Remember when you first heard about variable universal life (VUL)? You probably thought the same as most insurance professionals: “Interesting idea, but why would I use a mutual fund investment inside of a life insurance wrapper?” Well, after more than 30 years and multi-billions of dollars of premiums, VUL is alive and kicking—even thriving—in today’s changing life insurance scene. The first boom of VUL was in the mid 90s when many people sold it using illustrations of 10 percent or more and it looked like an inexpensive, permanent insurance alternative to term insurance. This was similar to the original UL policies with initial rates of 12-plus percent. Obviously neither scenario panned out well either for agents or their insured customers; however, what would have happened if VUL illustrations had been run and funded with more achievable rates of 7 percent? In that case the policies issued in the 90s and 2000s would have out-performed all other similar accumulation product types available at the time.
Since the onset of the new provisions of AG38 and AG37 in 2013, the landscape is changing for guaranteed products. When you look at many illustrations of the GVUL products alongside GUL there are three characteristics that usually stick out. First, the required premium is usually cheaper whether it is single pay, three-pay, seven-pay or lifetime premium. Second, there is significant cash value buildup even at the older ages, which allows more options for the customer as time goes by. If their health remains good, there may be opportunities to exchange into a new product if and when a new, better product comes along. Third, the target premium tends to be higher—especially in the older ages. Even survivorship VUL illustrates as a better alternative than similar SUL products. The guarantees are the same as GUL whether the carrier is using a shadow account guarantee or a general account guarantee. This may be a temporary phenomenon, but it may be an opportunity that you have overlooked, either because of previous bad experience with VUL or just not having the information.
Many of us have made the switch to IUL to provide the customer with fixed life protection and still allow for participation in market upswings. This is a good alternative for some customers; however, AG49 will give us new guidelines on illustrations, and the products may or may not be as competitive as they have appeared with past illustrations. Also, the history of IUL doesn’t give us a good indication of what the actual, long term results will be as compared to the illustrations that were run. Just like variable life, when there is no return on the index crediting amount, there is still the cost of insurance (COI) that reduces cash value on a monthly basis and that creates additional drag against the future cash value. For this reason, to get a similar comparison between most IUL and VUL policies, the illustrated rates need to be different to actually compare the expected results. According to Bobby Samuelson’s analysis, in his industry white paper “Hedging Strategies for Indexed UL Products” (https://www.leadersgroup.net/wp-content/uploads/2013/06/Bobby-Samuelson-IUL-Products-WP.pdf), indexed universal life policies should be illustrated at a maximum of 75 basis points above the current assumption UL rate (CAUL). So to illustrate a typical IUL policy at 7.5 percent, the equivalent comparison with a typical VUL policy would need to be 10.5 to 11 percent to be equivalent.
With the reduction of estate taxes, we have seen a movement to using cash value life insurance as an accumulation vehicle to create income in the future—i.e., supplemental retirement plans (SRPs) and life insurance retirement plans (LIRPs). When the three primary cash value products are compared (UL, IUL, VUL), the results are similar; however, if you look at the historic returns on all three product types, the over-funded VUL policy will usually outperform the other two over-funded products by 200-300 percent. The risk ratio is higher, but when you look at 20 year cycles, VUL would have outperformed in 24 of the last 25 cycles and even succeeded in the one cycle it was outperformed by UL ending in 2009. Financial advisors make these recommendations every day because of the probability of success.
We always have a desire to use the best rates we can to win the “spreadsheet game,” and as a result we often fail to achieve the results that the customer expects from the illustrations we run. I would not presume to say that VUL should be the exclusive product that a broker or BGA sells today, but 15-25 percent of the time it probably is the best choice for the client and should be one of the products that every broker is aware of and offers to his clients. Clients will be better served, and we will be doing a better job.
