White Paper An Analysis Comparing John Hancock Protection UL and MetLife Secure Flex UL updated April 2015
Background & General Comments John Hancock Protection UL is the only UL product without lifetime guarantees to successfully grab a significant share of the market for low premium, lifetime coverage. The secret to its success isn t exactly a secret at its current 5.05% rate, it consistently illustrates the lowest premiums on a current basis of any product available, regardless of chassis, in virtually every cell. It is the benchmark against which every other product is judged. But is price the only thing a client should consider? Obviously not. This paper explores other parameters in the context of comparing John Hancock Protection UL against MetLife Secure Flex UL, another UL product without lifetime guarantees. Complexity Whereas other UL products generally illustrate based on current policy charges and current interest credits, the illustrated performance of Protection UL is heavily reliant on the Persistency Credit (PC), a calculation embedded in the policy based on non guaranteed elements. Unlike the simple and straightforward design of MetLife Secure Flex UL and many other Universal Life policies, the Persistency Credit adds an element of complexity to Protection UL which can heavily impact illustrated performance. Understanding it is essential to positioning Protection UL. You can easily see the presence of the Persistency Credit in any Protection UL illustration. In the chart below, you can see the Persistency Credit significantly increasing cash values in year 23 on the ledger itself and under the Amount Credited column in the annual charge breakout available in the illustration. Virtually every Protection UL illustration has an identifiable point where the cash value flattens and then grows more quickly a direct result of the Persistency Credit. The chart below shows the cash value of a $1M Protection UL policy on a 45 year old Preferred Male funded at $6,594 annually at 5.05%. Account Value (000's) 250 150 50 0 1 11 21 Policy Year 31 41 51 So how does the Persistency Credit work? The best way to approach the question is to rethink what you know about how a Universal Life product operates. Protection UL simultaneously has two account values the cash value account you can see on the illustration and a notional, Persistency Measure (PM) account that you can t see. The PM operates similarly to the cash value account but has its own, unique set of non guaranteed charges and credits. Let s assume the cash value is $ and the PM has $ in year 10. The Persistency Credit is equal to the amount that will get the cash value account to equal a particular ratio of the PM, usually about 40%. The PC in year 5, then, is equal to $20 ($ x.4 = $120 $ = $20). The next year, let s say that the PM is $330 and the cash value is $120, then the PC is equal to $12 ($330 x.4 = $132 $120 = $12). In other words, Protection UL s illustrated performance is dependent on the Persistency Credit. Because of its complexity, you may want to perform more research before recommending Protection UL. One way to start is by reading the formula for the Persistency Credit, which is attached in 14 pages to this white paper. It goes without saying that MetLife Secure Flex UL does not have a persistency credit.
Cash Value Profile The cash value profile of any non guaranteed UL product is important for at least two reasons. First, it is the means by which the policy stays in force. Analyzing how it grows and shrinks across a variety of different funding and crediting rate scenarios is an essential tool for understanding how the product will actually perform. Second, cash value represents the amount available (disregarding tax consequences and applicable surrender charges) if the policyholder wants to get out of the policy. This is an extremely important consideration for any policy, but especially a Universal Life policy where the premium is not guaranteed. Cash value allows the policyholder to walk away from a policy that is not performing as expected or intended or that no longer serves their needs, assuming the policy is not at the point of lapsing for insufficient value. If the client is going to purchase a more complex product like Protection UL, it follows that the client would also want to have strong cash values as a form of insurance on the policy itself. However, Protection UL s currently illustrated cash value profile lags Secure Flex UL in several significant measures. Below is a chart showing annual illustrated cash values for both Protection UL and Secure Flex UL on a 45 year old Preferred Male for $1M of coverage and funded at $6,594, the current illustrated premium on Protection UL to endow at age 121. Both policies assume the crediting rates stated in the legend below with current, non guaranteed charges. PUL 5.05% all yrs MSF 4.7% all yrs MSF 2% all yrs 250 Account Value (000's) 150 50 0 1 11 21 Policy Year 31 41 51 When both policies are run at current illustrated crediting rates (4.7% for Secure Flex and 5.05% for Protection UL) with the same $6,549 annual premium, Secure