#226 | Lincoln VULone & Prudential VUL Protector Review – Part 1
Over the past decade, the prophesies about the imminent collapse of the Guaranteed UL market have mostly proven to be true. It is but a shadow of what it was in the past. Guaranteed UL at its peak accounted for something like $2.5B in annual recurring premium and the majority of Universal Life sales. Today, that number is closer to $500 million and falling at a clip of nearly 10% per year. Meanwhile, Indexed UL has grown into a $3B juggernaut. The coup is over and the palace has been stormed. Guaranteed UL is dead. Long live Indexed UL.
But that’s not quite the whole story, of course. Secondary guarantees have also long been available on a Variable UL chassis in Lincoln’s VULone, the godfather of the so-called Guaranteed VUL product. The basic story for a Guaranteed VUL is the same as a traditional Guaranteed UL – pay cheap premium, get guaranteed death benefit – but this time with cash value invested in separate accounts. What’s not to love? The market certainly agrees. By every metric, Guaranteed VUL now generates more sales than Guaranteed UL and is clocking huge growth figures even as Guaranteed UL continues to shrink. To put it more pointedly, Lincoln VULone and Prudential VUL Protector have the same combined sales as the entire 25 companies in the Guaranteed UL market. Guaranteed UL is dead. Long live Guaranteed VUL.
For all their obvious similarities, the two product types are actually quite different. It would be a mistake to see Guaranteed VUL through the lens of Guaranteed UL, primarily because that view shortchanges some of the profound benefits for both life insurers and consumers by combining secondary guarantees with separate account performance. But it also shortchanges the complex risks that life insurers assume when they write a Guaranteed VUL product, which is precisely what has kept many companies out of the market. Guaranteed VUL is tricky in the same way that Variable Annuities with Living Benefits are tricky – long-tail guarantees coupled with equity exposure that cuts both ways, either magically lifting the weight of the guarantee off of the life insurer’s balance sheet or dropping it like an anvil. Most companies aren’t willing to take that kind of risk on an industrial scale in a life insurance product. But if Lincoln and Prudential are, then consumers would do well to take advantage of what could end up being a short-lived opportunity.
Let’s start with the basics. Think of Guaranteed VUL as a normal VUL product with a secondary guarantee layered on top. The base contract looks and smells like any other Variable UL in that it has typical policy charges (premium loads, per $1k charges, COI charges, asset-based charges and surrender charges) and a suite of separate account fund options. There is no formal interaction between the secondary guarantee and the base contract. When a client pays a premium, that premium is counted both in the base policy and within the secondary guarantee account, which also has policy charges and earns interest. The difference, of course, is that the policy charges and interest rates in the secondary guarantee account are fully guaranteed. This dichotomy represents the true nature of a Guaranteed VUL – a client is buying a VUL that has an embedded put option in the form of a death benefit guarantee even if the base contract itself runs out of value.
As with any put option, there’s a cost to providing the guarantee, but there is no “rider” fee in either Lincoln VULone or Prudential VUL Protector. This is somewhat curious. In Variable Annuities, Living Benefit options have discrete and explicit charges related to their guaranteed benefits. Clients can see the clear before-and-after effects of adding various financial guarantees. But with Guaranteed VUL, the product appears to function as if it didn’t have any financial guarantees. There’s no way to see a clear before-and-after picture for either VULone or VUL Protector – but that doesn’t mean they have the same structure. Far from it. There is a clear and marked difference between the charge structures of the two products that materializes as divergent cash value profiles. Take a look at Prudential’s cost of insurance charges relative to Lincoln VULone and Equitable VUL Legacy, which is a pure-bred DB VUL without a secondary guarantee. This cell is for the 45 year old, but the general pattern shown here also holds for ages 55 and 65.
One of these things is clearly not like the others. VULone has a COI slope that is similar to what you’d see in an accumulation product whereas VUL Protector and VUL Legacy both sport lapse-supported, artificially flattened COI curves that are bread-and-butter for products geared for low-cost death benefit solves. Take a look at how these different product designs manifest in premium solves to maintain coverage to age 121 without taking into account the secondary guarantees.
