#317 | Lincoln drops LifeGuarantee UL

Around this time last year, I wrote in #271 | Cracks Emerge in the Guaranteed VUL Market that the Guaranteed UL market was ending, as T.S. Eliot famously said, “not with a bang but a whimper.” In 2018, Guaranteed UL sales tallied up to nearly $600 million. Last year, they were just $282 million – and about a fifth of that was with Prudential, which no longer sells Guaranteed UL. To put that into context, 5 companies have total Indexed UL sales greater than the entire Guaranteed UL market. Excluding Prudential, no company in the Guaranteed UL market sold more than $37 million of annual premium. As a category, it is simply fading away.

It should then come as no surprise that the long-time stalwart of Guaranteed UL, the company that has one of the largest blocks of Guaranteed UL in the industry tallying up to around $30 billion as of YE 2021 – Lincoln Financial – has decided to terminate its longstanding LifeGuarantee UL product line. As the Lincoln press release notes, LifeGuarantee UL/SUL currently represent “just 1%” of Lincoln’s overall sales. There’s just no reason to keep it around for new business anymore. VULone has picked up the mantle. It’s time for Lincoln to move on.

For the past few years, as far as I can tell, Lincoln has been pricing its LifeGuarantee UL product since 2019 in a way that is consistent with the current interest rate environment. Take a look at the level premiums for a male, Preferred and $1M death benefit at age 45, 55 and 65:

You can see the progression in Lincoln’s pricing. For the July 2019 update, which was probably priced 3 months in advance, the Moody’s Baa bond yield stood at around 4.75%. By September, the yield had crumpled to 4%, leading to substantial price increase in November of 2019. And by the time Lincoln made the final update in May of 2020, it was reflecting the yield from 3 months before – likely in the range of 3.5%, leading to a further price increase. From there, with the Baa yield hovering from 3.15% to 3.75% since July of 2020, it makes sense that Lincoln hasn’t made a pricing update.

But based on that logic, it’s a rather curious time for Lincoln to be pulling the plug on LifeGuarantee UL. The current Moody’s Baa yield is sitting at 5%. Theoretically, if the 2019 price is an indication, they could drop their premiums back down to a level where they’d be highly competitive. In the good ‘ol days, that would have been recipe for a tsunami of sales – and, in some ways, it still is. One of the carriers listed above posted a whopping 90% increase in sales in 2021. Another clocked in at a respectable 16%. Another 9%. Judging by how the sales broke out and Lincoln’s long history in this business, my guess is that if they were to drop prices to the 7/15/2019 levels, they could increase their sales by something like 800%.

However, there are several problems with that move, chief of which is the fact that increasing sales by 800% would still lead to total sales volume that is a drop in the bucket relative to the rest of the enterprise. The fact is that the GUL market simply isn’t big enough to be worth fighting for anymore. They could, maybe, grab $50 million in premium – but at what cost? Guaranteed UL remains a capital and reserve intensive product with relatively low returns that are contingent on a directional bet on interest rates.

From a carrier’s standpoint, the problem with Guaranteed UL is that even if it isn’t risky right now, there’s now a broad understanding that it could be risky in the future. It’s a latent liability that will rear its head in a future low interest rate environment, as it has done for the last decade and particularly the last couple of years. Simply the act of writing Guaranteed UL is seen as risky – regardless of what the current economic environment says.

At the same time, the Guaranteed UL value proposition is less attractive for consumers. As interest rates rise, the value of a Guaranteed UL policy diminishes. Inflation hasn’t been a real talking point for a very long time. But it is now – and Guaranteed UL has no answer. It does not hedge inflation. It has no response for a 1980’s-type inflation cycle, which would whittle the policy away to a shadow of what it once was.

What we need, therefore, is a product that can deliver guarantees at a sustainable price while being able to respond to inflation. That would thread the needle between what the life insurer wants and what most consumers want. What we need, in other words, is a new form of Guaranteed UL.

