier, and parties involved in the sale. As you can tell, these types of sales have thinner margins than standard “street” products. PPLI is a sexy sale, and a wonderful product to be able to market, but unless you plan on lining up several of these each year to build a recurring stream of income, its biggest value for you may be as a door opener for discussions with larger offices and clients. In many cases, it may be more worthwhile to utilize the off-the-shelf VUL products to go after the “middle market” millionaires.

Private placement VUL requires a lot of teamwork. There are several PPLI carriers to choose from and you will need to start there. Build and develop a good relationship with two or three carriers because they will help you when it comes time to bring the appropriate parties together and put a nice presentation forth for a customer. The carriers we see often, in alphabetical order, are Crown Global, Investors Preferred Life (IPL), Lombard, Prudential, and Zurich. Working with the client’s attorneys, estate planners, or accountants will also be critical, and determining whether a trust company should be utilized, typically located in South Dakota, Delaware, or Alaska, to offer the most favorable premium tax. Identifying the investment manager or managers and helping them develop SMAs or IDFs for use within the insurance wrapper may also come into play, which the carriers can assist with along with other industry players such as SALI Fund Services or Spearhead Innovative Solutions. Agents will need a life insurance license, along with at least a FINRA Series 6 and Series 63, to offer this type of product. Not all broker-dealers allow PPLI, which is a regulation D product, and will have strict guidelines and restrictions associated with the marketing of such a product, so keep that in mind.

I think the recent focus on increased taxation has led to some enhanced promotion of private placement life insurance, which isn’t necessarily a bad thing if it is presented to the correct types of clients. I do think there is a risk of focusing too much on a solution which has application for a limited market. Some people I’ve talked to don’t believe the margins are worth the effort it takes with PPLI which is debatable. I think it would be better for the industry, and more people, to help those clients in the mass affluent segment, making $250,000 to $2,500,000 per year in income, let’s say, and offering them a solution instead of “elephant hunting.” The more standard accumulation story doesn’t appear to be widely told to any substantial degree and that is a shame. We can help a greater pool of customers that way and attempts to mass market PPLI, especially to clients outside of the ultra-high-net-worth market, may be clouding the waters.

Clients need flexibility in financial and insurance products as their circumstances change through life. When they age and face new challenges, the financial products they put their faith in should be able to adjust to directly address those needs. Historically, many financial and insurance products were built to service a single need, but through the decades these products have evolved to meet the demands of a consumer that values choice and flexibility. In the permanent life insurance world we have seen continual evolution towards that end, and I would argue the most dramatic change has been within the variable universal life or VUL product arena. Due to a series of regulatory adjustments starting with actuarial guideline 38, followed by 49 and 49-A, coupled with a very low interest rate and resilient stock market environment, it has shifted some of the attractiveness towards the VUL side of the spectrum. None of those actuarial guidelines mentioned had an impact on VUL.

In 2013, AG 38 shifted the spectrum from traditional GUL to lifetime no-lapse guaranteed VUL products, often referred to as GVUL, creating a situation where more death benefit could be purchased per premium dollar with VUL while maintaining the guarantees compared to GUL/UL. AG 38 increased the reserve requirements for a carrier’s general account products which had a negative pricing impact for certain products. At that time there was one specific GVUL product available, but now there are several. Outside of the death benefit guarantee, VUL added the flexibility of cash value accumulation potential for the customer that GUL simply could not provide for potential income needs or 1035 exchange opportunities down the road. AG 49, and subsequently AG 49-A, put pressure on the indexed universal life or IUL market via specific guidelines on product specifications along with illustration requirements. That forced many carriers to integrate their multiplier IUL options, along with more traditional IUL options, within the VUL chassis as sub-account options instead. This adds tremendous flexibility to the VUL offering where previously there were no such options available for downside protection outside of the fixed accounts for VUL. Now a customer can invest some or all their cash value within these indexed accounts, between 50 and 100 equity, fixed income, or alternative investment options depending on the carrier, or within the fixed account options. Cash value volatility control becomes important as a client’s risk tolerance changes as they get older, or they decide it is time to take income. Without many being aware of it, suddenly, VUL has become one of the most flexible permanent life insurance solutions available–regardless of a protection or accumulation-based design–simply with the addition of these new features. Additionally, every carrier has their value-added nuances, such as John Hancock’s popular Vitality program, business solution support teams, as well as many offering survivorship or SVUL products in addition to their single life lineups.

Popular VUL carriers with age 120+ no-lapse guarantee availability:
Lincoln, Prudential, Securian and Nationwide (via ENLG rider)

So now you have a situation where VUL offers a range of no-lapse guarantees depending on product, IUL sub-account options for downside protection when needed, and typically a chronic illness rider with many policies as standard. For example, Prudential’s popular Benefit Access Rider (BAR) is an add-on that many agents and clients utilize. On top of that there are a handful of fantastic carriers that offer long term care riders for the “what if I get sick” scenario. This option is what I would refer to as a “combo” sale, to supplement what a client has perhaps already planned for in terms of long term care coverage. We all know how much assisted living costs, and the ability to accelerate the death benefit to provide a pool of cash either on an indemnity or reimbursement basis is adding another layer of flexibility to the product. Obviously a long term care rider comes at an additional cost that needs to be taken into consideration by both the retail representative and the client, but it at least provides that option.

