DROPPING SOME KNOWLEDGE ON UNIVERSAL LIFE PRODUCTS: REPRINT #LIAM2019
September 10, 2019 by Sheryl J. Moore
Recently, one of the largest Field Marketing Organizations (FMOs) in the country asked for Wink’s help with a big premium financing case. While preparing to run illustrations for the study, our team reviewed the list of products that the FMO wanted to include. I was shocked to see that while all of the products were Indexed Universal Life (IUL) contracts, not all of them were designed for building cash as a means to provide supplemental income.
This brought me back to my days training wholesalers and agents at my alma mater, on how Universal Life (UL) products are priced. One of the last products I helped to design at the company, prior to my departure, was the most competitive No Lapse Guarantee/Guaranteed UL in the industry; it just happened to be on an indexed life chassis. Distribution was understandably confused- wasn’t indexed life for cash accumulation? Not necessarily. Sit down. Let’s talk about UL product design and pricing.
THE EVOLUTION OF UNIVERSAL LIFE
Forgive me a stream of consciousness here…When UL was designed in the 1970s, it was primarily intended to provide permanent cash value life insurance, at a premium that was far more competitive than whole life insurance products. By contrast, single premium UL (SPUL) products were initially intended to provide a tax-sheltered vehicle for transferring assets; while the IRS has since passed regulations to eliminate the loopholes in this strategy, SPUL remains an effective method for transferring wealth to heirs. Immediately after insurance companies began offering loans on cash value life insurance, salespeople jumped-on the sales concept of offering life insurance as a vehicle to help supplement retirement income. However, when UL policy performance did not meet expectations with the 12.00% illustrated credited rates of the 1980s, insurance companies innovated by creating NLG/GUL products, which guaranteed that the UL would stay in force, regardless of what happened with future interest rates, as long as a specified premium was paid. Of course, there have been a plethora of other sales scenarios that have been the inspiration for developing specific UL products, in order to provide a means to an end- usually tax related. Overall though, UL has proven to be a flexible, dynamic life insurance product that can be used to meet a great many needs.
Which gets me to my point: Universal Life products are not a one-trick-pony. There are ULs designed for many different objectives!
UNIVERSAL LIFE PRODUCT OBJECTIVES
In retrospect of having spent nearly two decades developing life insurance products, I’ve been able to identify six primary product objectives that UL products are designed to meet:
- ADVANCED SALES SOLUTIONS: providing a solution that addresses a specific need, often tax-related (Think Buy-Sell Agreements, here);
- CASH ACCUMULATION: accumulating cash values (i.e. Supplementing retirement income);
- DEATH BENEFIT: providing the most life insurance per dollar spent (“Give me the most amount of insurance for the least amount of money!”);
- GUARANTEED DEATH BENEFIT: providing a death benefit that is guaranteed for a specified time period (Sort of like a GUL, but not for the entire life of the contract);
- NO LAPSE GUARANTEE: providing a death benefit that is guaranteed to the insured’s age 100, or longer (Your typical GUL); and
- WEALTH TRANSFER: providing a vehicle for transferring assets to beneficiaries upon death (The quintessential life sale for an annuity guy).
You see- Universal Life can be used for many different purposes.
(“The more you know!” *insert rainbow here*)
Given all of this, it is possible to have one product that meets more than one of these needs. However, the product manufacturer is always going to have a PRIMARY objective that they are trying to meet, when pricing the product. So, although the product may be designed for cash accumulation, it is possible that it also has an optional NLG rider to guarantee the premiums and death benefit. Would one want to put this rider on the contract for a cash accumulation sale? NO! No lapse guarantee riders, and the benefits offered by them, are expensive. They will have the effect of a drag on policy performance, and unnecessarily so in most cases where the UL is being presented for cash accumulation purposes. Likewise, a product designed for strong death benefits may still offer strong cash value buildup. That said, if the entire point was to provide the greatest amount of insurance possible, for the least amount of money, why would you want it to build-up extra cash values to simply accumulate? You get my point.
THE CHAMELEON THAT IS FLEXIBLE PREMIUM ADJUSTABLE LIFE
Here’s where I blow your mind though-
You can use any type of UL for any of these product objectives!! Traditional Universal Life? Yes. Indexed Universal Life. You bet. Variable Universal Life. Uh huh!
Are there fixed ULs that are designed for cash accumulation? Absolutely. Not many people market them today because fixed interest rates are so low on these products, that cash doesn’t accumulate too quickly on them as-of-late. Wink’s LifeSpecs tool indicates that the lowest UL crediting rate today is 2.00% and the highest is 5.85% (an outlier); the average is a mere 3.54%. In the ‘80s, it was another story. Products sold during this period had 12.00% credited rates and minimum guarantees of 5.00%!
Are there indexed ULs, or IULs, that are designed for a no lapse guarantee? As I mentioned above, the most competitive GUL ever developed was an indexed life product! Just because the excess interest is based-upon the performance of an outside index does not necessarily mean that we intend to accumulate a ton of cash in the product. Did it receive indexed interest- sure, but there wasn’t much cash accumulation, just guaranteed premiums and death benefits.
Are there variable ULs (VULs) that are designed to provide strong death benefit protection at a low cost? There are! Again, the fact that the products have the ability to earn an unlimited amount of interest does not devalue their ability to provide cost-effective death benefit protection.
DON’T COMPARE APPLES TO ORANGES
I wanted to convey to you how these products are priced, and designed, so that you could better-understand how to compare them to one another. One infamous influencer in indexed life once declared in his newsletter that XYZ Insurance Company had a “horrible IUL” because it didn’t generate meaningful supplemental income via loans. Too bad this guy with the rainbow-colored newsletters didn’t understand that XYZ Insurance Company’s IUL was priced for death benefit sales. Similarly, I had the occasion to read a subscription product review service where a self-proclaimed expert on indexed life declared that ABC Insurance Company did not develop a “competitive” IUL because the product’s disappointing income solves. It was a no lapse guarantee design; not intended to provide cash accumulation.
It is so, so important to know your product objectives! Read the marketing materials- if they make references to “accumulate” or “cash value buildup,” it is probably a product priced for cash accumulation. On the other hand, if there are constant references to “protection” and “providing a benefit to heirs,” the product is likely intended for death benefit sales. You get the idea.
And if you don’t know a product’s objective, check LifeSpecs! Wink identifies the primary product objective for every UL on the system. If all else fails, call us, and we’ll happily assist in ensuring that you are not using death benefit products for your income solves. After all, benchmarking products is what we do! 😉 sjm