A spoonful of sugar: variable life insurance had another rough year in 2005 with sales down slightly, but companies offering product guarantees saw gains.Nationwide Financial, like all writers of variable universal-life insurance, faced a big problem after the 2000-to-2003 bear market made people afraid to buy the product. This January, the company took a major step toward making prospective buyers less afraid by introducing a guaranteed minimum accumulation benefit on cash values. The new benefit is one of the latest attempts by several VUL VUL Variable Universal Life VUL Vulnerability (unit) VUL Vulgar writers to alleviate Alleviate To make something easier to be endured. Mentioned in: Kinesiology, Applied prospects' fears about the product and to reverse sales declines. Since 2000, annual industrywide in·dus·try·wide adv. & adj. Throughout an entire industry: sales that have decreased industrywide; industrywide cooperation. sales of variable universal life and its less-popular sister product, variable life, have fallen by more than half, according to according to prep. 1. As stated or indicated by; on the authority of: according to historians. 2. In keeping with: according to instructions. 3. marketing and research firm Limra International. Consulting and research firm Tillinghast, a Towers Perin in company, estimates new premiums in 2005 at about $2.7 billion. Wealth Guard, protects a VUL's cash value against investment loss and allows policyholders to lock in market gains annually. "It's a heck heck interj. Used as a mild oath. n. Slang Used as an intensive: had a heck of a lot of money; was crowded as heck. [Alteration of hell. of a benefit for anyone with any fear whatsoever, especially someone in their 40s who really should be investing fairly aggressively for the next 15 or 20 years in all of their accounts," said Peter Golato, senior vice president of individual protection. In 2000 and 2001, variable life products had the largest market share among individual life products. But Nancy Kenneally, a Tillinghast principal, said they always have appealed to a consumer generally more sophisticated, one used to investing in equities through other investments and accustomed to the ups and downs ups and downs pl.n. Alternating periods of good and bad fortune or spirits. ups and downs Noun, pl alternating periods of good and bad luck or high and low spirits of the market. So, it was no surprise that the severe bear market steered less-sophisticated buyers away from VUL. Exacerbating ex·ac·er·bate tr.v. ex·ac·er·bat·ed, ex·ac·er·bat·ing, ex·ac·er·bates To increase the severity, violence, or bitterness of; aggravate: that trend was the emergence of universal life insurance with no-lapse guarantees, which is very competitively priced. "That's where the sales shifted," said Elaine Tumicki, Limra's corporate vice president of product research. "UL sales have more than doubled since 2000 and were up 9% or 10% last year." At Nationwide, variable sales last year accounted for about 60% of all of its life sales, a very high percentage. Limra statistics show the industrywide average at less than 15%. Nationwide's variable life sales constituted close to 90% of its overall life sales in 2000, Golato said. Nationwide is seeking patent protection for Wealth Guard, which charges 110 basis points annually for a 100% guarantee on premiums and 70 basis points for an 85% guarantee. The guarantee covers the first 20 years. The cash value guarantee also means that contract owners need not worry about policy lapsation. Nationwide does not restrict the choice of investment options. Golato said people increasingly buy VUL insurance to generate supplemental retirement income. They fund a policy far more than is necessary to support the death benefit. They can then withdraw without tax the amount paid in premiums, and they can take low-cost or interest-free loans on earned values. Golato said VUL is popular among small-business owners using it for key-man insurance and as a way to emulate em·u·late tr.v. em·u·lat·ed, em·u·lat·ing, em·u·lates 1. To strive to equal or excel, especially through imitation: an older pupil whose accomplishments and style I emulated. 2. executive benefit plans. When it's time It's Time was a successful political campaign run by the Australian Labor Party (ALP) under Gough Whitlam at the 1972 election in Australia. Campaigning on the perceived need for change after 23 years of conservative (Liberal Party of Australia) government, Labor put forward a to take supplemental income, Nationwide offers a free automated au·to·mate v. au·to·mat·ed, au·to·mat·ing, au·to·mates v.tr. 1. To convert to automatic operation: automate a factory. 