Companies hope that new features will overcome buyers' concerns.
The variable universal life insurance market has
been on a rollercoaster ride the past several years that has mirrored
the equity market-enjoying enormous popularity in the 1990s and being
left for dead during the bear market. Yet even though policyholders
remain scarred with memories of underfunded polices, overhyped return
projections and death benefits gone up in smoke, there are indications
that the VUL market is starting to rebound.
Companies, meanwhile, are trying to lure customers back by getting back to basics and devoting as much attention to the insurance component of VUL products as the asset growth component. At The Hartford Financial Services Group, for example, officials feel the variable universal life market is rebounding from the bear market. The company sold about $305 million in new variable life premiums in 2004, which made it the largest seller of variable policies in the nation for the third year in a row.
The company also achieved a 28% increase in its variable life sales from a year earlier. It was the first time since 2001 that the company saw an increase in sales, having seen drops of 25% and 26% in 2002 and 2003, respectively.
Jeffrey Cullen, advanced marketing consultant with The Hartford's estate and business planning group, says the rebound in sales has come at a time when the marketplace is changing. Buyers of VUL policies, he says, are becoming increasingly segmented in terms of what they're looking for. Some are looking for accumulation products, some are looking for a death benefit and many are looking to variable products to fill several roles in their financial planning. "We're seeing more combination situations or double-duty dollars-people who say, 'I want my insurance dollar to serve multiple purposes,'" Cullen says.
Some policyholders, for example, are looking at VUL's as a way to fill their needs for asset accumulation and stock redemptions tied to nonqualified deferred compensation plans. Buyers of variable life polices are also more sophisticated, Cullen says, noting that they are more likely to want dollar cost averaging and assurances that fixed costs will be coming out of fixed funds. "They want a predictable flexibility pattern to pull dollars out of these contracts, making sure the contracts don't crash," he says.
It's this changing marketplace that has given rise to the hybrid VUL policy, which is advertised as providing the best of both the universal life and variable life worlds-upside investment potential together with a guaranteed death benefit-in one policy.
The Hartford's answer to the change is called the Quantum Life policy, which gives policyholders a guaranteed death benefit as long as they pay the necessary premium to support it. The guarantee lapses if policyholders fail to keep up with their premiums.
Anything paid as a premium beyond what is needed to support the guarantee are put into a tax-deferred investment account, which can be used as supplemental income. The product includes riders for cost of living adjustments and disability protection, and preserves death benefits beyond the age of 100. "What we've tried to do is segment the products to fit the needs we hear from our clients," Cullen says.
Brett Berg, director of advanced sales with Nationwide Financial in Columbus, Ohio, says the bear market showed the pitfalls of depending on variable universal life policies solely as tax-friendly vehicles for asset growth. The down period underscored the fact that one of the chief advantages of VUL's is their ability to the address multiple needs in one package.
"I think one of the trends we see grows out of what is the dual purpose of the actual variable universal life contract," Berg says. "Both the death benefit and the supplemental retirement income are important."
Nationwide has tried to reposition itself in the post-bear-market VUL market by introducing the marketFlex VUL policy, which offers policyholders tactical investment management options along with a guaranteed death benefit if premiums are kept at a certain level.
The investment portion of the contract gives policyholders access to 31 Rydex funds in addition to more than a dozen core funds, according to the company. "What's contemplated is that they will be traded more frequently and tactically managed," Berg says. "In many cases, what we find is that advisors will partner with third-party investment managers who have expertise in tactical allocation and in managing these types of subaccounts."
For policyholders concerned about market volatility, he says, "it allows them to take advantage of the ups and downs of the market." The accounts provide more flexibility than is usually available in a VUL subaccount, he says, noting that the tactical accounts allow managers to respond to down markets by trading short.
While Nationwide has not yet introduced a hybrid VUL policy, the company has responded to the demand for downside protection in other ways, he says. The company's policy guard rider, for example, protects against lapses in cases where cash values drop too low. Another rider, Berg says, provides policyholders with long-term care benefits by accelerating death benefits in cases involving a lengthy illness or disability.
Advisors can probably expect to see more features such as these attached to VUL policies he says, as companies continue to deal with the "apprehension among advisors and clients" when it comes to variable products.
"It takes a commitment by insurance companies to develop ways to mitigate the downside risk, both in the accumulation phase and distribution phase," Berg says.
One of the first insurance companies out of the gate with a hybrid VUL product was Massachusetts Mutual Life Insurance Co., which introduced the VUL Guard policy in May 2003. It has since become one of the company's fastest-selling products. MassMutual also saw its VUL sales increase 35% last year-an increase company officials directly attribute to the popularity of VUL Guard.
The company, however, has yet to make up all the ground it lost as a result of the bear market. Whereas variable life sales made up 30% of the company's annual sales as recently as 1999, variable premiums now account for only about 10% of the company's sales. "The bear market had a significant impact on variable life sales," says Rowland Fawthorpe, second vice president and actuary at MassMutual. "I think that's fairly the industry standard-if you didn't have a broad product portfolio you got very hurt."
The VUL Guard product was specifically aimed at clients who are still concerned about the market risk on their life insurance, he says, and was designed to provide "a ground floor of life insurance coverage." The company has also added a Survivorship VUL Guard policy offering as a second-to-die protection vehicle for estate planners. The products are supported by 40 subaccounts.
"What it does is it helps ensure that the variations in the equity markets are not going to adversely effect your life insurance policy," Fawthorpe says. "They found that they do not want or cannot afford to have their life insurance subject to the whims of the equity markets."
That attitude has remained even as the equity market has rebounded, he says. Another change, he says, is that people are more wary of under funding their policies on the front end after seeing so many policies lapse during the bear market.
On the sales side, Fawthorpe says, the company requires that sales of its VUL policies include a 0% return projection and an 8% projection, and that all illustrations be signed by policyholders. "Hopefully by now people have realized you can't underfund or minimum-fund a variable life contract," he says.