#91 | John Hancock Protection UL 2018

Executive Summary

If you focus just on the small illustrated premium adjustments and slightly longer guarantees in Protection UL 2018, you’re going to miss the bigger story – Protection UL is now riding on a new chassis. As with all iterations of Protection UL, it’s really three products (base chassis, Persistency Measure, shadow account) in one, but the new version has aligned the Persistency Measure and the shadow account to streamline the product. The base chassis has also been modified with higher COI charges and higher base charges in single pay or short pay scenarios. All in, Protection UL 2018 delivers the goods in the same way as its predecessors, albeit with a slightly cleaner design and more focus on level pays over single pays. But Protection UL 2018 also makes some of the complex underlying mechanics of the product more obvious, even to laypeople – so if you choose sell it, you had better know your stuff. As always, I also recommend that Protection UL be illustrated at 4% or lower. Better to underpromise and overdeliver than the other way around.

Forgive me for indulging in a pop culture analogy, but John Hancock’s Protection UL is the Taylor Swift of the life insurance business. Both have a long and undeniable track record of hits. Both have managed to successfully pivot genres, from country to pop in the case of Taylor Swift and from guaranteed UL to current assumption UL in the case of Protection UL, as their peers tried and failed. Both completely dominate and define their markets. Both attract hordes of supporters and critics alike, which leads them to live an uneasy balance between being simultaneously loved and hated but never ignored. And neither one can move an inch without causing headlines.

This latest reprice of Protection UL to PUL18 is a great example of this. Premiums moved by a few percentage points versus the old product. For example, on a 55 year old Preferred male with a $1M DB, the level pay for PUL16 was $10,973 and it’s $11,272 for PUL18 – just a 3% increase. And, to put this into historical context, the 2012 version of Protection UL had a premium of $11,114 and the 2013 version had a premium of $11,217 for the same cell. Those previous two numbers were also at higher crediting rates of 5.20% and 5.05%, respectively. In other words, John Hancock has kept the price of Protection UL within a 3% band since 2012 despite falling crediting rates. I’d call that pretty stable. I’m sure you can find other cells where the range is bigger, like single pays (+12% for PUL2018), but compared to the price swings you can regularly see in Guaranteed UL products, this basically counts as nothing. And yet, in talking to Hancock’s competitors, you’d think that Protection UL just dropped itself completely out of the market.

The main improvement for this cycle of Protection UL is that John Hancock has changed the shadow account formula in Protection UL, which causes the secondary guarantee to extend a bit longer. For example, in the cell above, the secondary guarantee in PUL16 goes to age 82 and 87 in PUL18. The premium to get the secondary guarantee in PUL16 to go to age 87 is about $14,500, well above the price of a standard Guaranteed UL product. Extending the guarantee in PUL18 is undeniably a benefit but it really just aligns the product with the market. Offering a “free” guarantee to age 90 or so is becoming table stakes in the non-guaranteed death benefit market. The main attraction in Protection UL is still the fact that it illustrates incredibly low premiums relative to other products – even Indexed UL products that have the benefit of much higher illustrated rates.

How John Hancock manages to do that is, of course, the reason why the product attracts more than its fair share of supporters and critics. It’s also the key to understanding why Protection UL 2018 is actually materially different from Protection UL 2016, even if the numbers in the benchmark don’t bear that out.

Protection UL’s performance hinges on a complex mechanism called the Persistency Measure, which is basically an alternative account value running parallel to Protection UL. You can think of it like the shadow accounts in Guaranteed UL products. The Persistency Measure has its own charges, credits and rules. The Persistency Credit, which you can see in the illustration, is applied to Protection UL so that the account value of Protection UL is always equal to a constant (and disclosed) percentage of the Persistency Measure. For PUL16, the percentage is 40%, meaning that the account value in Protection UL is always equal to 40% of the Persistency Measure. In other words, when you buy Protection UL you are really buying two products – the one you can see on the illustration (the base product and the one you can’t see (the Persistency Measure).

Below is a chart showing the account values in Protection UL 18 for a single pay design. You can clearly see the two products operating in parallel. The Persistency Credit can start as early as year 6 but when it actually kicks in is contingent on a variety of other factors. In this case, the change in the trajectory of the cash values that happens at year 21 is when the Persistency Credit begins to align the cash values of the policy with the specified ratio of the Persistency Measure. Like I said – two products in one.

