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.