THE PLACE FOR VARIABLE LIFE SALES AND EDUCATION THE SINGLE PREMIUM ALTERNATIVE TO THE VA: USING THE #1 CARRIER FOR VUL by Charles Arnold Single premium VUL can be found among the long list of great solutions that clients probably never hear about. Be that as it may, the strategy is simple, straightforward, and can be adapted to fit different needs. How it is interpreted is the key, and also how it is explained. The interpretation of single premium can mean different things. Aside from how industry gurus interpret it, all that really matters is how the client views it: It is a single lump-sum payment that is going to help them achieve income or legacy goals. With a fully guaranteed solution, it is also a set-it and forget-it purchase. I know what you are thinking: Oh there is a lot more to it than that! What about the MEC status? Forget about MEC vs. Non-MEC for now, the only thing that matters is what the client wants to achieve (MEC is a Modified Endowment Contract). Let s take a look at this sales flyer that Lincoln produced for a single premium guaranteed VUL to help illustrate my point. Below is a modified screenshot of what I d like to talk about, as well as the link to the supporting document. I ve highlighted the age 65 example, to keep it simple. This is solving for $1 million in death benefit, male, standard nontobacco and assuming a 7% net rate of return for the sub-account portfolio: Life Solutions Piece on Guaranteed UL vs. VUL
The single premium option on the top would be a MEC and the 5-pay below it would be a non-mec solution. The targets are aligned, so regardless of the solution, the agent and the BGA are getting paid the same. It comes down to what the client is wanting to achieve. It is important to note that this is a guaranteed solution: Lincoln offers a no-lapse guarantee to age 121 with this VUL ONE product. So, after making the premium payments, the client can rest assured that the death benefit is guaranteed regardless of market performance (dependent on Lincoln s claim paying ability). Lincoln allows the client to choose any mix of sub-account options so they may be as aggressive as they would like. If the death benefit is guaranteed, and the goal is maximum accumulation, I d see no reason but to be very aggressive, especially for a 20 to 30-year horizon. But that is going to depend on the client and advisor, of course. Knowing investor emotions, a set-it and forget-it approach might be best for the investment portfolio with a long-term investment horizon, but the advisor will want to continue to manage the sub-accounts. This is all assuming the client is insurable from an underwriting standpoint as well. If they aren t, then this isn t something that will work and they are better off looking at an annuity solution. So, assuming that, we can proceed. Sales positioning bullet points: Fully guaranteed policy, regardless of investment performance 70 world class investment managers and strategies available for accumulation Tax-free death benefit for beneficiaries regardless of policy design Lab-free and streamlined underwriting with LincXpress for qualifying clients Choice of a legacy option or a legacy with income option (MEC vs. non-mec) Referencing the tables from the sales flyer, for the single premium MEC option, the client is going to pay $400,356 for a guaranteed $1 million death benefit. Assuming that 7% net rate of return, the cash value will grow to $849,928 in 20 years. That creates over $800,000 in potential income if the client needs, with a $1 million death benefit if they don t. If they are expecting to take income, then it becomes a question of how much they are looking to take out and conducting a cost-benefit analysis. In this scenario, if they think they are going to take out more than $100,000 of supplemental income, based on some basic assumptions and calculations, then it is advantageous to purchase the 5-pay instead of the single premium (this is assuming a 22% income tax bracket at the time of withdrawals). Remember the MEC status is LIFO taxation, so that makes all the difference here, as opposed to FIFO for non-mec. The difference between the MEC and non-mec really is a question of how much the tax-free income option is worth to you as a client. You are going to pay more to maintain that life insurance status and the tax-free nature of withdrawals if you choose the non-mec vs. the MEC. Of course, a lot of people can t afford the single dump-in amount, but this is assuming the client has the ability to afford either option. This is how I arrived at that figure. Taking the total premium payments from the 5-pay which equaled $448,680 and subtracting the single premium amount of $400,356, we get a difference of $48,324. That means the break-even on what you d be willing to pay in taxes for supplemental income is equal to the difference in premium cost. If you expect to take enough income to generate a tax bill greater than $48,324, then you get value by paying for the non-mec status. To take it a step further, I wanted to create a solution that felt like a single premium for a client. I assumed $448,680 was deposited into a premium deposit account for the 5-pay solution earning a modest 3% after-tax return on the residual each year. That reduces the difference in cost from $48,324 to $21,403, which reduces the break-even amount. At a 22% income tax bracket, that would allow for $97,286 of income until you
backed up against $21,403 in taxes. So, I rounded up to $100,000 of income from there. To keep things comparable, I kept everything present value terms and we are assuming tax rates stay the same 20 years from now. If income tax rates are expected to increase, then the value of the non- MEC s tax-free income option will increase as well. Keep in mind that if the premium deposit fund can earn north of 5% or so after tax, then the options become equal, however; additional risk taking in this earmarked account for sake of higher yield isn t advisable. Here are the scenarios: Expect to take no income (straight legacy planning): Single premium MEC Expect to take less than $100,000 income in today s value: Single premium MEC Expect to take more than $100,000 income in today s value: 5-pay non-mec Expect to take significant income or think income taxes will increase: 5-pay non-mec It would make things easy if Lincoln had a premium deposit fund for someone to dump-in 5 to 10 years of premiums, earn a competitive rate, and have it look like a single premium solution. Many clients will prefer a one-time dump-in amount, or specifically ear-marking funds for this strategy in a dedicated account. The advisor can do this on their own, of course, for the client and collect the total premium and invest it in an account that is conservative in nature, but one they can still get paid on. For those without an