There are, of course, positive and negative aspects to this design. Protection UL is much more sensitive to crediting rate changes than products with similar cash value profiles because the Persistency Measure has such a large balance. In other words, Protection UL has the rate sensitivity of an accumulation product with the cash value margin for error of a death benefit product. Not a great combination. Although the mechanics and most of the rates in the Persistency Measure are disclosed in the contract, it is an appallingly complex structure that is very difficult to intuit.

But, on the positive side, this design provides an unparalleled ability for Hancock to tweak the product to keep it competitive by making adjustments to both the base chassis and the Persistency Measure. These are two products with the same ledger, after all, and scraping profit from the base chassis and feeding it into the Persistency Measure to maintain competitiveness is fair game. The biggest change in Protection UL since Hancock guaranteed the Persistency Measure formula in 2012 came in 2015, when Vitality was added to the product. There was so much focus on Vitality that I think people missed the fact that Hancock simultaneously clamped down on the account values in the product, which surely increased lapse profitability and allowed Hancock to put more value back into the product. Take a look at the chart below.

This ability to tweak the base chassis and the Persistency Measure separately has allowed Protection UL to stay remarkable stable over the last 7 years. The tradeoffs forced in normal pricing decisions can be easily managed in Protection UL because there are two mostly independent levers to push. In Protection UL 18, Hancock pushed both of them.

The first place you can spot the changes is on single pays. As noted previously, the sheer price for single pays in Protection UL 18 appears to have gone up the most of any funding pattern. All else being equal, this would be a reflection of a change in the way that the Persistency Measure operates with single premiums and you can find evidence for this in the policy filing. Whereas the filing for Protection UL 16 appears to show relatively flat premium loads across the years, the filing for Protection UL 18 shows a much higher load in year 1 that drops off in year 2 and then again in year 10. In other words, there’s an explicit penalty for large premiums in the first year baked into the contract in Protection UL 18. You can see this playing out in the numbers, too. A single premium solve in Protection UL 16 on a 55 year old Preferred male for $1M of DB is $178,759. If you pay $12,000 in the first year and then solve for the premium in the second year, the total premium over the first two years is greater than the single premium solve. This makes sense. All else being equal, there’s a cost to waiting to pay premiums in the form of lost interest.

Not so in Protection UL 18. Using the exact same scenario, the single premium would be $200,278, a 12% increase over Protection UL 16. But paying $12,000 in the first year and then solving for the premium in the second year gives a total premium amount over the first two years of $197, 549 – a savings of $3k for delaying the second year premium payment. Why? Because the new Protection UL 18 has a higher premium load in the Persistency Measure in the first year than the second. Take a look at what happens if the client pays $200,278 over one year versus two years in the chart below.

Again, you can clearly see the two products working in parallel to one another. The base chassis of Protection UL performs worse in the two pay scenario because it’s being deprived of earned interest in the first year. This is the classic and intuitive reason why paying the same amount over two years is worse than paying it all in the first year. But as soon as the Persistency Credit kicks in to align the values of the base chassis with the specified ratio of the Persistency Measure, you can see that the value of the Persistency Measure in the two pay scenario is significantly higher than in the single pay scenario. Two products in one.

Hancock also introduced another change to the base chassis structure that works in hand with the changes to the Persistency Measure. Since 2011, Hancock has been gradually increasing the base charge in Protection UL. In the same cell as above, the base charges in Protection UL 2012 would have been $1,574 annually for 20 years. In Protection UL 2013, they would have been $1,831 for the life of the contract. Protection UL 2016 sports a base charge of $3,574 for the life of the policy – nearly double the charge of PUL 2013. And Protection UL 2018 goes even higher to $4,405 from years 3+. To put that number in perspective, it’s about 40% of the level premium solve for the cell. Increasing the base charge is basically a tool to transfer value out of the base chassis and, theoretically, into the Persistency Measure. In other words, over time Protection UL has become more Persistency Measure and less base chassis, courtesy of increasing base charges.

But Protection UL 18 adds a new twist as well. For policies with short pay solves, the base charge actually increases dramatically to suck more value out of the base chassis. Take a look at the chart below of the base charges for the single premium scenario on both Protection UL 2016 and Protection UL 2018. Probably more than anything else, this mechanism ensures that the right amount of value is being scraped out of the base chassis to fund the Persistency Measure. Without it, single premium solves would likely have gone up much more than they did.