2. income monitor. The company's service center determines for a broker and client what level of income could be taken from a contract on an automatic basis either monthly, quarterly, semi-annually or annually without putting the policy in danger of lapsing lapse v. lapsed, laps·ing, laps·es v.intr. 1. a. To fall from a previous level or standard, as of accomplishment, quality, or conduct: . Each year, the program generates an inforce ledger The principal book of accounts of a business enterprise in which all the daily transactions are entered under appropriate headings to reflect the debits and credits of each account. to illustrate how the income stream affects the cash value and adjusts the income stream up or down. Golato said Nationwide is trying to develop a feature that would guarantee income. More than 99% of Nationwide VUL contracts have traditionally been funded from 2.5 to five times the minimum premium, Golato estimated. "We really don't want to sell a VUL policy at minimum," he said. "We've seen very little erosion from people lapsing policies because they've been very heavily funded in the beginning, which is the key to success with these contracts." Nationwide's VUL sales fell 11.6% in 2005, according to the Tillinghast survey, but Golato said that trend is starting to reverse. "Brokers are becoming more comfortable with the product because of the guarantees," he said. Also helping sales are new lifestyle fund options in which fund managers handle asset allocations Asset Allocation The process of dividing a portfolio among major asset categories such as bonds, stocks or cash. The purpose of asset allocation is to reduce risk by diversifying the portfolio. for a particular age group or risk profile. In its affiliated channels, Nationwide sells about 70% of its VUL insurance through the Nationwide Financial Network and about 30% through Nationwide storefront agents, Golato said. In the nonaffiliated channel, about 70% of sales are through independent broker-dealers, 20% through wirehouses and 10% through banks. Earlier, the company developed Lapse (language) LAPSE - A single assignment language for the Manchester dataflow machine. ["A Single Assignment Language for Data Flow Computing", J.R.W. Glauert, M.Sc Diss, Victoria U Manchester, 1978]. Guard, which serves to put contracts in danger of lapsing into a kind of paid-up status. VUL Hybrid Designs Hartford Life, also known for specializing in variable products, in February introduced a hybrid VUL, Quantum II, that guarantees the death benefit will not lapse. The company's variable life sales fell 9.2% last year, and it lost its number-one ranking to IDS Life in the Tillinghast survey. But the company is optimistic op·ti·mist n. 1. One who usually expects a favorable outcome. 2. A believer in philosophical optimism. op that its new product will strengthen its portfolio. Hartford has also added 14 investment options to its variable products, has streamlined its underwriting Underwriting 1. The process by which investment bankers raise investment capital from investors on behalf of corporations and governments that are issuing securities (both equity and debt). 2. The process of issuing insurance policies. (including elimination of medical exams for some applicants) and is offering standard rates to survivors of breast and prostate cancer prostate cancer, cancer originating in the prostate gland. Prostate cancer is the leading malignancy in men in the United States and is second only to lung cancer as a cause of cancer death in men. . The hybrid product design allows policyholders to invest in variable accounts without fear of lapsing their policies in market downturns, but only after the policyholder Policyholder An individual who owns an insurance policy. has funded the general account enough to support the death benefit. This benefit account is thus like a universal life product. Quantum II is simpler than Quantum I, introduced in 2003, and the no-lapse guarantee is less expensive, said John Vaccaro, chief marketing officer of individual life insurance. Hartford's variable products last year accounted for 45% of total life sales, down from 53.6% in 2003. The figures were 89% in 2000 and 81.5% in 2002. That drop in percentage is misleading, however, because Hartford has produced new fixed life products in recent years. "We've done a lot to diversify diversify To acquire a variety of assets that do not tend to change in value at the same time. To diversify a securities portfolio is to purchase different types of securities in different companies in unrelated industries. and grow our business," said Vaccaro. He estimated that about 30% of life sales last year