A relatively few years ago, the industry was simple—whole life or term life or maybe group term. Almost all Americans knew they needed coverage and a large percentage were purchasers of one of these products including many policies purchased for small children for later in life. Face amounts were relatively small, but financial obligations and incomes were smaller too. Over the last forty years the whole industry has evolved and changed into something that we would not have recognized in the 1970s. While whole life, term and group term are still part of the landscape, there are also UL, IUL, VUL and within each category there are multiple iterations that can confuse producers to say nothing of consumers. As we add the riders it continues to get more complicated. It is no wonder the regulators are trying to push more responsibility to the financial professional with best interest and fiduciary rules and statutes.
I am fortunate to have experienced all the gyrations that got us here and I expect to see more significant change in the next few years. For anyone that has read my articles in the past, you know I have a strong bias for VUL as a key option in many situations. The changes I have seen recently reinforce my bias as VUL has been priced into a position to outperform other permanent policies in the two primary situations for permanent coverage.
The biggest circumstance where we have seen a difference for a few years has been the guaranteed death benefit sale. Because of AG37 and AG38, GVUL is typically cheaper than GUL or IUL and has the flexibility to have potential cash value. This has been improved through the last few months as the low interest rate environment has made it more difficult for insurance companies to make money in the general account, so fixed products have had larger price increases than variable products. With an expectation of a return of estate taxes for more Americans between now and 2026, this need will be increasing faster than it did in the last 10 years and most insurance companies with variable products have a guaranteed product that can satisfy this need at a lower cost with more flexibility in the future.
The second circumstance where we have seen an improvement of VUL products has been in the accumulation needs sale. In this market there was a significant increase in IUL products over the last seven to eight years and we are now seeing the results of that process. As the pricing model has changed, the perceived advantage of IUL has gone away as most policies have not performed as illustrated. There are a lot of moving parts to the IUL product, and price increases within the product paired with changes in participation rates and caps have made the policies fail to achieve the projected values. VUL has the volatility of the markets, and is subject to changes in COI, but participation in the swings of the market have always made them better performers over time. In addition, the ability to accumulate investment assets into a tax advantaged product has improved the sales process with advisors as well as affluent clients. This has led to a huge increase in the private placement VUL market over the last few years and a big increase in interest for affluent and ultra-affluent clients’ attorneys and advisors. The differences in the last few months have demonstrated that a fully/over funded accumulation VUL will weather significant market fluctuations and will outperform other accumulation products over the long haul.
The last piece of important VUL product information is the availability of the long term care and critical care riders that are available from most companies today. The rider on VUL, like non-variable products, provides the long term or critical care coverage with the ability to assure that there is a benefit for beneficiaries whether the client uses the coverage or not. One of the complaints that used to stand in the way of people buying long term care was the use-it-or-lose-it concern that if I pay a premium and don’t need the benefit the money has been “wasted.” With a rider tied to life insurance, it assures that there is a benefit even if you are fortunate enough to not need coverage. It also provides the additional flexibility of cash value that can be used for other purposes if the long term care/critical care is not needed.
I believe that in today’s uncertain economy and tax expectations, VUL has now been positioned to be a better option than other products for these types of needs—until we see a new type of product that is, as yet, on the drawing board with actuaries for the future.