Covering the bases: universal life policies with guaranteed death benefits are driving the market, but the bigger trend may be that life writers are broadening their product lineups.

Watch out. The status quo is being shaken and stirred. Hartford Life Insurance Co., long known as a powerhouse in variable annuities and variable life, has become an active player in universal life and whole life products. Jackson National Life Insurance Co., long known for its fixed products, launched its first variable universal life product in March 2003, when the industry's VUL sales were fizzling rather than sizzling. The company has two VULs ready to go in 2005, designed to provide trail compensation instead of the traditional large first-year commission.

Massachusetts Mutual Life insurance Co., renowned for product development across a full line of life insurance products, has seen other carriers prey upon its existing business because of its reluctance to lower its price for UL policies with a guaranteed death benefit. Other companies, refusing to buckle under pricing pressure for those policies, have seen similar market-share intrusions. In an interview in the fall, New York Life's chief executive officer, Sy Sternberg, said his company was losing sales in its independent broker channel because the brokers cared more about price than overall value.

Why are so many life insurers turning out new, sometimes uncharacteristic, products? Are they making new bets on the direction of the markets, or are they filling out their product lineups to be ready for whatever the markets may bring? The answer is a little of both.

The UL products with a death-benefit guarantee were red-hot last year, according to Craig Waddington, a vice president and actuary, individual life insurance, for MassMutual. Many buyers were owners of existing UL policies who opted to replace them with single-premium policies that also locked in death benefits. "We have products like it, but not priced as low," he said. "We still see our share, but it's very competitive. We don't feel you can profitably compete."

Several companies last year introduced UL products aimed at increasing competition in the independent marketplace. Hartford launched Advanced UL, which offers a rider that guarantees the death benefit. Policyholders determine how long the guarantee will last and the length of time it will be funded.

Allstate subsidiary Lincoln Benefit Life Co. introduced Legacy Secure UL and Legacy Choice UL with riders that offer present and future options on guarantee periods and payment patterns. Legacy Choice also allows a one-time payment to guarantee the death benefit.

Ohio National Life Insurance Co. expanded its UL lineup with Virtus 100 G, which offers a death-benefit guarantee to age 100 with coverage beyond 100 in most states with no further premiums due.

A Portfolio for All Seasons

These product innovations aim to improve an insurer's ability to sell through its independent distribution networks, while those with strong agency systems of their own, such as New York Life and MassMutual, are better positioned to resist the competitive pricing. That's not only because of their mutual status and career agency systems, but because they have long offered a complete product portfolio. "It's been a strategy of ours," said Waddington. "Let's not try to pick the market, but have a product in place for when the market does change."

During the change in demand in the past few years from variable to fixed UL, MassMutual saw a big uptick in fixed UL sales, he said. "Now we're seeing a shift to traditional whole life because of the guarantees. You have to pay more, but you get cash values out of it. You can fund it heavily and have a guaranteed death benefit and retirement income.... In the 1990s, we saw sales of whole life drop 20% a year, but in the last few years, they've been up 20% a year. We're still committed to whole life."

New-money purchases in 2004 at MassMutual also have gone into UL and VUL (up 35%).Term insurance represented less than 10% of the company's premiums, but about 40% of its applications,Waddington said. Also hot last year was the 412i market, in which small businesses use whole life insurance to fund pension plans.

Despite MassMutual's extensive product lineup, which also includes survivorship life, the company continuously revamps its product portfolio. "Our CEO [Robert J. O'Connell] has a guideline that a third of all new premium must come from products not in existence three years earlier," said Waddington. Among recent new products are two versions of VUL Guard, a variable life policy with a no-lapse guaranteed death benefit. The company is seeking a patent on the design. The single-life version debuted in 2003, while a survivorship version launched in 2004.

After years of innovations on UL and VUL, MassMutual is planning more traditional whole-life products this year, Waddington said. Its previous innovation--in 2000--was a high-early-cash value product that proved useful for small-business owners and for premium financing, in which a policyholder borrows money to pay the premiums and the bank uses the policy as collateral.