were in universal life, and the company has plans for a new term product. Hartford's assets under management Assets Under Management (AUM) is a term used by financial services companies in the mutual fund and money management or investment management business to gauge how much money they are managing. in variable products, however, are higher than ever at more than $10 billion. "We sell primarily through producers that sell equity-based products," he said." They're not giving up on them. Broker-dealers are going to sell more and more life insurance as they continue their transition toward financial planning Financial planning Evaluating the investing and financing options available to a firm. Planning includes attempting to make optimal decisions, projecting the consequences of these decisions for the firm in the form of a financial plan, and then comparing future performance against , and they're going to sell VUL. It's their business, they can sell the equity markets, and they believe in the equity markets." Hartford will introduce in the third quarter a last-survivor variable policy, Vaccaro said. Guarantees Lead the Way Three other insurers--John Hancock, Lincoln National and Massachusetts Mutual--enjoyed big gains last year in variable life sales. All three said guarantees played a role. MassMutual, known for its whole-life product, ironically i·ron·ic also i·ron·i·cal adj. 1. Characterized by or constituting irony. 2. Given to the use of irony. See Synonyms at sarcastic. 3. had the best sales gain last year of any variable-life writer in the top 28 with 41.8%. Paul Strong, vice president of life product development, attributed that performance to a single-life VUL Guard product introduced in 2003 and a survivorship survivorship n. the right to receive full title or ownership due to having survived another person. Survivorship is particularly applied to persons owning real property or other assets, such as bank accounts or stocks, in "joint tenancy. version launched in 2004. Like Hartford's Quantum, they use a general account to guarantee the death benefit and the accumulation side for other fund options. MassMutual was a "real pioneer" in the concept, Strong said. "Since then, other companies have copied, or copied and put their own spin on, or they've taken a little different approach," he said. MassMutual's variable business rose by 25% in 2004 before booming last year. Those gains have come on a relatively small base, he added. There is no explicit additional charge for the guarantee. As with universal contracts, charges are deducted de·duct v. de·duct·ed, de·duct·ing, de·ducts v.tr. 1. To take away (a quantity) from another; subtract. 2. To derive by deduction; deduce. v.intr. from premiums for loads, expenses, risk charges and costs of insurance. The product is attractive because there is no need to heavily fund it immediately, he said. "It may be suitable for anyone if there's an expectation that down the road, it might be useful to use this product for higher funding," he said. Variable life premium last year came to about 20% of MassMutual's overall life premiums, according to Strong. That would be in keeping with the company's desire to be good in several different product lines. Lincoln National, the sixth-largest variable writer, last year scored a 31.4% gain in sales. It offers death-benefit guarantees to age 100 similar to the way that UL contracts guarantee death benefits. The company introduced VUL1 in May 2004 and its successor product in May 2005. The biggest difference is that the new product allows policyholders to choose a lower guaranteed amount, as low as 70% of the death benefit, in exchange for a lower minimum premium. Thus, a policyholder with a $1 million death benefit may choose to guarantee $700,000 and take the risk on the other $300,000. "So you have all the upside potential Upside potential The amount by which analysts or investors expect the price of a security may increase. upside potential The potential price or gain that may be expected in a security or in a security average, generally stated as the dollar you're used to, but now you have a very well-defined worst-case scenario worst-case scenario n → Schlimmstfallszenario nt ," said Jim Desrocher, assistant vice president, product management. Kurt Shallow, vice president, national managing-general agent relationships, said the original and successor product have had a growing positive effect. "Many advisers, after the 1990s and the great fall, sort of walked away from everything and went straight to UL," he said. "We wanted to focus on the fact that it's OK to come back into the market, to have some upside potential, and you don't