#319 | Lincoln LifeGoals VUL

black and white dartboard

At this point, there’s broad recognition that there should be a natural fit between the tax properties and investment flexibility of variable insurance products, particularly Variable UL and Variable Annuities. But there’s also increasingly a broad recognition that a theoretical fit is not always a practical one for financial advisors who don’t regularly incorporate insurance into their practice. Long surrender charges are unpalatable. The products themselves are complex. The advisor has to know how to design the policy to do what the client wants – and then they’re on the hook for managing it. And on top of that, the underwriting process is a mystery. For a lot of advisors, the life insurance solution probably feels like it’s worse than the problem.

There seems to be three general schools of thought about how to convert financial advisors. The first, and by far the most successful, is to convince financial advisors to sell retail life insurance policies. Second, life insurers have correctly perceived that fee-only RIAs may be more receptive to life insurance if it is built on a zero-street-commission chassis, which is the strategy that Ameritas has been pursuing for years, TIAA pursued for a long time and Nationwide is now after as well with their new Advisory VUL.

The third school of thought is financial advisors will sell accumulation-oriented variable life insurance policies only if the underwriting process is painless, the issuance process is seamless, the design process is decision-less and the commission is heaped-less. Less is the key. Why? Because financial advisors aren’t insurance experts. If you’re not an expert, then choice is intimidating. The solution, then, isn’t to add – it’s to subtract.

There’s a lot of merit to this idea. Shoot, I espoused it ad nauseum during my time at MetLife/Brighthouse. It rings intuitively true. We all love choice and nuance when we’re experts in something and have experience with all of the options, but more choices reduce confidence if that’s not the case. Barry Schwartz’s excellent book The Paradox of Choice will disavow you of the notion that more choice is good simply for choice’s sake. And it would make sense that financial planners who aren’t familiar with life insurance would feel that way about our products. Less choice makes our products more approachable.

There have been many efforts to make this concept work in life insurance. John Hancock pursued this strategy in 2014 with its Simplified Life product, described then as an “easy-issue VUL financial solution.” The focus, from what I recall, was a quick underwriting process (8 days or less), a slick user interface and very few inputs to produce an overfunded, LIRP-type case design. Simplified Life never took off and died an unceremonious death a few years later. Equitable is chasing the same market with its Advantage Variable UL product, which has rapid underwriting, levelized compensation and very tight design parameters specifically focused on accumulation.

And now Lincoln has entered the fray with LifeGoals VUL, focusing its distribution efforts initially on its own Lincoln Financial Advisors and a select group of other broker-dealers. The whole pitch for LifeGoals is a straightforward product that pays asset-based compensation (0.6%) built on a hyper-simplified buying, design and administration process. There is only one underwriting class and the underwriting is a simple knock-out based on published criteria. Everything is entirely digital. Start-to-finish issue time is a few hours, at most. The product has a full suite of funds but offers model portfolios based on both active and passive fund options. What LifeGoals may lack in options, it makes up for in simplicity.

The same goes for the case design itself. All LifeGoals policies are issued with GPT and set up to be overfunded for a certain (and specified) period of time. During that period, the death benefit is set to Variable (Option 2/B). As soon as the client says they want to start taking income, the death benefit switches to Level (Option 1/A) and drops to the GPT corridor. It’s the standard overfunded, income-oriented “LIRP” design, but all of the design parameters and future administrative policy actions are locked down.

However, the problem with most income-oriented life insurance designs is that they require a lot of future administration. It’s impossible to automate income without putting the policy itself at risk – unless you have an incredibly powerful built-in and automatically triggered Overloan Protection feature that allows the client to pull every single dollar out of the policy, regardless of whether that happens in one fell swoop or stretched out over a long period of time.

As it turns out, that’s exactly what LifeGoals has. I’ve never seen anything like it. Once the Overloan Protection feature is automatically triggered by the policy switching from Variable to Level and reducing the death benefit to GPT corridor, the client can literally take out their entire account value in a policy loan without causing a lapse – and they can do it in one fell swoop or over an extended period of time. It doesn’t matter. Overloan Protection is already triggered. It takes all of the guesswork out of taking income from the policy because there’s no way to blow the policy up, which eliminates one of the key objections about using life insurance for retirement income. LifeGoals may not change the industry in the long-run, but this Overloan Protection feature just might.

