Guarantees Still Matter

Advising clients through the “Product Popularity Pendulum”


by Steve Sanders

Mr. Sanders is Vice President of Marketing Services, Columbus Life . Connect with him by e-mail: [email protected]

Look back over the last few years, and you’ll notice that No-Lapse Guarantee (NLG) Universal Life products have been gradually losing prominence in the marketplace1, leaving some to question whether these products are dying a slow death. If you skim through industry publications, you’re likely to find an article on the rise of cash accumulation UL’s or a gloomy prediction on the future of NLG products.

Among other factors, the combination of a prolonged low interest rate environment and the increased reserve requirements tied to AG 38 has made it challenging for life insurance companies to keep their NLG products competitive and profitable. In response, some carriers have raised prices significantly and placed tighter restrictions on face amounts and premium payment structures. In quite a few cases, carriers have suspended or discontinued the sale of NLG products altogether.

Other companies have added optional no-lapse guarantee riders at an additional cost to cash accumulation focused ULs. These products are generally less efficient at offering no-lapse guarantees since it takes a higher premium to simultaneously build cash value and sustain the no lapse guarantee.

Additionally, policyholders may not realize that accessing the cash values in the policy could compromise the guarantees and negatively impact the death benefit. Some carriers have also leveraged marketing campaigns to shift the spotlight off of the importance of guarantees and emphasize the benefits of cash accumulation products. Cash-accumulation focused products indeed possess valuable features and are effective tools for the right clients. But, how much of the current interest in these products is influenced by the “Product Popularity Pendulum”?

What is the Product Popularity Pendulum?

It’s easier to identify if we take a quick look back at the history of universal life products.

UL was born in a high interest rate environment, and sales momentum predominantly came from an emphasis on the cash accumulation potential through interest crediting. As interest rates started to fall, the popularity pendulum swung to VULs, with a marketing emphasis placed on its market-driven cash accumulation potential. When the markets tumbled and volatility soared, the pendulum swung back, and there was a noticeable flight to quality and security. Guarantees became more popular and dominated the UL marketplace.

Where are we now? Memories of the “Great Recession” are starting to fade, equities have rebounded and indexes are hitting record highs. Indexed UL sales are showing strong growth, and even VUL is seeing a bit of resurgence in popularity. No-lapse sales are falling industry wide (although not at Columbus Life) in part due to the rising popularity of accumulation-focused products, but also from the sheer number of carriers raising NLG prices or no longer offering the product.

The point is this: Yes, the pendulum has shifted partially due to changing market conditions. But let’s not forget that the pendulum has also gotten a strong nudge from carriers choosing to promote or deemphasize certain products based upon their current profitability. This is not always a bad thing. Maintaining profitability is vital to the success of a company. At the same time, it’s essential that the measures a company uses to promote or discourage product sales, including product marketing messages, remain fair and balanced and avoid even the implication that the cash accumulation potential of certain products (which is not guaranteed) replaces the need for contractual no-lapse guarantees.
Has the need for guaranteed products gone away? No.

Yes, the pendulum has shifted partially due to changing market conditions. But let’s not forget that the pendulum has also gotten a strong nudge from carriers choosing to promote or deemphasize certain products based upon their current profitability. This is not always a bad thing

Competitive, affordable no-lapse products are just getting harder to find, and no lapse guarantee products have become generally less profitable for companies to sell; Hence, the shift in marketing focus. As one independent producer noted, “It’s not that my clients don’t want guarantees; It’s that fewer companies I write for want to sell guaranteed products, and those who still offer it raised the prices to the point where buying it didn’t seem to make sense anymore.”

In reality, the need for guarantees has never been greater, giving an advantage to producers who can still offer competitive, affordable no lapse guarantee products to their clients. As an industry, we are still on the front edge of what may be the greatest era of wealth transfer in American history. Bull or bear markets won’t change the fact that about 10,000 Baby Boomers turn 65 every day, and will do so for the next 17 years2. Yes, their nest eggs likely took a beating in the early and late 2000’s, but the equity markets have rebounded, restoring the balances of many investment portfolios battered by the “Great Recession.” It’s with renewed confidence that they’ll be looking for ways to efficiently and effectively leave a legacy for the next generation.

But they’ll be doing so with guarded optimism, and won’t soon forget the volatility that has defined the equity markets over the last two decades.  Boomers will be looking for products that can effectively enhance their legacy without exposing them to too much risk.  Guaranteed Death Benefit Universal Life is arguably still one of the best ways to do both. Clients who have not weathered the financial storm well may be carrying more debt into their retirement years than originally anticipated, and need dependable, affordable death benefit protection at ages where level term products are not offered. Here too NLG ULs can make a meaningful difference for your clients.

Though no carrier is immune to the challenges our industry faces, those with strong financial footing and straight-forward product design were in a better position than many when the updated AG 38 guidelines went into effect.

Challenging economic environments emphasize the need for the guarantees life insurance can offer. Industry regulations and a low interest rate environment don’t change how important these products are to meeting the very real needs your clients have.

As financial professionals, we need to be mindful of industry marketing messages based on what’s popular or most profitable rather than on what’s best for our clients. We know that there is no such thing as a “one size fits all” product.

Yes, cash accumulation potential and policy flexibility can be wonderful, but there will come a time when the pendulum will shift again. We have not seen the last recession. We have not seen the last market correction. Interest rates will, at some point, rise and risk tolerances will, at some point, shift. Guarantees will eventually rebound in popularity, and the cycle will begin anew.

Though we all face the same low interest rate and regulatory challenges, at Columbus Life we are committed to maintaining truly competitive No-Lapse Guarantee ULs in addition to our cash accumulation ULs. We firmly believe that a well rounded product portfolio needs both product types for producers to suitably meet their clients’ needs… no matter which direction the “Product Popularity Pendulum” is currently swinging.

1. “U.S. Individual Life Insurance Sales Survey” 2009-2012– LIMRA
2. “2012 National Population Projections” – U.S. Census Bureau