A special pool: two insurers find conditions are right for moving executives out of group term-life plans.

In the marketplace of employee benefits, group universal life/variable universal life is a classic niche product. It is not well known among employers, is not much sold except by two insurers, and it may be hard for other writers to break into the business. But the leading writers of the product, MetLife Inc. and MassMutual Financial, believe it has much potential as a benefit for highly compensated employees.

The niche that this product currently occupies is minuscule. Based on data provided by the two companies and the American Council of Life Insurers, group UL/VUL accounts for only about one-fifteenth of 1% of the more than haft trillion dollars of premium collected by life insurers in the United States. Insurers use it to provide a nonqualified benefit to executives they "carve out" of the group term-life employee pool.

It is a highly attractive benefit for these valued employees in that it can offer much higher death benefits than group term plans, belongs to the employee, is portable, and can provide another way for executives to accumulate money tax-deferred if they have maxed out on their companies' 401(k) plans.

Companies also enjoy some benefits beyond rewarding their most-valued employees. Carving the executive team out of the group term pool removes a block of older employees and reduces the pool's overall costs.

The two major players in the marketplace entered through merger and acquisition activity. MassMutual merged in the early 1990s with Connecticut Mutual, which had developed a group UL program for executives. MetLife's 2000 purchase of General American Life Insurance Co. included Paragon Life Insurance Co., which had developed a similar business. "There have been a lot of other carriers that have come into this space and gone from it," said John Laprade, who heads the sales unit of MassMutual's Executive Group Life Carve-Out Program. "We are the only two with staying power. And we feel there's a really good opportunity with the changes brought about by the Sarbanes-Oxley law that makes split-dollar plans less attractive. Employers are looking for simpler ways to provide better benefits to their key employees who really control the bottom line. We've been making a lot of inroads."

MassMutual currently has about 280 group plans insuring about 60,000 lives, according to Laprade. The program generates about $85 million to $90 million of renewal and new premium every year, with career agents and independent brokers bringing in nearly equal amounts.

The company's "sweet spot" has been professional firms, such as law firms, Laprade said. Career agents see the group UL/VUL as a way to "open doors" within these firms for the sale of ancillary products, including multilife disability income and long-term-care insurance, as well as individual products. Brokers that specialize in executive benefits and group benefits find the carve-out product attractive because they want to offer world-class products from top-rated life companies to their constituency, Laprade said.

Recently, however, MassMutual has achieved sales outside the professional-firm arena in both large and small corporations, Laprade said. "If you look at recent sales numbers, there's probably $50 million or $60 million in new premium being done in this marketplace, and that's growing very rapidly, for us, Paragon and the other carriers."

Pricing by Pool vs. Experience

The group UL/VUL executive carve-out is a hard business to enter because the pricing is based on the writing company's entire pool of insureds. In contrast, most group insurance is experience-rated; the rate is based on the experience of the employees in the group. "When you're carving 100 or 200 executives out of a company, and you're giving them big face amounts of coverage, and you're pooling that with all your other lives, if you don't have a big enough pool, you're going to have to play with your rates," said Laprade. "We've been at this for so long, and our pools are so big, that we don't have to fiddle around with this."

Group term-life plans are administered under Section 79 of the Tax Code, which says everyone has to be treated essentially the same or the employer loses the plan's tax advantages. If an employer wants to offer a death benefit better than the one or two times salary that is common--such as $1 million or $2 million--it has to discriminate. Under Section 162, however, employers are allowed to pay bonuses to certain employees, and executives use these bonuses to pay premiums under carve-out plans.

By keeping rank-and-file employees in group term life, employers have manageable amounts of insurance and can manage a certain amount of claims without affecting the rate too negatively, Laprade said. Meanwhile, by having executives in a pool-rated product, employers don't have to worry that the death of an executive will affect their experience.

MassMutual can typically offer a new carve-out group more guaranteed-issue insurance than executives were receiving under the group term-life plan, significantly more in many cases, said Laprade. He said group UL/VUL also offers employees:

* The ability to retain the coverage at the same rates when separating from the company.

* The same death benefit at retirement because the coverage is permanent. Group term coverage disappears or scales down to a small amount at retirement.

* The ability to fund the policy at high levels during working years so that account values can keep the policy in force during retirement.

* The ability to withdraw supplemental retirement income if the policy is adequately funded. Policy owners may withdraw their cost basis without paying tax, and then can borrow at little or no cost.