As it pertains to this topic, a particular carrier who has offered a long term care rider since 1999 has been Nationwide Financial. Currently, the rider is utilized in 45 percent of their policies where it is available. It is one of the only indemnity style riders available among the carriers and we have seen considerable traction with this solution. Nationwide has what I would consider a very balanced VUL offering with this rider, along with a strong sub-account lineup, indexed options, and available no-lapse guarantees.

Popular VUL carriers with available LTC riders:
Nationwide, John Hancock, Lincoln and Equitable

A primary barrier to entry to access the VUL market for general agents and insurance producers is the fact that it requires securities licensing and a registration with a broker-dealer. Offering VUL requires an insurance license, the FINRA Securities Industry Essentials (SIE) along with the top-off Series 6 and Series 63 exams in most states.

Securities licensing needed to market VUL products:
Securities Industry Essentials (SIE), Top-off Series 6, Series 63 (Most states)

As regulation continues to change, whether that comes from the NAIC, FINRA, the SEC, or Department of Labor (DOL), it may be advantageous to obtain these licenses as an insurance producer or general agent to remain competitive. Not all broker-dealers are geared for the insurance industry, although there are many to choose from for a potential affiliation and registration. If you are not able to offer these solutions, your agents and customers may be forced to go to your competition. This VUL market has evolved to offer some very competitive and flexible solutions that are certainly worth consideration as you think about the future of your business or agency.

People get emotional and do weird things. That’s what they do, especially en masse. What we have seen in the financial markets is a reflection of that emotion. Everyone needs to remember that the stock market and the economy are two entirely different things in the short term. Even though nothing triggered this volatility from an economic standpoint, the coronavirus fear has caused widespread panic and has forced the S&P 500 to sell-off nearly 27 percent in 16 days of trading. The single biggest market freefall since 1987 occurred on Thursday, March 12. As I write this on the morning of March 13th, the S&P 500 is set to open five percent higher, so it is clear we are still strapped into this stock market roller coaster. The best course of action for 99 percent of people will be to stay the course and stay invested.

This type of market volatility has clients very jittery, and they may turn to their trusted sources of advice. The aspect of the insurance business that, in turn, worries financial advisors and insurance agents is variable universal life or VUL. Everyone remembers the dot-com bubble and bust, with the subsequent pain felt with many VUL contracts. The good news is that this time is different. I know, I know, whenever anyone says that phrase they are usually entirely incorrect. One of the major innovations that came out of that crisis back in the early 2000s was the adoption of no-lapse guarantees tied to the majority of new VUL policies sold from a minimum of five years to lifetime. North of 85 percent of what our BGAs have sold the past decade for VUL has been lifetime no-lapse VUL contracts with Lincoln and then later Prudential, which means they have nothing to worry about as long as the client pays his premiums on time and sticks to the plan. Those particular policies are backed up by the guarantee and credit worthiness of the insurance carrier. Not to mention, all the VUL policies in force since 2009 have been on a rocket trajectory of fantastic gains, assuming they were invested, which means they all likely have a substantial cash value buffer built up.

So, for lifetime no-lapse policies and for policies that have been in force for over a decade, there is going to be very little to worry about. The plan in those situations is to stay calm and carry on. The worst thing to do is panic and sell out of the equity sub-accounts, locking in those losses. It is my belief that this market is going to recover as fast as, or faster than, it fell as soon as the coronavirus and the panic subsides. That being said, you still need to talk to your agents and clients about their VUL. We know lack of communication can lead to poor choices. Additionally, every insurance agent needs to be aware of underfunded, non-guaranteed VUL policies sold to older clients in particular within the last five years. Those will need some monitoring and possibly some potential action with advice from the carrier. Any accumulation-style VUL should always be overfunded to the maximum per IRS 7702(a), which means it is highly resilient to market volatility with a large cash pool. That is also usually younger clients age 30 to 50 with lower cost of insurance (COI), so the monthly deductions have less impact in down markets. Any MEC policies are by their nature drastically overfunded and are of little concern.

Other options to discuss with your agents and clients, if necessary, would be to shift some cash value to a fixed bucket and assign the COI deductions to that asset if allowed by the carrier. This will eliminate the systematic withdrawal risk on distressed sub-accounts. Alternatively, shifting into any indexed sub-account options with a floor and cap could be discussed, which many VUL contracts now have available. For clients investing premiums, a spread out dollar-cost average program is highly advisable. I think for most of the VUL clients out there, the best advice is to not panic, stay invested, and ride out the coronavirus roller coaster. This, too, shall pass. Just like the famous British motto when the public was under constant Nazi bombing in WWII: “Keep calm and carry on.”

Additionally, stay healthy out there everyone and take care of each other.