have to give up all your upside Upside The potential dollar amount by which the market or a stock could rise. Notes: This is basically an educated guess on how high a stock could go in the near future. See also: Bull, Downside to protect your downside Downside The dollar amount by which the market or a stock has the potential to fall. Notes: You might hear someone say that the downside on stock XYZ is $10. What that means is that the stock could fall by this amount if things got bad. . Once we started to have advisers beginning to understand, we had success." Shallow said prospects, too, are becoming much better educated by the industry, trade publications and consumer magazines on the importance of protecting their future retirements and on the risks of outliving their assets. Lincoln also has made variable life easier for clients. It has partnered with Wilshire Associates to provide a choice of funds that invest in other funds so that policyholders no longer need to monitor their asset allocation daily or even monthly, said Desrocher. Five years ago, variable life products were a much larger percentage of Lincoln's business, said Shallow. Today, the big seller is universal life, but variable products represent a growing percentage, "and we're feeling pretty good about the direction it's going in," he said. John Hancock, which merged with Manulife Financial Manulife Financial (NYSE: MFC, TSX: MFC, SEHK: 945, PSE: MFC), also known as The Manufacturers Life Insurance Company, is a major Canadian insurance company and financial services provider. in 2004, ranked fifth in the Tillinghast survey of variable life sales and enjoyed sales gains of 15.9% in 2005. But UL still represents 70% of life sales for the combined companies, said Naveed Irshad, vice president, product management. Variable sales account for 22%, term life for 7% and whole life for 1%. Variable sales are "not even close" to what they were for the companies in 2000, Irshad said. But he added: "We've seen the turnaround Turnaround A situation where a company that has had poor performance for an extended period of time experiences a positive reversal. Notes: A speculator may profit from a turnaround if he or she accurately anticipates the improvement of a poorly performing company. . We're investing significant resources to come up with new products and features because we think it is coming back." The company offers two distinct VUL products. In July, it launched Protection VUL, which offers a no-lapse guarantee for about 10% to 15% higher premiums than for the same death benefit in a universal life policy. To get the competitive guarantee, a policyholder must invest in one of the managed lifestyle portfolios. "It provides for instant diversification Diversification A risk management technique that mixes a wide variety of investments within a portfolio. It is designed to minimize the impact of any one security on overall portfolio performance. Notes: Diversification is possibly the greatest way to reduce the risk. for the client, but also manages our inherent economic risk in pricing these products," said Irshad. "It took some time for the product to get some traction Traction Definition Traction is the use of a pulling force to treat muscle and skeleton disorders. Purpose Traction is usually applied to the arms and legs, the neck, the backbone, or the pelvis. , but we're definitely seeing significant activity there now ... If you look at sales and inventory by month, it's trending in the right direction quite significantly." Accumulation VUL, announced on Jan. 30, is designed for nonqualified supplemental retirement income and business applications. It provides a broad array of investment options, a 20-year no-lapse guarantee, zero net-cost loans, and an optional rider that protects clients if they inadvertently incur To become subject to and liable for; to have liabilities imposed by act or operation of law. Expenses are incurred, for example, when the legal obligation to pay them arises. An individual incurs a liability when a money judgment is rendered against him or her by a court. policy debt greater than the policy's face amount. The overloan protection rider converts a policy in danger of lapsing to a reduced paid-up status. without any further charges, thus avoiding a lapse-induced taxable event Taxable event An event or transaction that has a tax consequence, such as the sale of stock holding that is subject to capital gains taxes. . Irshad said Hancock has priced the new product "quite aggressively." The company's career agency, John Hancock Financial Network, is by far the largest seller of the company's variable life products, followed by M Financial