advisor, that premium deposit fund would come in very handy. Lincoln has another great piece on this strategy that isolates the single premium solution. Instead of looking for a determined death benefit amount, like the above, we are looking at a specific investment dump-in amount of $100,000 for this example. For a lot of clients, they may just be looking for the best guaranteed legacy solution for a given sum of money. In which case, this is a very viable solution for them: A Guaranteed Single-Pay Solution If we can make it easy on an advisor and client, by using a single premium amount or creating a single premium look-a-like solution, it may have more mass-market appeal. It has the look and feel of being more transactional in nature, similar to any other financial product. The client gets to choose from over 70 different world-class investment options, plug their money into a tax-advantaged wrapper, and don t have to worry about the policy ever lapsing because it is fully guaranteed by Lincoln Financial, a top-rated insurance carrier. Additionally, for clients who are under age 60, using an accelerated underwriting solution can potentially reduce the underwriting time significantly. For instance, Lincoln has a new LincXpress process for underwriting, where if a client fits the parameters and is healthy, they can potentially go lab-free through the process. That is usually for clients under
60, healthy, and for cases under $1 million in death benefit (LincXpress Prequal Guidelines / LincXpress Advisor Guide). A single premium, fully guaranteed, tax-advantaged solution for income and death benefit with accelerated underwriting to make it transactional for an advisor and client is huge! Tell me why we aren t selling more of this? The entire VUL industry is $2 billion annually according to LIMRA statistics for 2017. In comparison, the variable annuity market is between $90 and $100 billion a year. The only qualitative factors separating a MEC VUL and a variable annuity is the need for underwriting, which is becoming faster and easier, and taxation. Between 70 and 80 percent of variable annuities sold historically, the first distribution ends up being a death benefit, which is taxable to beneficiaries. For all those clients sold a VA who didn t need the income, arguably in many cases, would have been better off with a MEC VUL; in terms of leaving more for beneficiaries aftertax. There are a lot of factors to consider there, but I think it is safe to say a good chuck of those people, and their families, would have been better off. They, at least, would have liked to have both options presented to them at the time of sale, which I doubt was the case for the vast majority. Product Attribute Sub-Account Investment Accumulation Fees and Charges Client Income Variable Annuity (VA) Tax-Deferred MA&E, Rider(s), Investment Taxable Variable Universal Life (VUL) Tax-Free Admin / Policy Charges, COI, Rider(s), Investment Non-MEC: Tax-Free MEC: Taxable Death Benefit Taxable Tax-Free Underwriting No Yes Sales Cycle 1-5 days Accelerated: 15 days Traditional: 25-60 days To take it a step further, if we are able to link the investment stories together with the tax-benefits of these products, I think this industry has the potential to drive significant volume. The sub-accounts are not being talked about, and with names like American Funds, Franklin Templeton, Fidelity, BlackRock, and Vanguard, how could you not be talking about them? Those are the most recognizable, household fund family names in the US. They use the same managers and same fund strategies that they use for their mutual funds and those found in variable annuities. It is the same great investment story, only in a tax-advantaged wrapper. Here is a sample portfolio using Lincoln s sub-account options and historical performance. Show this to an advisor and explain to them that with an overfunded design, the majority of what their client is buying with their premium payment, is an investment, not insurance. From a client s tax perspective, it really comes down to what cost they want to assume. There is the cost of tax or the cost of insurance, and a client must choose one. For high earning individuals, assuming the cost of insurance and eliminating the cost of tax is most likely going to be the better way to go. Especially if they are young and healthy (lower COI).
Sample Portfolio: 80% Equity / Bond 30% 10% American Funds Growth American Funds International Delaware Emerging Markets Franklin Templeton Global Bond Delaware SMID Cap Core As of QE 3/2018 1 Year 3 Year 5 Year 10 Year Annualized Return: 14.87% 8.30% 9.04% 7.13% Think about approaching that top VA producer in your territory with this comparison and solution. First and foremost, they need to be made aware that it exists and that it competes with what they sell, but they also need to realize that the life insurance industry is changing rapidly and is becoming faster and easier to work with. This is not the insurance industry they remember, things have changed! They can offer the same great investment options that VAs provide, are surprisingly cost competitive over the life of the client and offer a superior solution from a tax perspective. When VUL was sold in the late 1990 s and 2000 s, they weren t funded properly and they also didn t carry nolapse guarantees. With overfunded designs and guaranteed products, the risk of lapse is significantly reduced or eliminated for a client. In conclusion, clients deserve to hear this story and advisors need to realize that these products have evolved and have the potential to become major revenue drivers for their business. This is a story that advisors and wholesalers should run with proactively, as opposed to reactively. Much of the point-of-sale work today is on a reactive basis. Predominately, and about 90% in the wire-house broker-dealers, a life insurance sale is client initiated. A lot of it comes down to how it is interpreted by the advisor and client, and how we need to explain things using their language. Using a variable annuity comparison and talking the investment sub-accounts with a financial advisor for instance. Or talking in simple terms to the client about tax-free income and legacy planning using American Funds together with Lincoln Financial as another example. When clients hear life insurance, all they think of is death benefit and how expensive it is, which is a major misconception. When advisors hear it, all they think about is the painful process of underwriting, paperwork, and how they don t want to look stupid explaining something they don t really understand. At some point in the not-too-distant future, point-of-sale professionals are going to need to start thinking like traditional wholesalers and use a simple mass-market story to drive substantially more distribution.