The good news is that we already have those options, which is part of the reason why Guaranteed UL is losing its luster. The most obvious solution is Guaranteed VUL, which offers the potential for strong separate account performance – usually greater than 7% – to push the policy into corridor. Take a look at the Guaranteed UL chart with GVUL included:

Guaranteed VUL, on a level premium basis, is more expensive than Guaranteed UL but potentially offers an inflation hedge assuming that separate account returns are strong. But is it fair to assume that strong equity returns occur at the same time as inflation? I’m not a macroeconomist, but it would seem to me that those two aren’t necessarily linked. The connection is indirect, at best, and the correlation may be as well. Therefore, Guaranteed VUL isn’t really an inflation hedge. It’s a way to get guaranteed premiums with upside potential once returns have cracked a certain level. Whether that occurs in an inflationary environment or not is somewhat of a separate issue.

So allow me to introduce you to Whole Life – a product with sustainably priced guarantees and built-in inflation protection. Take a look at the table of premiums with a smattering of death benefit-oriented all-base Whole Life products included:

The Whole Life products range from much more expensive to massively more expensive than their Universal Life counterparts. The Whole Life products are actually so expensive that at age 65, all 3 of them produce negative IRRs range from age 89 (SMNLY) to age 83 (MassMutual). The guaranteed DB IRRs also go negative on the age 45 cell at ages ranging from 106 (SMNLY) to age 96 (MassMutual). But even that is a bit misleading. At age 45, SMLNY’s DB IRR drops below 1% at age 93. For MassMutual, the DB IRR drops below 1% at just age 86, which is around life expectancy for a 45 year old Preferred Male.

Whole Life costs more money in terms of level premium, but it also has substantial guaranteed cash value and pays non-guaranteed dividends that can go to buy more death benefit in the form of Paid Up Additions. The real economics of the policy isn’t measured by the premium – it’s measured by the Death Benefit IRR. And once you look at Whole Life through that lens, the balance starts to shift. Take a look at the non-guaranteed DB IRRs for Protective (the cheapest Guaranteed UL) against the Whole Life policies at age 90, 95 and 100:

If the client dies younger than 85, which is below LE for a Preferred 45 year old male, then the level pay Guaranteed UL clearly comes out on top. But for durations beyond that point – in other words, the heat of mortality for this client – then Whole Life provides better returns courtesy of its accrued and still accruing Paid Up Additions when illustrated at today’s current Dividend Interest Rates.

If interest rates and consequently DIRs fall, then we would expect Whole Life to lag the Guaranteed UL, potentially all the way down to the guarantees. But if interest rates and consequently DIRs rise, as we would expect to see in an inflationary environment, then the crossover point would begin to happen earlier and the long-term IRRs would begin to rise. In other words, it does exactly what you’d expect an inflation hedge to do.

And I’m not just cherry picking with a particular cell where it works. Take a look at a 65 year old. The breakeven year is later, but the same effect holds:

However, Whole Life isn’t built to be an inflation hedge. It’s built to be a self-completing permanent life insurance plan with a fixed guaranteed premium that generates guaranteed, tabular cash values and it’s priced accordingly. The fact that it provides an effective inflation hedge courtesy of the ability to use dividends to buy PUAs is something of a byproduct of the structure. That begs the question – is there a more direct way to hedge inflation in life insurance?

There was. It was called Lincoln Treasury IUL, effectively an expensive Guaranteed UL product with guaranteed credits that were paid based on the movement of an external index. In a rising rate environment, Treasury IUL could pay enough credits to eliminate the base premium and potentially even begin paying cash to policyholders, like a dividend on Whole Life but with a lower base cost. For a 55 year old Male for $1M of coverage, TIUL cost just $17,056* in 2013, which is slightly less expensive than the current pricing for the outgoing vanilla Lincoln LifeGuarantee UL product in the same cell.

Treasury IUL was a flop. But, like most flops, the problem was more a matter of timing than the quality of the concept. Nearly ten years later, the concept wears differently. The life insurance industry needs a response to rising interest rates and TIUL provides a roadmap for what could work in the death-benefit oriented Universal Life space. But until we get products that look more like TIUL than traditional Guaranteed UL, Whole Life is the closest thing we have to an inflation hedge – and, arguably, one that should be used in advanced planning applications more often than it is today, especially in the brokerage space.

*This price was what I could dig up from some old files from 2013.