The Cost of Guarantees in Variable UL

The Cost of Guarantees in Variable UL

By - 7 February 2022



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Written by Alan S. (Al) Lurty


Hi everyone,


Here’s another product brief that we hope will be useful in your practice.


In this post, we’ll briefly discuss variable UL, the pros and cons of guaranteed VUL (GVUL) products and compare the embedded costs of the guarantees against an alternative approach.


As a quick refresher, variable UL plans provide, first and foremost, an important death benefit that is tax-free to beneficiaries, and they can offer tax-advantaged exposure to the market using equity- and fixed income-based sub-accounts. Unlike a general-account UL, though, a VUL’s exposure to the market means that the value of these sub-accounts can increase or decrease.


A guaranteed VUL (GVUL) product provides that, regardless of sub-account performance, the policy death benefit is guaranteed to stay in force for a specified period or until a certain date, in many instances until well past age 100 or even lifetime. The attractiveness of the product stems from this guarantee coupled with the upside potential of the sub-accounts. Of course, the guarantee comes at a cost, and what we’ll analyze is how these products perform against a traditional VUL that may have a shorter secondary or no-lapse guarantee (NLG).


In this analysis we’ll compare a well-known carrier’s “regular” VUL against a competitor’s popular GVUL product. In my example I’m using a male, age 55, $1 million face, best class, with a minimum premium to guarantee to 121 of $15,276. At age 90 the GVUL has a surrender value (SV) of $1,228,078 on a current basis (8% gross rate, 7.47% net). At age 100 the SV is $2,748,051 and at age 120, $12,653,962.


I then applied that same premium (blended to the same target) and put that into the regular VUL, assuming an 8% gross rate (7.48% net). The age 90 SV is $1,690,297. This is over $462,000 more (37% higher) than the GVUL. At age 100 the SV is $3,481,558 (26% higher) and at age 120 it is $14,362,183, with a no-lapse guarantee to age 100.


If I then reduce the gross return on the regular VUL to 0% from age 90 forward, the policy still carries to 120 with $1.56 million of SV, and we still have the NLG to age 100. We get similar values in the GVUL policy with a reduction in gross return.


8% gross rate, 7.47% net GVUL (lifetime guarantee) Regular VUL w/shorter NLG
Premium $15,276 $15,276
Age 90 surrender value $1,228,078 $1,690,297
Age 100 surrender value $2,748,051 $3,481,558
Age 120 surrender value $12,653,962 $14,362,183


This implies that the required rate of return to carry the regular VUL policy beyond the age 100 NLG to the ultimate age with some meaningful SV is relatively low, and that the embedded cost of the lifetime guarantee in the GVUL product is relatively high (from the difference in values shown above).


The key question then becomes the client’s risk tolerance. Some advisors will say that their client is happy to pay the embedded guarantee cost to be able to “set it and forget it” with respect to the policy. Others will say that this approach of guaranteeing to a certain age and then using this “bridging” strategy to carry the policy to maturity makes more sense and is more economical.


I hope this analysis provides some food for thought in your practice!


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