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Life Insurance

"Term" (T) insurance is intended to provide short term coverage and is priced to reflect this temporary exposure.  Most term insurance is discontinued before the end of its initial level premium period by virtue of not offering any residual, "living" benefit (other than peace of mind).  Those coverages that continue beyond the initial period are typically unhealthy insured's with limited insurance purchase alternatives.  That's why a typical term premium increases exponentially beyond the years of the initial term.
 
Generally, cash building life insurance comes in 3 flavors.  The first is "Whole Life" (WL) and is defined by required premiums forever.  Although more rigid than the other two forms, WL offers guaranteed minimum cash values and death benefits and often a guaranteed level premium.  Excess investment earnings (over minimums) are typically returned to the policy in the form of dividends which may be used to accelerate cash value growth, increase death benefits, and/or reduce out of pocket premium cost.  Although near impossible to quantify in advance, dividends are the yield on the insurer's General Account and usually derive from a 65% Corporate Bond and 30% Equity long term investment mix.  Although in decline over the last 10 years, the interest component of most major carrier's dividend scales approx 7% today.  This investment earnings rate also affects excess interest credited to Universal Life, the second flavor.
 
In the late 1970's when short term interest rates approached 18% and insurance companies' long portfolios could not compete on yield, disintermediation was abound.  This forced a new cash value product invention called "Universal Life" (UL) which combined a projected annual term insurance cost with a short term (5 - 7 year) bond crediting rate.  Public response to separating the cost and investment elements of an insurance product was very favorable and, perhaps for the first time, the annual internal operation of a life product was unveiled and understood.  UL  policy illustrations reflect premium payments less direct expenses (including an aged based annual term cost) plus interest (projected at the current investment earnings rate).  Provided that policy cash values (plus interest less annual term cost) remain positive (greater than $0), coverage remains in force without a current premium payment.  The larger the investment earnings rate, the smaller (or fewer) premium payments are required to keep the coverage in force.  Although early premium payments are the most valuable since they compound tax deferred for the longest period of time, when investment earnings (short term) rates are depressed, additional premium payments may become required.
 
A natural extension of UL is "Variable Universal Life" (VUL) which operates from a similar chassis (separating the term and investment elements) and allows the policy owner to select their own investment media choosing among a menu of professionally managed Separate Account portfolios.  Akin to term insurance tied to a mutual fund, product has evolved that covers every major asset class with diversification from multi-family investment managers.  Despite relatively soft equity markets for the last 4 years, the allure of VUL is the likelihood of an average long term investment earnings rate 300 to 400 bps greater than any carrier's General Account (ie WL dividends) and certainly higher than short term bonds (ie UL).

In light of recent history where both the equity and bond markets were concurrently unrewarding, the industry responded with "Universal Life Secondary Guarantees" (ULSG).  An unusual hybrid which creates a form of "permanent term" on a UL chassis, the policy owner by leveraging tax deferred growth with low (reinsured) term insurance rates can define the premium payment duration at policy issue which determines the level premium amount which guarantees coverage for life.  Our sense is that this policy form is very new and under priced.

Notwithstanding, the ability to lock a carrier into a permanent (guaranteed) level premium contract (regardless of future investment earnings rates or mortality cost changes) is very attractive.  Premium costs for future buyers (as the policy form matures) must be higher than current levels.

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