Hartford Life, in recent years, found itself launching fixed products as demand cooled for its mainstay variable products. "We're evolving as a company for all seasons," said John Vaccaro, chief marketing officer. "We use an assisted sales model with close to 200 wholesalers. We're helping our independent distributors in case design, and we're dealing with client attorneys and certified public accountants. So we need not only to diversify, but to look at all possible uses of life insurance and to be flexible enough to meet client needs through products. A lot of companies are racing to widen their product portfolios."

Hartford's recent whole-life product, for example, funds 412i business retirement plans and better serves owners of small businesses, a major segment of the population the company serves. Hartford is currently looking to expand its term-life portfolio, which offers level premiums up to 20 years, to 30 years. Vaccaro said it is also considering a return-of-premium term product. Meanwhile, the company's new Advanced UL will be the only UL product it will offer this year. It is dropping Stag UL Plus because it is not competitive enough in pricing and flexibility, Vaccaro said.

Hybrids: the Best of Both Worlds

Hartford also has been developing hybrid products based on input from its distribution partners, the source of some of the company's best ideas, Vaccaro said. Feedback from the field led to Quantum Life, a hybrid using a UL fixed chassis for the death benefit and a variable chassis for generating cash value. Premiums paid into the variable portion would be optional; Hartford estimates a 50-year-old male might pay an annual $12,000 to maintain $1 million of the guaranteed UL coverage, but could put up to another $62,000 into the variable side without turning the policy into a modified endowment contract. Vaccaro said the product could be ideal for a young executive who needs a low-cost, guaranteed death benefit but also wants growth potential.

Tim Fitch, senior vice president and director of individual life product development, said the variable chassis serves much like a Roth IRA, but is better for an executive, who could contribute far more than a Roth IRA's annual limit and withdraw money from the contract without penalty before age 59 1/2. Moreover, few executives in Hartford's market qualify for a Roth IRA because their annual incomes are too high. A plus over a VUL contract is that the variable side of Quantum cannot lapse if the markets tank because the fixed side provides the death-benefit guarantee.

Vaccaro reported "steady" monthly increases in sales of the Quantum product. "But this is a revolutionary new product, so the sales cycle takes a little longer," he said.

Jackson National took a "contrarian" position when it rolled out its first VUL in March 2003, said Bruce Wing, senior vice president and national sales director for life insurance with Jackson National Life Distributors. But the company saw opportunities driven by demographics and greater ability by its distributors to market variable products. "Over the long term, VUL makes sense," he said.

Wing said Jackson National wants to be better prepared for the asset-repositioning market populated by aging baby boomers who will move their qualified plans and nonqualified variable annuities into life insurance. Except for the Roth IRA, qualified plans are poor vehicles for transferring wealth to the next generation. The company also wants to attract younger buyers who need insurance but also want to save for retirement.

Working with Financial Advisers

Jackson National's two new products, Ultimate Investor VUL and JNL Advisor VUL, are designed for sale by financial advisers who market mutual funds and variable annuities. These advisers are accustomed to receiving smaller first-year commissions plus annual trail commissions, a schedule uncommon in the life industry. The Ultimate Investor, an A-share product, pays a 5% sales load and provides high cash value in the first year. It also offers a zero-net loan feature in the sixth year to help attract older clientele. Wing said it's designed as either a new or replacement policy and may be attractive in business markets for executive benefits.

The JNL Advisor uses the same chassis, but imposes no sales load at all. Wing said the company is able to negotiate commission terms with individual advisers using either VUL product.

The new VULs will use the investment options similar to those in Jackson National's variable annuities. "Advisers today are more savvy about the subaccount lineup, said Wing. "Ours is very well thought out. It employs a 'core and explore' mix of passive funds and actively managed funds."