Flex UL generates an average of 81% more cash surrender value than Protection UL from year 6 through 41 and nearly 2.5 times the cash value in year 22. The cash surrender value profile of Secure Flex UL is so strong that it performs better at 2% than Protection UL does at 5.05% from years 6 29, averaging 41% more cash surrender value. Although Secure Flex UL currently illustrates lapsing before Protection UL, note that Protection UL only outperforms Secure Flex UL due to the Persistency Credit, and its significant effects will not be known or seen until policy year 23. In other words, when the Persistency Credit meaningfully kicks in at year 23 in Protection UL, it illustrates just 42% of the cash value of Secure Flex UL. Whereas a Secure Flex UL policyholder would be able to surrender the policy in year 23, based on the current illustrative scale, with more cash value than premiums paid, a Protection UL policyholder would surrender the policy based on its comparable scale for only 44% of premiums paid. There are two other ways to compare the cash value profile of Protection UL against Secure Flex UL. The first is to compare the two products under the Secure Flex UL premium to have $1 at age 121 under current assumptions $8,794 annually for a 45 year old Preferred Male and $1M death benefit. The chart below shows the illustrative performance of
the two products under this funding pattern, both at current non guaranteed rates and charges in all years and Secure Flex at 2% in all years with current charges. 800 MSF 4.70% All Years Protection UL 5.05% All Years MSF Switch 2% All years 700 Account Value (Thousands) 600 500 400 1 11 21 Policy Year 31 41 51 In this scenario at the current illustrated rates, Secure Flex has an average of 49% higher cash value than Protection UL from years 7 45. Only after age 90, well after the Persistency Credit has kicked in, does Protection UL surpass the performance of Secure Flex UL. At 2% in all years, Secure Flex UL still has better cash value than Protection UL from years 6 29. Despite the fact that Protection UL is being overfunded relative to the $6,594 annual premium to solve for $1 of cash value at age 121 under its current 5.05% crediting rate, it still illustrates lower cash value than Secure Flex UL for many years. The second way of comparing the cash value profiles of the products is to compare the cash value return on the marginal dollars spent to purchase Secure Flex UL versus Protection UL. For example, if the illustrated Secure Flex UL premium is $8,794 and the illustrated Protection UL premium is $6,594, the marginal premium of Secure Flex UL is $2,. The question, then, is how much additional cash value is illustrated to come as a result of paying an additional $2, annually. This is the decision that faces every client when they choose to purchase Secure Flex UL over Protection UL. We can evaluate the marginal returns both in absolute dollars and in internal rate of return. The table below shows both based on current non guaranteed interest rates and charges. Year 10 Year 20 Year 30 Year 40 Year 50 Cumulative Marginal Paid $22,000 $44,000 $66,000 $88,000 $110,000 Marginal Cash Value $49,231 $144,860 $245,638 $356,281 $416,163 Marginal Cash Value IRR 13.17% 10.36% 7.52% 5.95% 4.54% In short, Secure Flex UL has the potential to deliver substantially better cash value than Protection UL across a wide range of funding patterns and crediting rate scenarios. Protection UL only pulls ahead well after the Persistency Credit begins to materially impact policy performance. Stress Testing Policy Performance Fortunately, the Persistency Credit is relatively easy to stress test because changes in the Persistency Measure s nonguaranteed elements (currently illustrated charges and credits) are directly tied to changes in the cash value account s
non guaranteed elements. The important thing to note is that when the policy crediting rate changes, so does the crediting rate of the Persistency Measure, but the relationship between the two changes when the crediting rate is below 3%. The result is greater sensitivity to crediting rate changes below 3%. The table below shows the impact of changing the crediting rate on both Protection UL and Secure Flex UL for the same client as the chart in the previous section. Although Protection UL illustrates a much lower premium than Secure Flex UL ($6,594 vs $8,794), Secure Flex UL actually performs better than Protection UL at the same premium assuming the Guaranteed crediting rate of 2% and current, non guaranteed charges for both. John Hancock Protection UL MetLife Secure Flex UL Crediting Rate Premium (Pay to A121) Lapse Age Lapse Age Current 6,594 * 121 91 Guaranteed (2%) 6,594 * 76 85 Current 8,794 ** 121 121 Guaranteed (2%) 8,794 ** 84 89 *Solve endow @ A121 for Protection UL **Solve endow @ A121 for Secure Flex Male, age 45, Preferred NS, $1M of death benefit The Persistency Credit has another important wrinkle it doesn t always store value for the future in the way one might think it would. One way to mentally tackle the Persistency Credit is to think of it as a give and take. One could