Full Disclosure's VL And VUL Report

Internal rates of return (IRRs) indicate which products are designed to be more efficient in producing cash values, death benefits, or are an all-around solution. The IRR can be applied to cash values as well as death benefits, and we have chosen to measure both at a policy duration of 30 years. Those seeking to analyze the relationship between cash values and death benefits will find the IRR measurement a useful tool.

The final two columns in the chart illustrate what the death benefits would be under an increasing death benefit option. Its easy to see, using the provided IRRs, which policies are built to generate death benefits, which is why it would be unfair to compare them under a level death benefit only.

VL is marketed as a tool to supplement retirement income by surrendering accumulation values to the contracts cost basis and using policy loans thereafter to provide maximum income. In the retirement income table, companies were asked to illustrate policies using a $10,000 premium starting at a males age 40, selecting an increasing death benefit option until age 65. At retirement age 65, the death benefit type is switched to level as values are liquidated. A residual value of $100,000 was requested at the policy maturity age and companies tried to come as close to that as their illustration systems would allow.

Again, certain policies are designed to do certain things and a high cash value at age 65 does not necessarily translate into high retirement income. Ones that do typically have low later insurance charges and low- or no-cost loans.

One of the obstacles to performing adequate VL comparisons is that much of the material available publicly is subaccount oriented. However, there is not as much difference between funds of similar objective/asset class (growth, balanced, etc.) in terms of costs as there may have been 10 years ago. The last decade has also seen a proliferation of subaccounts at multiple insurers managed by the same fund manager.

The real product differentiation is at the policy level in the features, limitations, and current and guaranteed cost structure of each. A contract that is policyholder-friendly (catch-up provisions on secondary guarantees, for example) or that matches the goal of the policyholder (cash, death benefits or flexibility), is much more relevant to a comparison between contracts than that of whose leading fund has had the best returns over the last few years. Yesterdays star is todays laggard, but the fundamentals of the policy remain and should bear the lions share of scrutiny.

The Full Disclosure approach is to look at all aspects of the policy that translate value to the policyholder. We champion the fact that policies are designed to accomplish certain objectives. And while these illustrated values are helpful, a comprehensive analysis is the only reasonable way to draw comparisons. A policy may shine at issue ages, face amounts, issue classes we do not cover. To that end, we have also included the strengths, as given by each company, that the policy brings to market.

Reproduced from National Underwriter Life & Health/Financial Services Edition, July 29, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.