Wing said that when VULs first became popular in the mid 1990s, excitement over the bull market drove sales, but now the excitement is more due to the experience and savvy of advisers and clients--a better understanding of style boxes and measures of volatility like alpha and beta. "The whole industry is waiting to see where advisers will take VUL," added Tim Padot, director of corporate communications.

But Padot added that Jackson National's launch of a VUL portfolio doesn't mean it has to sell a lot of the product. "We're trying to create a depth and breadth of our product line," he said. "Each product is for a specific kind of client. Advisers need that, a carrier that can offer different solutions."

Key Points

* Life markets are subject to trends, but market dynamics change those trends.

* Many large life writers are realizing that a diversified product portfolio affords them opportunities in all markets.

* Keeping the portfolio fresh is part of being prepared.

* New opportunities may arise for hybrid products and working closer with financial advisers.

Product Market Share, U.S. Individual Life

Market shares in the past 14 years of life insurance's four main product groups illustrate the value to each insurer of offering a full lineup. In the past four years, variable life products lost share to universal life.

[GRAPHIC OMITTED]

Variable Life (VUL + VL) vs. Stock Market

From early 1995 to late 2002, variable products' share of total premium correlated with the level of the S&P 500 Index of stocks, but the 2000 to 2003 bear market clearly dampened enthusiasm for the products since then.

[GRAPHIC OMITTED]

Learn More

Hartford Life Insurance Co.

A.M. Best Company # 06518

Distribution: Independent agents, brokers, banks, wirehouses

Jackson National Life Insurance Co.

A.M. Best Company # 06596

Distribution: Independent agents, brokers and banks

Massachusetts Mutual Life Insurance Co.

A.M. Best Company # 06695

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

New York Life Insurance Co.

A.M. Best Company # 06820

Distribution: Career agents, brokers

Lincoln Benefit Life Co.

A.M. Best Company # 06657

Distribution: Allstate agencies, independent brokers and agencies, securities firms, banks

Ohio National Life Insurance Co.

A.M. Best Company # 06852

Distribution: Career agents, personal producing general agents, institutional sales system

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

RELATED ARTICLE: Life's enigma: top producers follow different drummers.

Kimberly Kitts and John Ocwieja sell life insurance as part of their jobs of helping clients. That's about where the similarities end. Like many in the life business, they hold different opinions about what kinds of life insurance to buy, and why.

Kitts, president of Marquis Consulting LLC in Orleans, Mass., at the elbow of Cape Cod, says universal life insurance with a guaranteed death benefit is "fabulous, one of the great things for the industry." She holds a master's degree in business administration, is a certified public accountant and a certified valuation analyst, and her firm has contracts with 10 life insurance companies.

Ocwieja, a member of the 80-member Pearre and Associates firm in Chicago, left his family's successful manufacturing company early in life to build a business in financial services. His company has a contract to sell MassMutual products. Despite the trends and changes that continually rock the life insurance industry, Ocwieja is a serf-described student of life insurance history and believes deeply in the traditional whole life product. MassMutual offers 14 kinds of whole life, but Ocwieja says the "straight vanilla" version "gives you the biggest bang for the buck." He says new UL products with guaranteed death benefits can be dangerous. Ocwieja has been among the top sellers of whole life insurance for MassMutual in the central United States.

Why such accomplished professionals come to such different conclusions is part of the enigma--and the opportunity--that is the life business. And it may illustrate why the large life writers, more than ever, are broadening their product lineups. Attracting and servicing a wide variety of professionals in an evolving financial-services world has become an important way to grow their businesses.

A Perfect Middle Ground

Kitts started her career auditing pension plans. She later was a financial-products wholesaler for several companies. She started her own company three years ago and has a broker-dealer relationship as a registered principal with Royal Alliance Associates Inc. Her firm fosters more efficient relationships between producers and insurers. It is able to give producers a better payout because it does a high volume of business with the firm's contracted insurance carriers; it helps insurers by submitting "scrubbed" applications, she said.

