Fueled by the growth of an equity culture and widespread wealth creation, variable universal life (VUL) insurance has become one of the biggest success stories in recent years. Although insurance companies began selling variable products in the 1980s, it took an explosion of consumer interest in mutual funds over the last five years to open up the VUL market. From a relatively small base in the mid-1990s, VUL now accounts for almost half of all new premium income.
VUL offers a double attraction for customers. It allows them to obtain life coverage while building stakes in the investment markets. "There are more and more individuals," says Roger H. Morris, CLU, ChFC, owner of R.H. Morris Insurance and Financial Services in Irvine, Calif., "who are willing to take the risk of investments in their life insurance program from a long-term planning standpoint."
"Business is good," adds David B. Malkin, CLU, ChFC, president of New Jersey Life and Casualty Associates, a financial services firm in Livingston, N.J. "What's driving it is planning. I don't mean insurance planning. I mean estate planning, succession planning and distribution planning from qualified plans."
Ben Wolzenski, FSA, CLU, executive vice president of product and corporate strategies for General American Life Insurance Company in St. Louis, estimates that VUL is now generating 40 to 50 percent of new life premium revenue. Wolzenski says that the emergence of the VUL market in the U.S. "has been the result of more and more individuals becoming familiar with the stock market through their 401(k) plans or through the ownership of mutual funds."
But there is disquiet about VUL among some advisors, who are concerned about its dependence on a stock market that can be volatile. VUL sales across the industry were down by about 8 percent in the second quarter of this year, compared to the same period in 2000. This was the first such decline in six years. The dip has been blamed largely on the poor performance of the stock market in recent months.
Wolzenski believes it is important to have some perspective about the tapering off of VUL sales this year. "The extraordinary bull market of '97, '98 and '99 probably caused variable sales to go up faster than they otherwise would have," he says. "They went from about 20 percent to 45 percent."
Morris, a New York Life agent, agrees that the downturn in the stock market has had a negative effect on VUL sales. He says that there has been particular concern from customers who are relatively new to the market and who might tend to focus on short-term results. However, he expects such concerns to ease as people adjust to a longer-term view.
Wealthy clients are generating enough business to keep insurance companies busy.
In addition, some advisors argue that insurance and investment should be kept separate. Take the case of Brian Hillyer, a partner in the independent brokerage firm Hillyer Gonzales Insurance Agency, in Santa Fe, N.M. He has concerns about selling VUL to his clients. "My sense of VUL," says Hillyer, who is Series 6 qualified, "is that it's a good product long term. But right now I'm personally having a hard time coming to grips with selling it." He describes his client base as "middle income, middle age." He is happy to sell mutual funds, but has a philosophical difficulty "combining, insurance and assets. To me, it makes more sense to separate the two."
The problems that have occurred this year in the stock market have also underscored VUL's lack of a guarantee. Hillyer prefers the traditional universal life product, which has a guaranteed return. "If you are looking at the next two to five years," he says, "VUL is a concern. And my concern is having someone throw X amount of dollars in there and then suddenly seeing that they're going to have to put a lot more in to keep the policy in force."
|Careful explanations can help limit customer dissatisfaction after a drop in stock prices.|
Wolzenski is aware of such objections. He says that term coverage or universal life, with secondary guarantees emphasizing the death benefit, is an appropriate vehicle for customers who are buying insurance purely for protection. "I would never try to make the case that it [VUL] is for everybody," he says, "but it's natural for some people to think about their insurance program as having both a savings and an insurance element." Careful explanations at the point of sale can help limit customer dissatisfaction that may result from a drop in stock prices. He says that the same approach applies to the sale of products that are linked to interest rates.
Targeting the wealthy
Despite these issues, the wealthy are generating enough business to keep insurance companies busy developing and adjusting products to meet their needs.
Hartford Life has been a leader in the VUL market. According to Bob Kerzner, executive vice president and director of individual life, "most of our [VUL] business has been on the high-end business. We deal predominantly with the wealthiest five percent of Americans." Hartford Life is now working to build its VUL presence among the next 15 percent of wealthy Americans, a demographic group he describes as the "emerging affluent."
The company has concentrated on product development-especially in the area of second-to-die-to maintain its market strength among the wealthy. Hartford has devised a policy under which the death benefit can be put in trust while the cash value can be owned by the surviving spouse. Kerzner says that such innovation "points to how you have to differentiate yourself in the marketplace by offering not just a product but something else that's unique."
Hartford has also created structures to allow the very wealthy to leverage their assets by borrowing from outside sources at competitive interest rates rather than paying the VUL premiums themselves. This is based on the idea that the customer prefers investing his own money to putting it in insurance.
Kerzner says that the changes in the tax law caused Hartford Life and other companies to look at the accumulation capabilities of VUL and other products. But he says the company believes strongly that there is a still a very significant need for life insurance as part of planning at the high end of the market, where the firm operates.
Going after the newly
Hartford is also trying to reach the second tier of the wealthy. To accomplish this goal, the company has tried to streamline the insurance process. Its Simplify Life program is intended to "revolutionize the life insurance business." The objective is to expedite the process so that insurance advisors can spend more time with more clients.
