VUL Endowment – Primary Guarantees

by Ami Amega, LifeTrends Product Analyst

Variable Universal Life (VUL) products have come a long way since their debut in the 1980s. Their tagline is simple – they are universal life products whose cash component is invested in the market rather than growing by rates set by carriers. Through VULs, carriers are transferring the investment risk from their hands to policyholders in exchange for lower premiums and the possibility of increased returns. These high-risk, high-reward products may be great for those with large risk appetites, but we were interested in how they might fare with more conservative investors. Could the guarantee years embedded in VUL products put them in the running to qualify as bridge products – products that capitalize on guarantees, offer flexible premiums, and provide enough cash buildup to fund a lengthy exit strategy? To better understand the impact of this risk transfer, we chose to study the inherent no-lapse guarantees (NLGs) offered by these products.

We looked at 29 VUL endowment products where, overall, there remains no industry standard. Except for a few outliers, companies tend to sit in one of three buckets:

No explicit guarantees – Accounts for about 20% of the products studied

Standardized guarantees – Accounts for about 50% of products studied

  • Some offer a flat base period across the board,
  • Some offer blocks of guarantees (5, 10, 15, 20) years, usually based on age and gender
  • Guarantees tend to cap out at 20 years

Guarantees based on premium thresholds – Accounts for about the top 30% of products studied

  • NLGs are based on the amount paid into the policy
  • Most guarantees pass the 20-year mark, some make it to average life expectancy, and few can guarantee up to life
  • Age played the biggest role with pay structure trailing behind it. Ten and single pay structures guaranteed the longest, while death benefit and risk class showed to be of little importance.

Using a premium threshold approach, Lincoln’s VULOne and Protective’s Investors Choice VUL had the longest guarantee years, spanning close to or through the life of the policy. However, the results show that guarantees can be costly. Premiums for the longest guaranteeing products tend to sit at the back of the pack. American General’s Platinum Choice VUL 2 or Prudential’s VUL Protector would be good options for cheaper premiums with relatively good NLGs. Their premiums are lower than VULOne and Investors Choice, and their guarantees either come close to or surpass the average life expectancy. John Hancock’s Protection VUL 17 is also a good one to consider. In areas where this product is competitive, the guarantees sit within the top quartile while maintaining premiums substantially lower than even American General and Prudential.

Most importantly, premiums need to be paid on time with little give. If not, guarantees can be lost leaving policyholders unreasonably expensive products. So, the answer to our original question is no – because of the overall lackluster lengths of their NLGs, coupled with volatility, and high prices, VUL endowment products have yet to reach the point of consideration for bridge product status. Instead, VUL primary guarantees can be thought of as nice additions for aggressive investors, or training wheels for the less aggressive, but not substantial enough to meet the needs of conservative investors.