In terms of process and design, LifeGoals is one of the cleanest, simplest and most elegant products I’ve seen. It is truly – forgive the term – VUL for dummies. It is the ultimate test of the core thesis of whether the advisors not selling VUL will change their mind if you make the implementation almost mindlessly simple. There may be advisors who have their minds and habits changed by LifeGoals. There may be clients who decide to use the product because it doesn’t have the trappings of traditional retail life insurance products. And on that score, I think and I hope that LifeGoals is a smash success. We, as an industry, need more products like this. We need companies who try to challenge the status quo. And for all of Lincoln’s flaws, they’ve always been willing to do that, and you have to applaud them for it.

However, I think that there may be a flaw in the core thesis that the complexity of life insurance is what’s keeping financial advisors out of the market. The problem with the idea is that, in my view, it underestimates the power of habit. Some advisors sell life insurance and some don’t. There are a myriad of reasons why. It’s possible that there are advisors sitting on the margin, just waiting for a simpler product and process to come along to get them off the margin and into the fray.

But, in my experience, those advisors are few and far between, one or two out of a hundred. The rest are either already convinced that life insurance is valuable enough to their practice and their clients to sell it in its current cumbersome and complex form – or they’re flat out not interested. LifeGoals will get a few folks off of the fence, but it likely won’t do much to get the rest to jump over.

That means that the most likely group of advisors who will take a hard look at LifeGoals are advisors already selling life insurance. The first thing they’re going to want to know is whether the product deserves a place on their shelf, a slot in their toolbelt. They’ll want to know, basically, if the dang thing is competitive. So let’s dig in.

Lincoln LifeGoals vs. Lincoln Asset Edge VUL

Mechanically, LifeGoals works like any other Variable UL policy, but there are some unique quirks to the structure – chief of which is the policy charge structure during the premium payment period which, again, is specified at the onset of the policy. During that period of time, all policy charges are fully guaranteed. The mortality element is a flat expense because the Net Amount at Risk (DB-AV) is flat thanks to the required Variable (Option B/2) death benefit, although the expense itself is actually a blend of Cost of Insurance charges and an Administrative Charge. The policy also has a guaranteed 0.6% M&E that stretches for 20 years – not coincidentally, that’s exactly how long and how much the asset-based compensation for the policy is as well. And, of course, there are no surrender charges.

The beautiful thing about the fully guaranteed nature of the initial policy period is that the Guaranteed and Current ledgers are identical over that period of time. For advisors who are fundamentally skeptical of insurance, they’ll be able to see that the policy cash values at the end of year 20 are the same on both ledgers. The only moving part over that period of time is the actual performance of the investments. After that point, the only non-guaranteed elements are the Cost of Insurance charges and a 0.5% non-guaranteed Persistency Bonus that is paid at the so-called Target Age, which is when income is scheduled to begin.

If you tally up all of the policy expenses in LifeGoals within the first 20 years and compare them to Lincoln’s retail product, AssetEdge VUL, the total charges from the cells I looked at were remarkably similar. Take a look at the charge structures for a 45 year old Male funding at $18,000 per year for 20 years, both policies with the same 7% gross rate and $280,400 death benefit, using a Standard risk class for Asset Edge:

YearPremiumLIfeGoals “Insurance Charge” (Admin + COI)LifeGoals 0.6% M&ELifeGoals Total ChargesAsset Edge VUL Premium LoadAsset Edge VUL Policy ChargesAsset Edge VUL COI ChargesAsset Edge Total Charges
118,0001,250561,3066302,9341133,677
218,0001,2501621,4126302,9341823,746
318,0001,2502751,5256302,9342363,800
418,0001,2503941,6446302,9342773,841
518,0001,2505201,7706302,9342973,861
618,0001,2506531,9036302,9343253,889
718,0001,2507942,0446302,9343593,923
818,0001,2509432,1936302,9344123,976
918,0001,2501,1012,3506302,9344514,015
1018,0001,2501,2682,5176302,9344684,032
1118,0001,2501,4442,6946301805101,320
1218,0001,2501,6312,8816301805611,371
1318,0001,2501,8293,0786301805801,390
1418,0001,2502,0383,2876301806391,449
1518,0001,2502,2593,5086301807121,522
1618,0001,2502,4933,7426301807621,572
1718,0001,2502,7403,9906301808771,687
1818,0001,2503,0024,2526301809731,783
1918,0001,2503,2794,5296301801,0201,830
2018,0001,2503,5724,8226301801,0761,886
Total55,44654,570

After 20 years, the difference is spitting distance at less than 2%. LifeGoals frontloads the Insurance Charges but backloads the M&E. Asset Edge VUL frontloads the Policy Expenses but backloads the Cost of Insurance Charges. In total, Asset Edge VUL has higher initial charges but lower later charges. And, of course, LifeGoals has the benefit of liquidity because it doesn’t have a surrender charge and the benefit of certainty because of all of the expenses are fully guaranteed.