Potential clients are presented with details of products in easy-to-absorb grid forms. A drop ticket is provided to allow the advisor to communicate with the company online or by fax. A tele-underwriter can then call the client, get the necessary information and set up a medical exam, if necessary.
This program emerged from research that Hartford Life conducted to find what would help advisors sell more life insurance. "What the data suggested," Kerzner says, "was that most recognized their clients had the need, but that they didn't like the whole process. They didn't like completing the paperwork. They didn't like asking their clients personal medical questions. And they really wanted to be disengaged from the heavy lifting."
Morris adds that VUL has a lot of appeal for the expanding market of younger people who are looking to buy cash value life insurance products over the longer term. VUL is less appropriate, however, for older clients who are more interested in security and predictability.
Need for flexibility
Wolzenski says that General American's status within the MetLife organization provides valuable resources in the potentially costly area of product development. He notes that policies can be created to meet specific needs such as accumulation, long-term protection and the provision of income streams. "If you try to build a product that does everything for everybody," he says, "you usually end up with something that doesn't do the best job for anybody."
Hartford Life has two core VUL products. One is for the death benefit market. The other is designed for accumulation. In 2002, the company plans to introduce a third product aimed at lower-faced transactional business. One size, Kerzner explains, does not fit all. "You're seeing a lot more flexibility in design to make it custom-fit the type of business that the carrier looks for," he says.
New York Life entered the VUL market in 1993. In 1999, it rolled out its VUL 2000 policy and has introduced a single-premium VUL policy. It currently has a broad range of variable products and approximately 6,000 registered representatives, all of whom are Series 6 and 7 certified.
The stock market and mutual funds have outperformed all types of fixed investments over the long haul.
John Hess, assistant vice president and product manager for variable universal life at New York Life, says: "We feel that we've got something for everybody within the variable market." The company's traditional outlook had created a preference for whole life and term-type policies. But when the stock market began to take off, Hess says, people became "more comfortable sitting in their kitchens and looking at mutual funds and their own personal 401(k) plans. They got a good feeling about having some money in these types of instruments. And I think that's when [VUL] really started to take off."
According to Hess, New York Life is "still comfortable" with the long-term outlook for the stock market, but adds that the company is now responding to a desire from potential VUL customers for a guarantee. The company's single premium VUL policy offers a guarantee as a rider. "We're looking at ways to make people feel comfortable, more secure," he adds.
Risk analysis is a
Malkin says that VUL is well suited for people who are so busy with their lives and careers that they don't take the time to think about the future. He has encountered high-powered professionals who don't even have wills, much less any clear plans about personal finances or business succession.
When taking on such clients, Malkin starts with a fact-finding exercise. His recommendations are likely to involve legal agreements, a financial plan, investment planning and insurance. "When it comes to insurance," Malkin says, "I always do a risk tolerance to see how my client is built. And then I decide whether I'm going to use variable universal life, universal life or whole life."
Malkin poses a series of questions to his clients to measure risk tolerance, ranging from aggressive to conservative. An aggressive client would take a long-term view-typically 20 years-and go for maximum growth. At the other end of the spectrum are those who are extremely conservative. These are people who say: "I really need to know without any scintilla of a doubt that if I pay this premium, the death benefit is going to be there."
He leans toward VUL when an assessment of current age and life expectancy suggests that a client has a "significant window of time" for investments to operate effectively. Longer life spans mean that clients need not be young. In fact, Malkin has sold VUL policies to people in their early 60s, with the expectation that they would be alive for another 20 to 25 years.
He counsels his clients that the stock market and mutual funds have outperformed all types of fixed investments over the long haul-including recessions and depressions. "You meet with your clients on a regular basis, so they understand the risk and don't get panicked when things go down," he says. The emphasis is that once the policy is in place, it should be supported by automatic rebalancing.
As a rule, Malkin is only moderately aggressive. He argues that an aggressive view would run counter to reasons people have for buying life insurance. He sees that a VUL policy can be a good place for accumulated assets. In making such assessments, he would want to know details such as how much the client spends, how much he gives to charity, when he plans to retire and what health issues he might have. He says that the prospect of a death benefit that is free of income tax-and possibly estate tax-is a powerful lure with securities, lest he spread himself too thin.
More customer service
Morris, who is Series 7 certified, says that customer support is more important with VUL than with traditional insurance products. "The client assumes a lot more investment risk," he says, "so he wants more information, and he wants it faster."
Insurers seem intent on encouraging advisors to sell VUL. "More and more," Morris says, "there's a demand by companies that their representatives get licensed to sell variable products quite early in their careers." He also believes that it is probably more difficult now to get certified than it was during the mid-1980s. There is more study and more testing required.
According to Morris, the range of options available within universal life also means that the sales process can be time-consuming. But he does not regard VUL as particularly difficult to sell. The real sale, he says, is life insurance itself. He compares the choice of the product to the selection of a mortgage. "You first decide what it is you need," he says. "And the secondary question is: what's the best way to finance this?"
VUL is clearly destined to remain an important part of the life insurance and financial advising market. Customers have gotten a taste for investments and are taking more interest in the performance of their personal holdings. But the recent reverses of the stock market suggest some caution may be warranted.
Robert O'Connor is a London-based freelance writer and a frequent contributor to Advisor Today.