#316 | Follow Up to The Rising Tide of Accumulation VUL

Last weeks article generated probably more questions and comments than I’ve ever gotten. So, in response, I figured it’d be a good idea to cover some of the main topics that folks send my way in a follow up post. Here goes!
2021 Accumulation VUL Sales in Context
One question that came up was whether the growth in accumulation VUL sales was a function of a very bad 2020 or a very good 2021. The answer, unequivocally, is that 2021 was a fantastic year by any measure. Take a look at VUL annualized premium + 10% excess since 2017:

It’s little wonder, looking at this chart, why Guaranteed VUL has been the conversation topic for the last few years. But accumulation VUL convincingly stole the show in 2021. And, as I wrote in the last article, this isn’t because of PPLI being suddenly included in the numbers. Accumulation VUL sales increased by $700 million last year, of which $531 million came from firms that don’t offer Private Placement. The outlier is Prudential, which is currently putting a huge effort into promoting its retail accumulation VUL, so it’s hard to believe that all of their sales growth came solely from Private Placement.
I was at a conference earlier this week and a life insurer executive made a passing comment about the fact that 7702 changed the sales reporting a bit and that might have been a contributing factor to the reported sales growth. I don’t agree with that assessment but, regardless, the other metric to look at is total premium – and there still, accumulation VUL had a blockbuster year. Take a look:

Private Placement shows up a bit more in these numbers because one PPLI company reports its premium as “single,” which flows through at 10% for the recurring premium + excess metric but flows through 1-for-1 under total premium. But regardless, accumulation VUL posted a massive $1B growth in total premium, of which only $200 million could be attributed to PPLI. I don’t see any evidence that the growth for accumulation VUL in 2021 is a reporting fluke. It very much looks like the real deal.
CVAT and GPT in Protection Sales
For any design that is protection-oriented, you’re unlikely to bump up against restrictions for CVAT or GPT. Thin-funded policies generally don’t have premiums high enough to interact with Guideline Premium restrictions and don’t generate enough cash value to push the death benefit into corridor under CVAT, much less GPT. You’ll never (under any reasonable scenario) see an illustration where the policy has to go into corridor in order to endow at maturity. As a result, most people don’t even think about whether to use GPT or CVAT when it comes to protection sales.
I do, however, think it’s worth thinking about. Consider a scenario where a client has funded a policy with a minimum premium for a few years and then wants to pay it up with a single premium – it’s a possible that doing so could run afoul of the GSP. I illustrated this on a 45 year old Preferred male with a $1M DB to test this out. After thin funding at $6,000 for a few years, the maximum premium in year 6 under GPT for was (for this product) $280k. At a 2% net illustrated rate, the policy lapsed at age 85. By contrast, the client could pay $500k in year 6 with CVAT and the policy runs to age 109 at 2%. It’s a weird scenario, but not an unimaginable one.
My general take is that CVAT is the better test for protection-oriented sales for the sole reason that it gives the client more premium flexibility without ever having to think about the potential of bumping into a Guideline Premium restriction. Or, to put it a different way, I don’t see any upsides to using GPT over CVAT, but I do see downsides to using GPT. Therefore, my default is almost always to use CVAT for protection sales – and I would even argue that it’s worth the extra couple of seconds to switch the default, which is usually GPT, to CVAT.
Non-Monetary Considerations for Accumulation Sales
CVAT is clearly the simpler of the two tests and simplicity is a benefit when it comes to tax testing. GPT has a lot of wrinkles – force-outs, the recapture ceiling, premium limitations that vary by face option and undoubtedly several more that I don’t even know about or understand. It’s a tricky test. Coding GPT into policy administration systems is a notoriously difficult exercise, whereas CVAT is about as straightforward as it gets. It’s a corridor factor and the corridor factor is literally in the contract. That’s not to say that CVAT doesn’t have its own wrinkles in how the life insurer calculates the corridor because it certainly does, but from a client’s standpoint, the likelihood that they run afoul of anything funky in CVAT is much lower than in GPT.
Optimal policy design under CVAT is also much simpler. GPT has different premium limitations by face option, which is why the usual design is to select Option 2/Increasing at issue to get higher Guideline Level premiums and then switch to Option 1 once premiums have ended. CVAT has no such considerations because the corridor is the same regardless of face option. Therefore, it doesn’t require a switch from increasing to level, which means no one has to remember to actually execute the switch in the future. And it also means that the client doesn’t have to stop to think “am I really done funding this thing?” before making the switch because it can’t be reversed without underwriting.
Then there’s the matter of the face decrease that is essential to getting the benefit of GPT. Without decreasing the face at the earliest available opportunity – preferably immediately after the final premium payment – then CVAT is generally as efficient (if not more efficient) than GPT for accumulation-oriented sales that are maximally funded, especially if the funding period extends for more than 7 years.
Decreasing the face amount with GPT is a problem on two fronts. First, someone has to remember to do it. No carrier that I know of will automatically decrease the face amount. Why? For the second reason – reducing the death benefit is a real loss to the customer. There will necessarily be clients who die days, weeks and months after face reductions. Their families will be furious. They will be litigious. It will not be pretty. Why we haven’t seen more scandals over deaths after face reductions is a sign that either producers are having clients sign CYA documents, clients weren’t aware of the prior benefit, carriers are “handling” it or, most likely, that agents are forgetting to actually drop the face amount. None of these are fun.
But, on the flip side, the face reduction in GPT introduces valuable optionality into the sale. As one person pointed out to me, 40 year old clients think about their death benefit at issue very differently than 60 year old clients think about the death benefit they bought at 40. The perceived value of the death benefit increases with age, probably faster than the actual cost of death benefit. It’s not so unlikely that an accumulation sale may eventually become a protection sale and, in that scenario, a client might choose not to exercise the face reduction and will therefore have a fully funded policy carrying a very valuable – and very large – death benefit. That’s not such a bad thing, but you could do the same design in CVAT as well. It’s not unique to GPT.
For all of these reasons, I stand by my general observation – for the vast majority of clients buying life insurance for accumulation, CVAT is the better choice. High net worth clients who have advisors who are actually going to service the policy for a very long time can play chicken with the face switch / decrease GPT design. The fact that so many people are selling small(ish) policies geared for accumulation using a face switch / decrease GPT design is baffling to me and somewhat of an indication of just how much the illustration, and not the real world, rules the sale.
Overloan Protection Riders
I’ve written about these riders several times before (and I think we even did a podcast on them at one point), but I’ll summarize my view about OLPRs as this – they look great on paper, but the real-world will, I think, be less kind. Actually triggering an OLPR will be trickier than it first appears and require a fair bit of active management to make sure that the rider is triggered after all of the conditions are met. But more importantly, the IRS has yet to opine on OLPRs. A prominent life insurance tax attorney commented to me, offhand, that he thinks that OLPRs are going to be the biggest tax remediation problem that the life insurance industry has ever faced because it is unlikely that the IRS isn’t going to try to strike them down. For those reasons, I don’t think that OLPR should swing the choice between GPT and CVAT.
I’ve also pointed out in other posts that there’s nothing technically restricting life insurers from having OLPR with CVAT and a handful of carriers offer that option. OLPRs typically assess a charge that reduces the cash value so that the new corridor-driven DB is equal to the prior cash value. The bigger the corridor, the bigger the charge, which is why OLPR with CVAT hasn’t been so enticing in the past. But with the new 7702 rates and narrower CVAT corridor, OLPR with CVAT makes more sense and I think it’s only a matter of time before we at least see it offered as an option on most accumulation-oriented products.
What about GPT Option 1?
As the dust was settling on the changes to 7702, I wrote an article about the so-called “reverse blend” where agents were basically increasing the death benefit of policies to pre-change levels in order to maintain their same general compensation level. Several folks told me about presentations they’d seen by carriers and distributors alike advocating to use GPT with Option 1 as a way to both increase compensation, reduce the complexity of the case design and still deliver competitive illustrated performance. It certainly does those things – in that order. It’s great at increasing compensation. It certainly simplifies the design and administration. But when it comes to accumulation, GPT Option 1 needs a lot of illustrated rate to cover up the higher policy charges fueled by the higher death benefit. CVAT smokes GPT Option 1 all day long, every day, with the same (or arguably less) design and administration complexity. For that reason, I don’t view GPT Option 1 as a viable accumulation design except for agents who are looking for cover to tell clients that they illustrated the “minimum” death benefit while boosting their compensation. It’s not a great look.