But does it have the benefit of illustrated performance? At the end of 20 years, in this cell, LifeGoals stands at $621,368 and Asset Edge VUL (without illustrating the LEAR bonus) stands at $630,107. That translates to a difference in illustrated IRR of a little over 10bps. But if you look at illustrated income, LifeGoals has a slight edge at $55,614 in income from years 21-40 while Asset Edge VUL stands at $55,549.

However, it’s not a fair fight on income. Because of the unique OPR structure in LifeGoals, the income stream can solve for literally zero account value at the end of year 40. Asset Edge has to maintain value at the end of the income stream to keep the death benefit in-force. In terms of total value, Asset Edge has a slight edge – pun intended – despite the fact that the income levels are nearly identical.

If the policy charges are so similar, then why does Asset Edge VUL deliver more total value? The fund lineup. The LifeGoals illustrations I have use a passive fund lineup with a weighted average expense of 57 basis points. Using the same mix of funds in Asset Edge VUL, the weighted average expense is just 33bps, a difference of 24bps. The fund lineups aren’t exactly the same, but there is enough overlap to compare fundamental expense of like funds. On average, funds in LifeGoals are 25bps more expensive than the same funds in Asset Edge VUL. Therefore, illustrating a gross 7% rate in LifeGoals will result in a net rate that is about 25bps less than using the same gross 7% rate in Asset Edge VUL.

This phenomenon of loaded funds in Variable UL isn’t new and I’ve written about it several times over the years, but fund loading in LifeGoals is almost on a different planet relative to other VUL products. Lincoln has a marketing piece that directly compares the funds in LifeGoals with their retail counterparts, which is something I’ve never seen from a life insurer before. It allows for direct comparisons between street fund expenses and the expenses in the variable product. There are 74 funds in LifeGoals with a direct street counterpart where I could get complete expense information. Here’s the comparison of expenses using the cheapest share class for the retail funds available:

On average, the difference between the lowest cost retail fund expense and the fund expense in LifeGoals is an even 0.4%. For a lot of funds, the lowest cost share class was R-6, which is specifically used in retirement plans. A better comparison is an Institutional share class and that usually prices at about 0.1% higher than R-6. Given the mix of R-6 and other funds in the lineup, I would say that gap is really more like 0.35%.

Where does that money go? To Lincoln, presumably, and it’s probably not even the full amount. Asset Edge VUL has a 0.25% persistency bonus, which implies that the expected fund revenue share in the product is around that same amount. Asset Edge VUL has fund expenses that are, on average, 25bps lower than LifeGoals, which means that the total revenue share for LifeGoals is probably on the order of 50bps. Sound familiar? That’s exactly the size of the Persistency Bonus, which would probably be better termed as a non-guaranteed refund of fund revenue sharing agreements.

This brings us back to the reason why LifeGoals doesn’t beat Asset Edge VUL in terms of performance. For the first 20 years, LifeGoals is running a 50bps illustrated return deficit to Asset Edge VUL. When income starts and the 50bps Persistency Bonus kicks in, the two products have virtually identical expenses but Asset Edge VUL is holding a 0.1%+ lead in IRR. Hence, the slight gap in long-term illustrated value.

For all intents and purposes, LifeGoals and Asset Edge VUL are very, very close in terms of performance – despite the fact that they have very different policy charge structures – when run with identical parameters, which is how I did it. But I don’t think that’s an accurate reflection of how the two will be compared. Asset Edge VUL is vastly more flexible and advisors who are familiar with VUL will know how to translate that flexibility into designs that will potentially deliver better value to customers than the standardized designs in LifeGoals.

In terms of policy design, the most interesting thing about LifeGoals is what it’s not. Lincoln could have built this product to have the same level of transparency and asset-based compensation as Nationwide did with Advisory VUL, but they didn’t. They could have increased the asset-based compensation to at least match the 1% that most financial advisors charge on AUM, but they didn’t. They could have used the same slick process, tight design parameters and automated administration with a product that essentially mirrored Asset Edge VUL, but they didn’t.

In my view, the fact that Lincoln chose this particular LifeGoals design that sort of exists in the middle ground between a true advisor-oriented solution like Nationwide Advisory VUL and a traditional retail life insurance policy means that LifeGoals is the first of what will probably be a full suite of these sorts of products. It’s the beginning, not the end, of an exploration into how to win over the hearts, minds and clients of financial advisors who have traditionally shunned life insurance – regardless of whether this particular LifeGoals product is a success.