The main reason I bring this up is not to highlight how clever John Hancock is but, instead, because the change in the base charge creates some very bizarre looking illustrations. Take a look again at the chart showing the single pay design. See how the account value declines every year until the Persistency Credit kicks in? Yeah, that’s not going to make any sense to a customer or their advisors. It looks like the policy is on a nosedive and then is magically levitated by a device that now needs to be explained. Protection UL 16 didn’t make it quite so obvious because the flat base charge didn’t crush the account values from day 1 like the higher base charges do in Protection UL 18. I’m a big believer that the complexity and dual nature of Protection UL should always be disclosed but 99.9% of advisors don’t know it’s there or don’t talk about it. The strange looking cash value curve of Protection UL 18 in higher funded scenarios is going to cause a lot of awkward conversations with unprepared agents. But if you’ve made it this far in the article, you’ll be safe.

The other big change from PUL 2016 to PUL 2018 is in the Cost of Insurance charges for the two versions, which you can clearly see in the chart below.

Based on this chart, you’d expect that Protection UL 2018 performs significantly worse than Protection UL 2016, but you’ve already seen that the premium solves are virtually identical. Again, this is because the base chassis is not what’s delivering the premium solves – that’s the job of the Persistency Measure. So these higher charges in the base chassis of Protection UL 2018 are offset by a higher Persistency Credit in order to keep the performance in line with the specified ratio of the Persistency Measure. The chart below is identical to the chart above but I’ve added the Credits column so that you can see that although the COIs in the new Protection UL are higher, so is the Persistency Credit.

Clearly, Hancock has monkeyed around a bit with structure of the new product even if the premium solves are very nearly identical to the old one. Hence, the performance of the two products is actually very similar, but the weight on the Persistency Credit has increased. It has to “do” more in order to get to the same result because of the higher COIs, and I think that will be somewhat unnerving to some people. And, if I’m being honest, I don’t know why they made the adjustment because it gets washed out by the Persistency Credit. If I had to guess, I’d say that it moderately changes how Protection UL reacts under extreme premium and rate scenarios. Is it a major change that will impact most policyholders? Nah. But should you know that it’s there and be able to explain it if your client asks to see a policy charge report? Yes, definitely.

The net effect of all of these changes is that, I would argue, Protection UL 2018 represents a material improvement on previous Protection UL products. It’s a cleaner and more aligned structure. For example, Hancock used to have two separate calculation structures for the secondary guarantee and the Persistency Measure, but now they both use the same one, which creates more alignment with the results of the product. That needed to happen.

One of my main gripes with Protection UL has always been that it is inordinately sensitive to changes in the crediting rate and premium flow, but a subtle tweak in the Persistency Measure ratio from 40% to 50% has made the product a bit less sensitive. Increasing the ratio pushes more margin for error back into the base chassis because the two are a little more closely related in value. In other words, Protection UL 18 takes more in the form of higher base charges but it gives more in the form of a higher Persistency Measure ratio as well. The net result is that premium solves are slightly less sensitive to crediting rate changes than in Protection UL 2016 and, probably more importantly, catch up premiums in lapse scenarios are generally lower. I really hesitate to say this because it’s such a complex product, but my gut is that this product is slightly less risky than its predecessors. If you throw in the fact that the secondary guarantee is simpler and goes further than any other Protection UL product, then it’s certainly less risky.

But to be clear, Protection UL should still always be sold with a healthy dose of conservatism in both the illustrated rate assumption and funding pattern. I never use an illustrated rate of more than 4% for premium solves. This product is too complex and too sensitive to crediting rate and funding patterns to not have a significant margin of error. Fortunately, it performs reasonably well even at a 4% illustrated rate – certainly well enough to merit consideration for the superb underwriting that John Hancock sometimes offers. The changes introduced in Protection UL 2018 do not fundamentally alleviate the risks in the product, even if the secondary guarantee extends a bit longer than in the old version. Until this product sports a secondary guarantee to age 100, treat it with kid gloves.

You might have noticed that I didn’t address Vitality in this article and that’s for a very specific reason – I don’t believe that Vitality should be reason enough, even on the margin, to choose a John Hancock policy. As a result, it does not factor into my formal review of John Hancock products. However, I do think there are customers who will like the idea of Vitality, even if they never really take full advantage of it, and that it should be a part of the conversation once the decision has been made to purchase a John Hancock policy. The only question, in my mind, is whether or not it’s worth the $2 monthly fee for Bronze status to have the option to engage with the program. It almost always is.