NEW YORK — Universal life insurance captured a 40% share of the overall life insurance market for the first time last year and is expected to continue its strong showing, industry experts say.
Universal life surpassed term and whole life, which had 23% and 22% market shares, respectively, according to a study this month by LIMRA International Inc. in Windsor, Conn. LIMRA estimated a total of $13.4 billion in annualized new life insurance premiums for 2006.
The policies — which invest in fixed-interest-rate instruments such as bonds — have become so popular that clients are starting to ask their agents and advisers for it, said David Hayes, a certified financial planner with David Hayes & Associates in Mount Juliet, Tenn. “Agents who don’t show clients UL illustrations are leaving money on the table,” he said. “The clients will go somewhere else.”
But universal life has its “pitfalls,” said Lee Slavutin, principal of Stern Slavutin-2 Inc., a life insurance and
estate planning firm in New York. “Guaranteed UL is very inflexible,” he said. Premiums are locked in, so the client can’t take advantage of lower premiums that may become available, Mr. Slavutin added. “And since there is little or no cash value, the cash value can’t be used to pay missed premiums,” he said.
Stock market vagaries
Variable universal life, which invests in equities, captured only 14% of the overall market, despite stock market growth. Many clients remain hesitant about entrusting their life insurance to the vagaries of the stock market, observers noted. However, recent excitement about the Dow Jones Industrial Average hitting 13,000 for the first time may spark more interest in the policies, they said.
First-year universal life commissions are 60% to 70% — compared with 90% for term life, with which it competes and is comparably priced, Mr. Hayes said. But universal life often is better for the client, because it has some cash value accumulation and can be written for longer terms, such as to age 100 or beyond, he noted. Most insurers won’t write term life once a client reaches a certain age.
Universal life premiums are especially attractive for clients age 45 and younger who are non-smokers, Mr. Hayes said. “They expect to live more than 30 years, so [a] 30-year term is not attractive to them, even if the premiums are somewhat less,” he added.
Whole-life insurance accumulates a higher cash value because the premiums are about 40% to 60% higher, said Jim Gelder, president of ING Life Distribution in Minneapolis. But universal life often accumulates at least enough cash value to reimburse policyholders for the premiums paid in, he noted. Product enhancements, including guaranteed death benefits and premiums — along with a lower price — account for universal life’s market dominance, Mr. Gelder added.
The knock on universal life used to be that it was a good investment when interest rates were high, but decreasing interest rates could cause death benefits to be reduced dramatically, noted Mr. Slavutin. The interest-rate risk, in effect, was shifted from the insurer to the client. But now that many policies guarantee the death benefits, that no longer is a problem, Mr. Slavutin added.
Universal life has become more attractive to clients due to product innovations such as the guaranteed death benefits and survivorship features, noted Dale Visser, a consulting actuary for Seattle-based Milliman Inc. The survivorship features help clients avoid probate expenses, because both spouses are covered.
Universal life is a good choice for advisers with clients who have money-market or bank accounts that are to be passed on to heirs, noted Paul LaPiana, national sales manager of life insurance for the independent distribution group of New York-based
MetLife Inc. Transferring those assets into a universal life policy allows clients to pass them on to heirs as tax-free death benefits, said Mr. LaPiana, who works in
MetLife’s Irvine, Calif., office. Many clients buy universal life for other estate planning purposes, such as to pay estate taxes at the time of death, Mr. Slavutin noted.
Stock market daring
Variable universal life may be appropriate for baby boomers who have confidence in equities, said Steve Roche, vice president of product development for The Hartford (Conn.) Financial Services Group Inc. “Unlike the previous generation, they grew up investing in mutual funds and understand that with the potential to live longer, they should keep some of their investments in the stock market,” he said.
Variable universal life’s increasingly attractive investment options — including lifestyle funds and other options that make them comparable to the investment choices in 401(k) plans — will add to that policy’s appeal, said Mr. Gelder of ING.
Another emerging product is indexed universal life, according to Ray Trueblood, vice president of life insurance marketing strategy for Jackson National Life Distributors Inc. in Denver. Indexed universal life is tied to an index, such as the Standard & Poor’s 500 stock index, and is similar to equity index annuities, he noted.
“Adviser clients who have confidence in the stock market will likely buy variable universal life or an indexed product, while those with little confidence in the market will probably choose universal life,” Mr. Trueblood added.