think of Protection UL as providing lower cash values in the early years in return for higher values via the Persistency Credit in the later years. Given this dynamic, one might think that a future change in the policy Crediting Rate would not have a significant impact on the value of the Persistency Measure at the time of the change. After all, the Persistency Measure would have been accruing at a very healthy rate right up until that point and cash value was lowered in order to provide higher future value. As it turns out, changes to the Crediting Rate in the future can have meaningful and immediate impacts to policy values. This means that the client won t really know how beneficial the Persistency Credit will be until it begins significantly impacting the policy sometimes as long as 40 years. As shown in a previous chart and based on current charges, Secure Flex UL at 2% out performs Protection UL at 5.05% for 29 years until the Persistency Credit is illustrated to impact policy values significantly. But all of those years of lower cash value do not necessarily translate to positive future performance, as shown in the chart below. 350 Account Value (000's) 250 150 50 0 All Policies at Current 5.05% Years 1 21 Stated Rate Years 22+ 1 11 21 Policy Year 31 41 51 2% 3% 4% 5.05% The Persistency Credit also appears to be very sensitive to premium payment patterns. This is alluded to in the illustration, which states that the Persistency Credit above the minimum is determined based on policy owner actions, including the timing and amount of premium payments. As is shown in the table below, Protection UL is much more
sensitive to deviations from the originally planned premium pattern than Secure Flex UL. All scenarios use current nonguaranteed crediting rates and charges. John Hancock Protection UL MetLife Secure Flex UL Premium Premium Deviation Lapse Age Lapse Age 6,594 * None 121 92 6,594 * Skip years 11 12 92 ( 29 years) 89 ( 3 years) *Solve endow @ A121 for Protection UL Male, age 45, Preferred NS, $1M of death benefit Given that many clients deviate from the originally planned premium stream, the degree to which their life insurance product is sensitive to premium changes should be an important consideration when choosing a product. At $6,594 annually, Protection UL illustrates lapsing 29 years earlier than the original plan due to two skipped premiums in years 11 and 12. Under the same scenario, Secure Flex UL illustrates lapse three years earlier than if all premiums were paid. Summary Although illustrated premium should certainly be a consideration when choosing a life insurance product, it should hardly be the deciding factor for many consumers. Purchasing any financial product should entail the consideration of both risks and rewards. The complexity of the product, its sensitivity to crediting rate changes, the impact of deviating from the original planned premium stream and the product s cash value profile should all be considered when making a buying decision. Secure Flex UL may not have the lowest illustrated premium, but on the measures illustrated above, it can deliver consumer value in spades. We chose not to include John Hancock s Vitality Program in the illustrated values for Protection UL for three reasons. First, including all possible combinations of Vitality Statuses over the life of the policy would have been cumbersome. Second, the Program only changes the policy performance insofar as it assesses a modest rider fee ($2 per month) and applies credits analogous to an increase in the crediting rate, so the comments in this paper broadly apply regardless of the Status achieved by the insured. Third, John Hancock has retained the contractual right to change the qualification for the Statuses at any time.
MetLife Insurance Company USA and Metropolitan Life Insurance Company have designed this document to provide introductory information on the subject matter. The numerical data was compiled from illustrations. This information is believed accurate and current as of April 2015. This information cannot be guaranteed and is subject to change. This information is for producer use only. It is not to be shown to the public or to clients in any form or reproduced in whole or in part. MetLife, its agents, and representatives may not give legal, tax or accounting advice and this document should not be construed as such. Clients should confer with their qualified legal, tax and accounting advisors as appropriate. MetLife Secure Flex Universal Life is issued by MetLife Insurance Company USA on Policy Form 5E 38 14 and in New York only by Metropolitan Life Insurance Company on Policy Form 1E 38 14 NY. All guarantees are subject to the claims paying ability and financial strength of the issuing insurance company. Life Insurance Products: Not A Deposit Not FDIC Insured Not Insured By Any Federal Government Agency May Lose Value Not Guaranteed By Any Bank Or Credit Union MetLife Insurance Company USA 11225 North Community House Road Charlotte, NC 28277 Metropolitan Life Insurance Company Park Avenue New York, NY 10166 metlife.com L0415421658[exp0317][All States]