Variable life, secondary guarantees and AG 37
By Jeff Reed
Kestler Financial Group
As we all come to grips with new, increased NLG rates from most carriers, I have been keeping my eye on a nuance in the regulations that offers a significant opportunity in 2013. The nuance in question is the existence of products offering secondary guarantees that fall under a different set of rules than the NLG universal life products we have all been selling for the last 10 years: variable life products.
At first, I was rather skeptical. The last thing I want to recommend is exploiting a loophole in the regulations. Once I popped the hood and began to understand why variable life is treated differently than universal life from a reserving standpoint, I realized that there is a real opportunity with variable in 2013. The crux of the matter is the presence of cash value and the fact they offset reserves, making reserving for these products an entirely different process than traditional NLG. As a result of these differences, variable products are governed by an entirely different set of regulations: Actuarial Guideline 37. The bottom line is these products are significantly cheaper to reserve at the carrier level, and the result is that they have become more competitive as a result of increases in NLG UL products.
A second market force is at work here as well. There is a renewed emphasis on products that offer a broader feature set and increased overall policyholder value products that do more than simply provide a death benefit in the current market. Even funded at the guaranteed minimum premium, these variable contracts have the ability to accumulate significant cash values. Unlike older products, the death benefit in currently available products is protected from potential market downturns by the secondary guarantee. In some cases, there is the opportunity to stop paying premiums early while locking in the guarantees, if market performance allows it.
So, what variable product are we talking about? Which carrier offers it? How do they work? There are a number of them on the market from big name carriers like MetLife, Lincoln National and John Hancock, and they all have their own strengths and weaknesses.
Short pays are particularly competitive, and using life expectancy guarantees with current side performance beyond LE is a very compelling design. The moral of the story is that the perceived challenge of increased NLG UL prices also creates a significant opportunity for our clients. All we need to do is show it to them.
One last note: Did I mention this could also result in a raise? Targets are significantly higher on these products. Sure, these cases have to go through the grid at your broker-dealer, but the increased target often results in equivalent or increased compensation for the producer.