On the Verge: Equity Indexed Life Movers and Shakers
January 9, 2010 by Ron Panko
Source: Best’s Review (August 2005 Issue)
If potential is in the eye of the beholder, then Mike Pinkans and the National Life Insurance Co. of Montpelier, Vt., should win a prize for their optimism about equity indexed universal life insurance. National Life is committing resources to the fledgling product line, and Pinkans and his staff are projecting at least a 15- to 20-fold increase in equity indexed universal life insurance sales over the next 12 months.
“If I can’t eventually ramp this up to $15 million or $20 million, I won’t be here,” said Pinkans, vice president of sales and promotion.
Of course, a low starting point makes huge sales gains possible. Through its subsidiary, Life Insurance Company of the Southwest, National Life had equity indexed universal life insurance premium of $249,000 last year and $112,000 in this year’s first quarter, according to Advantage Compendium, a Missouri-based company that tracks index products. Last year, LSW also had $415.5 million in index annuity sales, and Pinkans said the company is leveraging those skills. Its newest index life products use nearly the exact terminology and crediting strategies as its index annuities, and it is expanding its training of its career agents, independent agents, broker/dealers and 403(b) distributors.
“EIAs have become mainstream,” said Pinkans. “And now the reps selling the EIAs are saying it’s a natural to do it on the insurance side. … Ten years ago, it was more of a push strategy. Now it’s more of a pull — the field is asking for it.”
National Life’s new product designs offer three investment strategies: a fixed account like a straight universal life, a point-to-point index, and a point-to-average index. Contract holders may allocate among the three strategies with each new premium, but then must leave the money in each bucket for five years. Policy loans are available and serve to give the contract holder leverage, Pinkans said. “We’re trying to give the customers as much value as possible,” he said. “As an industry, we’re trying to move to almost an irreplaceable type of contract.” Products issued on National Life paper also offer long-term-care riders.
Pinkans said that since less than 10% of equity index annuities are annuitized, the industry ought to consider that some of those annuity sales really should be index life. “Ultimately most of these people are just passing on the annuities to their heirs,” he said. “They ought to be doing it on a tax-advantaged basis.” In addition, the design of index-life products allows for higher participation rates and caps than on straight indexed annuities, he said. “Most representatives always go for the path of least resistance, so if they can sell the annuity, they get the quick commission, and they leave the life sale on the table,” said Pinkans.
A major difference in the products is that producers can guarantee buyers they will, at a minimum, get their money back with an index annuity. But on the life side, if the market stays flat, the cash value decreases due to insurance charges. That difference is an example of why producer training is important, Pinkans said.
John Phelps, vice president of life distribution at Baltimore-based Old Mutual Financial Network U.S., said low receptivity in the mid- to late 1990s was partly due to product designs typically complicated for agents to explain. Now Old Mutual partners with its distributors in product design. The result is products with few moving parts that are easy to understand, he said. Old Mutual last year sold $17.6 million in index life, a 14.25% share of the known market and up from only $524,000 in 2003, a 33-fold increase, according to Advantage Compendium.
Old Mutual’s overall life sales increased 52% last year, Phelps said.
Old Mutual’s top equity indexed universal life insurance product, MasterChoice, is based on providing a minimal annual floor guarantee of only 1% so that the company can offer a higher cap. Introduced in August 2003, the product provides a 100% participation rate linked to the S&P 500 Index and an annual credit cap of 17%. A minimum annual premium also guarantees the death benefit to age 100. In June, the company was preparing to launch HeritageMaster, a single-premium product that is geared more toward wealth transfer. It carries a 1% annual crediting guarantee, a 10% annual cap, and a guarantee of the death benefit to age 100.
Both products use a point-to-point annual-reset mechanism in which the company buys options in mid-February, May, August and November. To illustrate the policies, Old Mutual tracks the 30-year performance of the index based on the average annual gains of the four purchase dates and the existing terms of the equity indexed universal life insurance contracts. Remarkably, its 30-year illustration average is close to the actual performance of the S&P 500 Index, Phelps said.
Phelps said Old Mutual projects a $150 million to $200 million industrywide equity indexed universal life insurance market this year and a $500-million market once it matures.
Making a Comeback
American General Life Insurance Co., part of American International Group, led the equity indexed universal life insurance market in 1999 with $20.4 million in sales, nearly a third of the market share. But in succeeding years, the company devoted resources to build its VUL business, and equity indexed universal life insurance sales fell. In 2004, the company doubled its previous-year sales and ranked among the top five writers, said Doug Israel, senior vice president, product development and advertising, but Israel declined to provide sales numbers.
Behind the sales improvement was introduction in late 2003 of Elite Index Universal Life, an annual-reset, point-to-point product that guarantees a 1% annual return, a 100% guaranteed participation rate and an annual cap of 11%. In addition to its link to the S&P 500 Index, it offers a fixed-interest bucket with high interest-rate guarantees currently crediting 4.8% that potentially allows policyholders to profitably park their money during bear markets. Policyholders must keep money in each bucket a minimum of one year.
American General distributes to middle, upper-middle and affluent markets through personal producing general agents, brokers, independent marketing organizations, brokerage general agents and an agency system.
Israel and Rod Rishel, fixed life product manager, raised concerns about the use of optimistic illustrations justifying higher target premiums and resulting in the potential of enhanced commissions. “If target premiums are not close to those used in typical current-assumption UL products, possibly reaching 2 to 2 1/2 times, the consumer will ultimately pay for the higher commission if the assumptions prove unsupportable,” said Rishel. His concerns center on the potential for clients and regulators, with 20-20 hindsight, questioning the projected results. “Our targets tend to be in line with normal current-assumption UL,” he said. “Many people in this marketplace tend to have targets much higher than normal target premiums. These targets are artificially high because the illustrations have been artificially inflated. They are based on what compensation is. Our position is that the consumer will ultimately pay for that high compensation if the carrier is unable to support the assumptions used in the original illustration.”
Rishel recalled the concept of the vanishing premium, which was viable in the high-interest-rate environment of the 1980s, turning on the industry as a whole when interest rates fell in the 1990s.
“We believe we have developed a product that will perform as illustrated, and it will not result in unintended surprises for the agent or his/her client,” Rishel said.
By Ron Panko, senior associate editor, Best’s Review: Ronald.Panko@ambest.com