Full Disclosure Indexed UL Report
April 8, 2010 by Roger L. Blease
Full Disclosure covers universal life insurance products twice yearly and features both fixed and indexed policies. This excerpt includes one of the illustration scenarios featured in Full Disclosure, an extract featuring long-term guaranteed minimum premiums (for those that offer them), and a listing of each product’s policy design objectives. This report features indexed policies only. Traditional universal life was covered in the March 15 issue. All data is current as of January 1, 2010.
One of the challenges in evaluating indexed UL products is determining how the individual pricing components affect policyholder values. An illustration can help, but different features, caps and participation rates affect the amount of gain the policy experiences due to gains in the underlying index. There are potentially complex combinations of these that can make two illustrations under scrutiny as different as night and day. Products are also priced at sometimes dramatically different premium funding levels as well as optimal indexing and crediting method combinations.
For these, and other reasons, benchmarking indexed products to get some idea of their competitive position in the marketplace, is tricky–especially when examining only slivers of data. Some of our users have challenged the idea of trying to standardize parameters, such as the premium level, used in developing the illustrations. But we believe that without some level of standardization, albeit one that may penalize products designed for either end of a bell curve of performance, you are left with data anarchy that is less useful for comparative purposes. We recommend using these illustrations, in conjunction with a wide range of information pertaining to the policy itself to get the best results.
The main chart in this excerpt includes illustrated values on a current basis based on a male age 40 with a best nonsmoker class (representing at least 15% of the contracts issued) paying a $7,500 annual premium and a $1,000,000 policy. If our specified premium of $7,500 is too low to illustrate the policy for this age and face amount, the policies are blended with term insurance if available. The death benefit type is level; however, a column is included with a true increasing death benefit for each policy to indicate which are designed to generate maximum death benefits.
Internal rate of return (IRR) figures included in the main chart indicate which products are designed to be more efficient in producing cash values, death benefits, or providing an all-around solution. The IRR can be applied to cash values as well as death benefits, and we have chosen to measure both at a policy duration of 30 years. Those seeking to analyze the relationship between cash values and death benefits will find the IRR measurement a useful tool. It’s easy to see, using the provided IRRs, which policies are built to generate death benefits, which is why it would be unfair to compare them under a level death benefit only.
Included at the end of the current illustration chart are the minimum level premium on a current basis to endow the policy (cash value equals death benefit at maturity) and minimum premium to carry it (cash value equals lowest cash values at maturity). Also featured is the indexing option rate and crediting method used to derive the illustration. Illustrations were requested using indexing options and crediting methods reflecting how the policies are most often sold, but some policies offer a plethora of options designed to further tailor the product to the investment and risk expectation of the client.
The simple, yet increasingly challenging, key to good analysis of indexed products is that the more information you can get the better. A sample policy is important to use with any illustration as is asking the right questions of your wholesaler, or better yet, the company being illustrated. It is tempting to highlight the best parts of the contract while ignoring elements that are confusing or less attractive. A “whole contract” policy analysis shows how the puzzle pieces of indexing option, crediting method, participation rate, caps on gains, illustration rates, and everything else in the complex puzzle, fits together.