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.
