#242 | Prudential Files a VUL Protector Reprice
At the end of a recent 4-part article series on the two products with a duopoly on the Guaranteed VUL category, Lincoln VULone and Prudential VUL Protector, I wrote the following about Prudential’s product – “sell the daylights out of it while you can.” My broader point in the series was that Prudential was clearly out over its skis in terms of pricing and that Lincoln’s long history in Guaranteed VUL was proof positive. It was only a matter of time before Prudential would do a reprice. The date on that last article was July 14th. Little did I know how quickly that reprice would be coming – and how it would open my eyes to an opportunity to not only avoid the impact of the reprice but to, believe it or not, make the product even more efficient. But first, let’s talk about what Prudential appears to be doing with this reprice.
On 8/27, Prudential received approval from at least one state (Florida) for a reprice to Protection VUL’s no-lapse guarantee feature. Much about the pricing did not change. The cost of insurance charges, which more or less mirror the 2001 CSO Table (with some discount in the early ages), remain the same. So does the fixed policy charge and per thousand policy charges. And, surprisingly, so do the guaranteed crediting rates, which start off at a very healthy 6.15%, increase to a whopping 8.25% until the 49th year and then drop back to 6%. To put those rates into perspective, the 4% guaranteed rate in Whole Life is causing those companies no small amount of headache these days in terms of the potential specter of a 0% rate environment and especially for short-pay products, as we’ll cover in an upcoming post. But here Prudential is guaranteeing rates in VUL Protector that are as much as twice as high, which is why the guaranteed premiums in this product are so unbelievably cheap. If Whole Life with a 4% guaranteed rate is causing companies headaches, just imagine the migraine coming for Prudential (and Lincoln, for that matter).
The only thing that has changed is the premium load. Both products share a base premium load of 3% in all years, but there’s an additional load tacked on top of that in the first 10 years to price for short-pay designs. The current product has a total premium load of 26% in the first year, but the new reprice shows a 35.65% premium load in the first year. Given that nothing else about the product has changed, your first instinct might be to say that for a single pay design, Prudential is increasing the price of the product by about 10%. But not so fast. The effect of an initial premium load is also influenced by other factors. Less money hitting the account value means higher COI charges from a slightly higher Net Amount at Risk. Furthermore, there’s less money available to earn the sky-high guaranteed crediting rates, which is how the product performance can overcome the inflated COI charges. So the real effect should be bigger than 10%.
Fortunately, we can get a feel for what the effects will be because the filing is actually quite specific. The specimen contract is on a 35 year old Standard male for $250,000 of death benefit. Using the Dynamic Illustration Tool (DIT), I can replicate the illustration for that cell using the contract values. Prudential also included an actuarial calculation in the original filing that showed the month-by-month values for the shadow account under a given premium flow, so I can actually match those values to what the DIT produces. It’s almost exact. From there, I just pulled up WinFlex and solved for a single premium to guarantee to maturity. The illustration shows a guaranteed single premium of $32,173. The DIT produces a guaranteed premium of $32,222, a difference of $49 or about 0.15%. Chalk that up to differences in rounding compounding over 86 years.
So what happens when we plug in the new premium loads? The guaranteed single premium solve jumps to $37,055, a 15% increase from the illustrated premium solve. So, folks, there you have it. For a 35 year old Standard Male buying $250,000 of coverage, Prudential is increasing the single pay price by 15%.
What about other cells – you know, the ones that people actually sell with this product? That’s a bit harder. Everything in the filing is bracketed, so we know it’s accurate for the 35 year old but it might be different for a 65 year old. But we can draw some basic conclusions. I built a sketch model for a 65 year old single premium design, solved for the COI slope to get it to match the current product and then plugged in the new premium loads. The single premium for the reprice increased by almost exactly 15%. My hunch, however, is that the reprice is actually going to be a bit steeper for older clients because I solved for a COI slope that was well below the 2001 CSO to get it to work. If Prudential played around with another factor like, for example, the crediting rates to make that cell work, then the results could be different. But it’s hard for me to imagine that the impact will be less than 15%.
For non-single premium designs, the impact of the premium load increase isn’t nearly as noticeable. A 10 Pay design, for example, looks like about a 7% price increase. Level pays are maybe on the order of 1-2%. The reason, of course, is because the big premium load increase only applies in the first 5 years. After that, the products are identical. So spreading the premium out over time means that you’re taking advantage of a more efficient charge structure.
It also means that there’s a much more efficient way to design these single premium patterns. Take the 65 year old, for example. The current premium single pay premium for $1M of coverage is $413,919, all of which gets hit with the current first year 26% premium load. A better way to design the product would be to string it along for 3 years at $20,200 per year and then pay a single premium in year 4 to guarantee to age 121 when the premium load has dropped off to just 10%. The total premium under that scenario is just $386,173. The guaranteed IRR is a whopping 0.6% higher at age 90 and 0.36% higher at age 100. And yes, folks, there’s still a significant benefit if you fund it at Target in the first year ($36k, in this case).
The new product will show even more of a stark advantage for delaying premiums, but the delay will need to be longer until the new (and increased) premium loads wear off. Actually, when you really think about it, you can almost completely avoid the price increase altogether simply by paying a minimum premium over the first 5 years. The new product will be priced almost identically under that scenario as the current product, which means that the long-term IRR will be higher even than today’s single premium designs. The fact that Prudential is clearly targeting short pays in this reprice means that you can basically fool the pricing model by stringing out the premiums.
Of course, the ability to string out premiums only really applies to scenarios without a 1035 exchange, which is presumably a large part of the single premium flow going to Prudential. But there are other situations where it will work flawlessly such as, for example, a client funding a trust with their lifetime exemption and then repositioning the assets into life insurance. Not only does VUL Protector work brilliantly for that scenario, but now the client can get even more IRR out of the policy by stringing out the premiums and completely avoiding the impact of the reprice.
And that’s the strange thing about this reprice. It was clearly a quick-fix to the current product because it is so targeted and, consequently, so easily avoided. The long-term solution, however, is undoubtedly a complete re-work of the product. It’s only a matter of time. So I’ll say the same thing I said at the end of the last article: sell the daylights out of VUL Protector while you can – and don’t let this reprice get in your way, even if you can’t avoid it.