Looking at this table, it’s not much of a stretch to think that Prudential built a reasonably competitive death benefit oriented VUL and then decided to add a secondary guarantee after the fact. That’s certainly how the product appears to be built and, if my memory serves me, Prudential once offered this product either without a secondary guarantee or without an even remotely competitively priced one. This is what really sets VULone and VUL Protector apart. If VULone is secondary guarantee on a VUL chassis, then VUL Protector is a VUL with a secondary guarantee. This might seem like a subtle distinction, but it’s not. It’s a structural difference that has huge implications for the long-term viability of the two products, as we’ll see.
The most obvious way that this difference between the two structures manifests is in the illustrated cash values. Take a look at the two products funded with the same $165k single premium on a 45 year old Preferred male. The assumption here is a 6% level return with 0.5% in fund fees.
And here’s the same 6% level return assumption but for a 65 year old Preferred male, just so you know I wasn’t being selective with the analysis:
The classic story for Guaranteed VUL has always been that it provides lifetime guarantees and cash value – and in that order. On the score of cash value, the clear and unambiguous winner is Prudential. Quantifying Prudential’s advantage is tricky because these products are usually thin funded, but no matter the metric, Prudential comes out on top thanks to its leaner charge structure all the way through. Here are some salient data points:
- Year 1 Account Value – Prudential wins. Lincoln has a 10% initial premium load plus a 0.9% M&E charge, which is much steeper than Prudential’s 6.75% load and 0.25% M&E. Prudential does tend to have higher initial fixed charges, but it’s not enough to make up for the difference.
- Year 10 Account Value – Prudential wins. Lincoln’s initial 0.9% M&E eats up a lot of value before it drops to 0.2% in year 10, but Lincoln’s lower fixed charges also last longer than Prudential’s (10 years versus 7 years) so the total fixed and COI charges coming out of VULone are slightly higher than in VUL Protector.
- Year 20 Account Value – Prudential wins. Whereas Lincoln is still charging a 0.2% M&E (drops off in year 20), Prudential offsets its 0.25% M&E with a 0.4% interest bonus starting in year 11, which nets to a 0.15% bonus on cash values. Lincoln’s COIs also start to really pick up after year 10 and are much higher than Prudential’s.
- Return Drag – For policies that have been funded or have performance that leads them to hit GPT/CVAT corridor, Lincoln generally has cash value IRRs (and therefore death benefit IRRs) that are 0.5-1% lower than Prudential, depending on the cell and the return assumption. The higher the return assumption, the lower the drag.
- Account Value Lapse Year – In general, if the account value drops to zero, Prudential VUL Protector drops to zero roughly 4-8 years later than Lincoln VULone when funded with the same premium.
The fact that Prudential generates better cash values on every metric is, as I wrote earlier, the most obvious manifestation of the profound structural difference between the two products. It’s the thing that pops off of the page for consumers. When Prudential first rolled out this product, the combination of stellar cash value performance and secondary guarantees was its main competitive angle against VULone. This proved to be an effective strategy. While VULone held on to the single premium market, VUL Protector chipped away at everything else and at the end of 2019 was just a half-step behind VULone in sales after posting huge growth last year.
But now the dynamic is changed. As of May, Lincoln has raised the guaranteed premiums on VULone across the board so that now VUL Protector not only has better cash value but also, in many cases, lower premiums as well. Lincoln is ceding ground and Prudential gobbling it up. From what I hear, VUL Protector is handedly outselling VULone through the first part of the year, a trend that is only going to accelerate now that Lincoln has repriced its product. How is it that the company that created this market and dominated it for more than a decade is stepping back and letting its arch-nemeses come to prominence with a product that is better on every metric? It could be that Lincoln has had its fill. Maybe Lincoln is trying to preserve capital. Or maybe, just maybe, Lincoln knows something that Prudential hasn’t yet figured out – and that’s where the structural differences between these two products really get interesting.
If you’re wondering why I only looked at 2 of the Guaranteed VUL products in the market, the reason is because they make up something like 95% of the market and 100% of the buzz. But an honorable mention goes out to AIG, Nationwide and Securian.