By Linda Koco
Contributing Editor, InsuranceNewsNet
Variable universal life insurance sales grew by 9 percent in the first half, according to LIMRA’s data on new annualized premium for the first six months compared to year-earlier figures.
At first blush, that might prompt industry professionals to think that the first half’s rising stock market made variable universal life (VUL) insurance catch on once again among consumers, this after several years of being a sad half-sister to variable annuities (and to other life policies, for that matter).
Not so. LIMRA Senior Analyst Ashley Durham points out that most of the growth in VUL business was because of sales for specialized insurance purposes. Examples include corporate owned life insurance and private placement cases.
Comparatively few sales were for general life insurance protection and investment purposes.
In fact, the total number of VUL policies sold keeps on declining quarter by quarter. When the “policies sold” number declined again at the end of second quarter, Durham says, that meant that new VUL sales, by policy count, have “dropped for 27 quarters in a row.”
In 2010, she adds, fewer than 100,000 VULs were sold industry wide.
Compare to variable annuities
In general, rising equities markets do draw new buyers into the variable insurance fold. Consider what is happening to that other variable product, the variable annuity (VA).
In the second quarter, when the stock market was gradually rising, VA policies saw a 20 percent increase in sales compared to last year, bringing total sales for the six-month period to $80.7 billion, according to LIMRA.
Nonetheless, the volatile economy still had a hold on buyer preferences. Again, looking at VA sales, LIMRA reports a striking figure: fully 87 percent of new VA sales made in second quarter 2011 came with a guaranteed living benefit (GLB) rider elected.
GLB riders guarantee that certain policy values or minimums will be available for retirement income purposes, assuming certain conditions are met.
For VA buyers, the GLB rider is the customers’ safety net. That is, consumers buy the VAs for the upside potential of the VA’s various subaccounts—a potential that appears tantalizingly accessible during rising equities markets—but they buy the GLB for the guaranteed values it brings to their retirement planning. They’ve been through a few market routs in the past decade, so they probably view this as a prudent move.
In fact, today’s VA customers want the GLB guarantee so much that, even though they have to pay extra to have it, they buy it.
It’s worth noting that most VA buyers bought these riders in 2Q even though the stock market was going up for much of the quarter. Today’s market downturn didn’t even start until August, well into the third quarter, so it wasn’t renewed market jitters that caused the VA sales bump-up.
In short, the VA customers were buying, but defensively, to ward off generalized, long-term uncertainty.
Back to the VUL business
Returning to the state of the VUL marketplace, a similar buyer uncertainty has been permeating the business for several years. This is showing up in the low numbers of VULs sold.
The fact that VULs are more complicated than VAs may account for some of this uncertainty. After all, VUL policies have underwriting requirements, various rider options, cost of insurance charges and other features that VAs do not. If the customer doesn’t understand it, the customer may just give a shake of the head and move on.
Also, depending on how the products are structured, VULs can be pretty expensive—a negative for many buyers in a wallet-challenged economy, even in the early stages of an equities market uptick.
Furthermore, some consumers never learn about VUL in the first place, because their advisors may not mention it. Many registered advisors hold back due to their own uncertainty. The dominant concern seems to be that internal costs plus underperforming subaccounts could cause policies to collapse later on. They don’t want their clients to risk that, and they don’t want to be on the receiving end of the client’s anger about that.
High-end sophisticated buyers can handle all that complexity, cost, and risk with aplomb. They have teams of experts to advise them, money to invest, and tax and protection needs best answered by VUL. And the advisors in this market have no qualms about recommending a particular VUL, due to all the design and management built into the overall plan.
Safety-minded buyers are not in the same orbit, however, not even the mass affluent who have money looking for a home somewhere. They don’t mind upside potential but they don’t want downside risk. Not even 2Q’s upward bound stock market was enough to entice many of them to dip toes in the VUL waters. This is evident in LIMRA’s sales statistics.
For these reasons, it’s tempting to say that today’s VUL market is a niche market—mostly for high-end buyers. That’s a far cry from the mid-1990s when promoters were predicting that VUL—with its multiple subaccounts, fixed accounts, flexible premiums, long-term build-up, liquidity and tax benefits--would become a mainline product for equities-minded clients in the mass affluent market on up.
End of story?
VUL’s current status may not be the end of story though.
VUL’s older sibling — universal life — has gone through similar swoons, from being widely sold but later niched beyond belief and then all but trampled upon by term life insurance sales. But UL also made a comeback. In recent years, advisors have positioned it as a permanent product for the mid- and mass affluent markets.
That comeback was thanks in large part to carriers tweaking their ULs to include lifetime no lapse guarantees. Those guarantees are hot hot hot in these uncertain times.
It could be that carrier tweaking of the VUL product line, if not with guarantees then with something else, could set off similar product resurgence. That won’t happen today; the tough economy has put a lot of tweaking into sleep mode. But a few years from now, conditions will be different, and VUL will be fair game for a remake.
Linda Koco, MBA, is a contributing editor to InsuranceNewsNet, specializing in life insurance, annuities and income planning. Linda can be reached at [email protected].
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