Group, an independent distributor. Irshad said the demographic profile A demographic or demographic profile is a term used in marketing and broadcasting, to describe a demographic grouping or a market segment. This typically involves age bands (as teenagers do not wish to purchase denture fixant), social class bands (as the rich may want of the company's network "fits very well with variable life products." A lot of VUL product design is driving off the success of the living benefits in variable annuities Variable annuities Investment contracts whose issuer pays a periodic amount linked to the investment performance of an underlying portfolio. , Irshad said. "The table has been set in terms of developing models that will work in that world" he said. According to Kenneally, there is room for modest growth in the variable life market industrywide, probably single-digit, assuming equity markets continue to stabilize stabilize See peg. or improve and fixed-account returns remain low. In the overall life market, sales are relatively flat, with only UL sales achieving significant growth. If the UL no-lapse market were to become less competitive, VUL would become more attractive, she said. Life and annuity annuity: see insurance. annuity Payment made at a fixed interval. A common example is the payment received by retirees from their pension plan. There are two main classes of annuities: annuities certain and contingent annuities. products go in and out of favor, depending on economic conditions, Kenneally said. "For companies with diversified diversified (di·verˑ·s product portfolios, with fixed and variable products on the shell they can pull out certain products and dust them off when conditions change," she said. "Companies specialized spe·cial·ize v. spe·cial·ized, spe·cial·iz·ing, spe·cial·iz·es v.intr. 1. To pursue a special activity, occupation, or field of study. 2. in either fixed or variable product lines are less able to cope with changing economic conditions." The bear market constituted a hard lesson for them, she said. Key Points * Variable universal life products offer the potential benefits of supplemental income, but the past few years have shown that buyers still want guarantees. * The industry is only in the beginning stages of developing minimum accumulation benefits and minimum withdrawal benefits. * Though variable life sales continued to fall in 2005, several companies achieved significant sales gains. Learn More Nationwide Life Group A.M. Best Company # 70350 Distribution: Affiliated agents, P/C agents, independent broker-dealers, wirehouses, banks Hartford Life Insurance Co. A.M. Best Company # 06518 Distribution: Independent agents, brokers, banks, wirehouses John Hancock Life Insurance Co. A.M. Best Company # 06681 Distribution: Career agents, independent agents, other third-party producers Lincoln National Life Insurance Co. A.M. Best Company # 06664 Distribution: independent agents, brokers, banks, wirehouses Massachusetts Mutual Life Insurance Co. A.M. Best Company # 06695 Distribution: Career agents, banks, brokerdealers, wirehouses For ratings and other financial strength information about these companies, visit www.ambest.com.
Tillinghast's Value Variable Life Survey
Annual premiums with single premiums included at 10%.
($ Millions)
YTD 2005
Change from
Company Name 2004 2005 YTD 2004 (%)
IDS Life $288.6 $326.2 13.0
Hartford Life 305.1 277.0 -9.2
Pacific Life 244.7 193.1 -21.1
MetLife 199.6 171.9 -13.9
John Hancock 136.3 158.0 15.9
Lincoln National 111.1 146.0 31.4
Nationwide Life 152.0 134.4 -11.6
Allstate Financial 126.0 129.2 2.5
Axa Financial/MONY 162.6 129.1 -20.6
ING Life 135.5 115.3 -14.9
Aegon Cos. 123.7 112.7 -8.9
Mass Mutual 68.4 97.0 41.8
Minnesota Life 84.3 89.7 6.4
Prudential Financial 93.2 77.0 -17.4
New York Life 75.2 65.5 -12.9
Jefferson Pilot 62.4 64.9 4.0
Penn Mutual 43.1 37.6 -12.7
Northwestern Mutual 38.2 33.9 -11.4
AmeritasAcacia Cos. 26.8 31.6 17.8
Midland National Life 31.9 25.2 -21.0
Total for companies providing
data $2,720.4 $2,594.7 -4.6
Total Market Estimate $2,850.0 $2,700.0
Rank by Premiums
Full Yr YTD
Company Name 2004 2005
IDS Life 2 1
Hartford Life 1 2
Pacific Life 3 3
MetLife 4 4
John Hancock 7 5
Lincoln National 11 6
Nationwide Life 6 7
Allstate Financial 9 8
Axa Financial/MONY 5 9
ING Life 8 10
Aegon Cos. 10 11
Mass Mutual 15 12
Minnesota Life 13 13
Prudential Financial 12 14
New York Life 14 15
Jefferson Pilot 16 16
Penn Mutual 17 17
Northwestern Mutual 18 18
AmeritasAcacia Cos. 21 19
Midland National Life 20 20
Total for companies providing
data
Total Market Estimate
Source: Tillinghast, a Towers Perrin company
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