Kitts' clients are owners of mostly small to mid-sized, closely held businesses. Most brokers who work with Marquis are in the same marketplace, she said. Clients' businesses typically have annual revenues of $10 million to $80 million, and clients average about $10 million in net worth.

Universal life with guaranteed death benefits accounted for about half of Marquis' sales last year, Kitts estimated. "I understand reinsurers are sick of this product, but I think it's safe. It's basically buying term that will be there when you die. It's a perfect middle ground between whole life and term insurance. Whole life is not the best way to accumulate money." Universal life's risk to buyers is about an insurer's ability to pay. "Beyond that, the risk is minimal," she said.

Whole life is "wonderful" inside a 412i plan and in a life insurance trust, and Marquis has used it in some estate planning, Kitts said. Term insurance represents only about 20% of the firm's premium, but about 50% of its applications. It is particularly good for key-man insurance because the insured often knows when his or her retirement will occur.

Kitts said she considers variable life a niche product, often inappropriately sold, and many life producers are once again selling it now that the stock cycle is almost two years from the end of the three-year bear market. "You don't buy life insurance as an investment," she said. "Either you rent it or buy it to be there when you actually die. The problem with VL is that you combine investment and risk. We write very little variable life here. When we do, it is on the super wealthy."

After the bear market, some VL policies were in crises as a result of low cash values, and Kitts sponsors a continuing education course on the subject. If a client is healthy, she advises to consider a tax-free 1035 exchange. "If they are not healthy, they're in a rough boat," she said. Among options: self-insuring by moving the life policy into a variable annuity with a death-benefit feature or selling the policy through a life settlement.

Overall, however, Kitts said she is "a big believer that you have to have access to a multitude of life products-everything in the bucket," and that there is a place /or each kind.

The Best Tank to Store Money

But while many producers favor new products that address current concerns of the public, some believe deeply in the tried-and-true traditional products. That's especially true of the agents of mutual companies, and it is particularly true of Ocwieja.

Ocwieja's downbeat assessment of UL with a guaranteed benefit is that it lacks adequate reserves and offers only a level death benefit, which won't keep tip with inflation, he said. Conversely, whole life pays dividends that can be used to buy paid-up additions to the policy, which increase the amounts of coverage and drive down the cost of insurance over time. "It's a superior product for accumulation, reduction of risk and conservation of wealth," he said. "It's protected from creditors. It's got a death benefit. When you borrow against the policy, you still have the full amount earning interest." Whole life protects financially against taxes, lawsuits, failing health and market fluctuations--risks that everyone faces--and it is designed to affordably remain in force after age 65, when term life insurance becomes expensive. Removing those risks frees up policyholders to invest other money more aggressively, he said.

By the time his maternal grandfather died in 1998 after owning a whole life policy for more than 40 years, its annual dividend had grown to six times the annual premium, Ocwieja said. Today's insureds want that same kind of security and certainty, he said of his clientele: emerging affluent, boot-strap entrepreneurs with first-generation self-made wealth, owners of small business, and many medical doctors. Most of these clients have tens of millions of dollars in assets to protect, but even those starting out in their careers--the "cash-flow sales," as Ocwieja describes them--have the same concerns.

Ocwieja said he was "the prototypical ideal recruit for a general agent" when he broke into the life business in 1996 at age 26. He had spent the previous four years in the family manufacturing business that his grandfather had founded, where he came to know entrepreneurs. Through these contacts, Ocwieja learned how these "self-made men" used life insurance to protect their families and businesses, and he became one of the rare rookie agents able to immediately work in the estate- and business-planning markets.

The family business manufactured hand tools used in the installation of floor and wall coverings and sold them to big-box stores such as Home Depot. "I didn't want to have a life and business like my father had, where everything was price-driven and there were no meaningful relationships with customers," he said. "I knew I wanted a career in financial services, but not in a wirehouse or brokerage operation."