While this has been a good year for sales of term life insurance, a smaller product segment has done twice as well.
Premiums for variable universal insurance, on an annualized basis, jumped 10% through the first nine months of 2020, according to Limra. Other types of universal life insurance, such as indexed and fixed, fell over the same period.
Buyers are migrating to variable universal life products with guarantees as premiums for conventional guaranteed universal life insurance have risen, according to LIBRA Insurance Partners CEO William Shelow. Variable life products haven’t been affected to the same extent by low yields or by principle-based reserving, a statutory reserve regulation that combines company-specific assumptions with prescribed rule-based requirements.
“Guaranteed variable universal life became a better option from a price perspective for a lot of advisors and their clients,” Shelow says. “That’s really what drove sales in the first half of the year.” Shelow says the independent marketing organization has collected $60 million in variable universal life premium this year, 60% more than a year ago. The products now also account for 33% of its sales of permanent, or cash-value life products, up from 20% last year.
The product’s price advantage may not last for long, though. Shelow observes that some variable life carriers have more recently had to increase premiums to sufficiently reserve for guaranteed benefits.
Shelow expects that sales in the product segment will stabilize for a time at current levels, then rise again next year as carriers introduce new features, including potentially shorter-term guarantees.
“The products will look a little different, but still be attractive,” he says.
Caps on Premiums
Valmark Financial CEO Larry Rybka says the variable products have benefited from limits placed on premiums for other products, such as universal life, where the collected premium must go into an insurer’s general account. In contrast, insurers place few or no limits on variable life coverage, which allows buyers to direct premiums to separate investment accounts.
“With a variable product, the consumer is selecting where they want to put the money,” says Rybka. “The insurance company is not tied to providing a guaranteed cash value. The company is just providing long-term guarantees around the death benefit.”
He added that “particularly with guaranteed death benefits, variable universal life is the only avenue where companies can have a competitively priced product and still make a profit.” Sales have surged, including to affluent business owners, retirees and those nearing retirement who are looking to grow savings as much as they can on a tax-deferred basis. Sales frequently include transactions, allowed by the Internal Revenue Service, where the policyholder exchanges an old life insurance contract for a new one without paying tax on investment gains, according to Rybka.
For agents and advisors, the big money to be made in variable life products is in sales of policies with large dollar amounts.
Valmark sells around 3,500 variable universal policies annually, according to Rybka. About 100 to 150 of the contracts, he estimates, account for up to 30% or 40% of the premiums generated. The high coverage policies often are sold to older clients through tax-free exchanges.
“That a big part of our sales,” says Rybka. He adds that sales of the variable life products are up about 60% from a year earlier, while volume for other life insurance products was down or flat. He notes also Valmark is now trying to finalize a huge inventory of variable life business before year-end.
The Bigger Picture
Limra research seems to support Rybka’s observations that premiums are increasingly concentrated in sales to the high net worth. While third-quarter sales rose by 11%, the number of policies sold dipped by 2% and coverage amounts rose by 13%.
The market for the products is concentrated among a handful of companies. The top five carriers by market share last year — Lincoln National, Prudential Financial, Pacific Life, Equitable and Northwestern Mutual — cornered close to three-quarters of the market, according to Limra.
Only six of 31 carriers surveyed by Limra saw growth of 10% or higher, according to Elaine Tumicki, a corporate VP of Limra insurance research. More than half of the insurers suffered double-digit declines. The handful of companies that are enjoying gains, says Tumicki, are generating premium dollars in large measure from products with guarantees attached. That aligns with the experience of Prudential Financial, which touts the product’s flexibility.
With the ability to add survivor benefit guarantees, cash-value growth, and chronic illness riders, it's no wonder the segment has grown, Kevin Brayton,VP of sales and distribution for individual life insurance for Prudential, says in an e-mail.
Prudential expects that non-traditional advisors focused on diversifying client assets and protecting portfolios will continue to be a source of new sales, Brayton adds. The company also expects the market for variable life products with a focus on accumulating wealth to grow, as people look at how to supplement retirement income in a tax-favorable way.
New Kids on the Block
Recent entrants have contributed to the market’s growth, according to Andrew Bucklee, head of life and executive benefits distribution at Lincoln. Still others may rethink their positioning on variable universal life, he adds, observing that the low interest rate environment “continues to present challenges for other products.”
Valmark’s Rybka expects intensified competition among the product segment’s top 10 insurers but cautions there are barriers to entry.
The commercialization process — from product conception to filing a prospectus with the Securities and Exchange Commission — is a long one, he notes. There are also distribution hurdles.
“If you don't have any selling agreements in place with existing broker-dealers, it's hard to get on the product shelf,” he says.