* The ability to use the policy as a pension-enhancement tool. With life insurance in place, a covered executive is free to choose a pension life-income option that provides the highest monthly payout. The death benefit would then offset for the spouse the loss of the deceased spouse's pension.

MetLife: Growth Through Leverage

Paragon Life was created in 1987 to develop a group universal life program, which was distributed through General American's independent agency system. In 1988, it created the first group variable universal life program at the request of a large financial-services client, said Tony Trani, vice president of Life Products Management at MetLife.

Like Connecticut Mutual, Paragon focused on law firms, medical institutions and other parts of the professional marketplace. But after the MetLife acquisition, Paragon leveraged MetLife's No. 1 ranking in group-life insurance market share to expand its carve-out business to large corporate customers, Trani said. From 1999 through 2004, Paragon's compound annual growth rate for new business sales was more than 30%, and that for total revenue was more than 10%. Trani estimated that Paragon now has about 300 client companies, 130,000 covered lives and $40 billion in coverage. Annual premium is about $150 million. At the end of 2004, assets under management were about $525 million. MetLife covers 88 of the Fortune 100 companies, and Paragon has more than half of group UL/VUL market share according to the company.

Paragon's advantages include the brand and reputation of MetLife in the benefits marketplace and strong technological capability. Trani said plan members can enroll online and can check account balances and move funds at any time. Laprade said MassMutual, too, recently made a multimillion investment in its online enrollment system and is investing in a new administrative platform to make self-service easier for plan members.

Marketing of the MetLife business is through only 12 individuals located in the company's group insurance offices throughout the country. These 12 take advantage of existing group relationships, Trani said. "The product has to be explained to fairly high-level people in the companies," he said. "Their usual first reaction is, 'Why shouldn't we do this?'"

Asked about the potential for growth, Trani said MetLife has "just touched the surface" and estimates that the entire potential marketplace could be $4.5 billion in annual premiums. The 12-member sales team has added nearly 200 clients in the past five years with the help of the company's 200-plus group life sales marketers, which identify prospects. To qualify, prospective clients must have at least 100 executives earning at least $75,000 a year. "Typically, we're looking at employee groups of 1,000 or more, with maybe 10% earning $75,000 or more," he said. "There are more than 5,000 employers in the country with more than 1,000 employees."

The Paragon product is composed of a term-life component and a variable component, what Trani calls the "side fund." It is usually up to employees to contribute to the side fund, and they add nearly $3 for every dollar of term-life premium, he said.

MetLife typically offers 18 investment options from several managers, including a fixed-income option. It charges up to $3.50 per month per employee for record keeping, online support and fund statements, but that charge can vary by size of account.

Switches From Split-Dollar

Many client companies have joined MetLife's group UL/VUL program as a result of unwinding their split-dollar benefit programs, Trani said. Split-dollar plans have been under government scrutiny since 1996 and lost much of their allure in 2003, when the Treasury Department and Internal Revenue Service issued final regulations on their tax treatment. Also, Section 402 of the Sarbanes-Oxley Act of 2002 puts splitdollar plans into question because it prohibits public companies from extending credit in the form of personal loans to their officers and directors. Trani said switching from splitdollar to group UL/VUL is not a taxable event for a company.

Laprade said MassMutual has fielded many inquiries about switching and quoted a lot of cases. He pointed out, however, that while split-dollar plans are corporate-owned, the group UL/VUL product is not. "That's one negative factor, especially if the employer wanted to put money in and handcuff the employee with that money," he said. "But there are a lot of other features that make the group product attractive, and it's cost-effective." Several employers in the past year have opened plans in which they pay a percentage of salary over and above the costs of the insurance, he said. "You didn't see a lot of that activity prior to last year, so we think a big part of that is the change in the legislation," said Laprade.

Key Points

* Employers may benefit from group universal life/variable universal life plans for executives by culling risk and cost from their group term-life pools.

* Group universal life/variable universal life plans may be alternatives to split-dollar plans.

* Insurers new to the niche may find established competition tough to beat.

Group Universal/Variable Universal Life

Group term life plans include all employees from a company. In group universal and group variable universal-life plans, insurers move executives and senior managers into a separate pool containing similar employees from other companies.

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MassMutual Financial Group A.M. Best Company # 06695 (Massachusetts Mutual Life Insurance Co.)

Distribution: Career agents, banks, broker/dealers, wirehouses

Metropolitan Life Insurance Co. A.M. Best Company # 06704

Distribution: Career agents, group sales specialists, independent agents, wirehouses, banks

For ratings and other financial strength information about these companies, visit www.ambest.com.