Here’s a rundown on the changes of keenest interest to insurance advisors...
By Linda Koco
CHICAGO – Indexed universal life insurance is on a growth trajectory, according to Milliman consulting actuary Rob Stone.
A key reason is that indexed life policies are more attractive for carriers to offer today compared to the other two types of universal life, said the actuary.
The other two types are secondary guarantee universal life and traditional fixed current assumption universal life. Both products have been strong sellers in various market conditions over the years and both are still being sold, but each, for different reasons, has lost some punch in today’s market.
As Stone sees it, indexed universal life is now being tasked to be “the” current assumption universal life insurance in today’s environment.
The carriers are looking to indexed universal life to “pick up the slack” left by the other two types of universal life, he told InsuranceNewsNet.
Stone highlighted some underlying factors for indexed life’s rising importance in an interview that took place in advance of his presentation on the subject here yesterday at the annual Life Insurance Conference. The conference is co-sponsored by LIMRA, LOMA, SOA and ACLI.
Secondary guarantee universal life. Life carriers have been transitioning away from offering secondary guarantee products and they will continue to do so, Stone predicted. These products are low-premium policies that guarantee the death benefit up to a specified age or the policy maturity date, provided the owner pays the scheduled premiums.
The low premiums and the guarantees are what made secondary guarantee products tremendously popular over the years. However, that was before stricter reserve regulations took effect in 2013, the latest move made by regulators to get comfortable with reserving for these products.
“Looking at the sales data, there may have been a small fire sale on secondary guarantee products at the end of 2012,” Stone pointed out. But the fire sale ended in 2013 as carriers changed products and increased prices in response to the new requirement. As a result, the products stopped looking so attractive and sales decreased.
Traditional fixed universal life. Also called current assumption universal life, these policies credit a fixed interest rate, typically declared yearly, subject to a guaranteed floor. In the prolonged low interest rate environment, carriers have been forced to lower the credited interest rates offered in these products, Stone said. As a result, these are no longer “the place to be” on a guaranteed basis.
Indexed universal life. These policies have become the “go-to” products for universal life carriers, in lieu of the other two types of universal life, Stone said. They credit interest by linking to one or more market indexes and also offer a guaranteed interest floor.
Part of the appeal is that the policies offer the potential for owners to get a higher non-guaranteed crediting rate than in traditional fixed current assumption products, plus the downside protection. But what is giving them curb appeal in the current market is that “they have an opportunity to illustrate better in sales situations than do traditional fixed universal life policies,” he said.
Carriers still want to offer universal life, Stone said, but “they want to offer some sort of universal life that focuses less on a secondary guarantee.”
That narrows the choice down to traditional fixed universal life and indexed universal life. “Since the fixed product has a harder time illustrating well in the low interest rate environment, indexed universal life products are becoming more attractive.”
The illustration factor is important, he added, because nearly all traditional fixed universal life policies and nearly all indexed universal life policies are sold with an illustration.
What the customers see in the indexed illustrations is the potential for better non-guaranteed growth, he said, noting that this appeals to those looking for retirement income.
But indexed universal life is also being used as a solution in low-cost-to-carry scenarios (for example, when the goal is the minimum premium needed for the policy to last to age 100), he said. In addition, it is being used in endowment scenarios (where the cost falls between that for polices used for income and policies used for low-cost-to-carry, Stone said).
“Given the importance of illustrations in this discussion, companies are working diligently to make sure illustrations are presented with the appropriate customer understanding,” he added.
As evidence of indexed life’s rising popularity, Stone pointed to LIMRA’s recent figures on estimated individual life sales.
In 2013, indexed universal life sales represented a record 35 percent of individual universal life premium and 13 percent of total life insurance premium, according to LIMRA. By comparison, in 2012, the numbers were 30 percent and 12 percent, respectively.
Are secondary guarantee universal life policies going to die? No, Stone replied. Even with the higher reserve requirements and other regulations under discussion, “those products are still good for permanent insurance sales at the lowest premium.” Companies that have an appetite for it or need for the premium will still write the business. “But secondary guarantee products won’t drive 40 percent of sales the way they did in 2012.”
Linda Koco, MBA, is a contributing editor to InsuranceNewsNet, specializing in life insurance, annuities and income planning. Linda may be reached at firstname.lastname@example.org.
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