No-Lapse UL: Down but Don’t Count Them Out
By Linda Koco
Contributing Editor, InsuranceNewsNet
At least eight of the top 20 universal life carriers have stopped selling a popular type of universal life product, and those exits are impacting overall individual life sales this year.
The product involved is universal life (UL) with lifetime death benefit guarantees, also called no-lapse UL.
It guarantees that the UL policy won’t lapse, even if policy values drop to zero, as long as the policy meets premium payment, loan and other conditions. The guarantees are popular due to the certainty they inject into a very flexible product.
Despite the popularity, some carriers started exiting the market in 2009 and all eight of the top players had left by 2010, says Ashley Durham, a senior analyst at LIMRA, Windsor, Conn. She says the exiting companies included: AXA, Sun Life, Phoenix, Old Mutual, Ohio National, National Life, One America and Ameritas.
Now those exits are crimping industry-wide individual life sales. Growth in those sales, as measured by new annualized premium, slowed in second quarter compared to first, explains Durham.
[Note: Overall, new annualized individual life premium did increase by 4 percent and premium and policy count were both up by 1 percent compared to second quarter last year, so the UL market shift did not wipe out growth in the individual life industry. But Durham’s point is that the UL exits have put a damper on this growth.]
Sign of the times
The development is another sign of the times. The prolonged, extremely low interest rate environment of recent years is widely thought to be a key reason for the exits.
As Durham puts it, because UL policies are paying very low interest rates, some companies found that their UL policies did not earn enough credited interest to cover the expenses of the contracts. Those expenses then ate into the policy cash values and ultimately rendered the contracts unprofitable, or threatened to do so.
The policy guarantees require companies to hold more reserves, adds Joe Stamps, director of life and long term care development at Covenant Reliance Producers LLC, Nashville. That became a factor, too, he says, because holding more reserves effectively inhibits growth of cash value.
Carriers also had their “own particular reasons” for leaving, he adds.
But this was not an industry-wide phenomenon. For instance, Stamps says that none of the carriers with which his firm does business has stopped offering no-lapse UL. Because of that, even though some of the departing carriers were big, agents still have markets for this product.
- Some carriers have put limits on the amount of money that the client is allowed to dump into a lifetime guaranteed UL.
- Some have limited or eliminated commissions on any excess premium that the client pays. (The carrier will still pay commissions on the base target premium but not the excess, Stamps says.
- Some have decreased the amount of commission they will pay on the excess.
- Some have increased the cost of the guarantee to the client.
- Some have come out with a newer version of the older product. (“They price it a little differently or tweak it in a new way, but it’s still a very attractive product for this environment,” Stamps says.)
Both Durham and Stamps agree that lifetime death benefit guarantees remain a very important feature in UL for both consumers and producers.
“With that guarantee, the UL is like lifetime term insurance, guaranteed,” says Stamps. “It won’t build much cash value, but it is permanent insurance.”
That appeals to people who are looking for death benefit protection, he contends. “They may have heard that whole life insurance or cash value life insurance is a rip-off, but they like UL with no lapse guarantee because it’s permanent and ‘it’s not cash value insurance.’”
Durham says that, even though there have been some notable carrier exits in this market and second quarter 2011 annualized premium sales in the lifetime death benefit guaranteed UL market were down by 3 percent compared to second quarter 2010, the products still garnered 43 percent of all UL sales in the first half of 2001.
Linda Koco, MBA, is a contributing editor to InsuranceNewsNet, specializing in life insurance, annuities and income planning. Linda can be reached at [email protected].