#338 | New York Life Wealth Plus

Quick Take

New York Life’s new Secure Wealth Plus is a direct competitor to Mass Mutual and Guardian in the 2% 10 Pay Whole Life space – and it delivers the goods. First year liquidity is at the top of the heap and, more importantly, so is illustrated performance. But where Secure Wealth Plus really shines, at least relative to New York Life’s traditional Custom Whole life Product, is the quick and simple underwriting process. What’s the give? SWP pays less compensation by a meaningful margin than its closest competitors. And to make matters more interesting, New York Life simultaneously rolled out Market Wealth Plus, a fully levelized compensation Variable UL product with nearly 100% first year cash values in the first year and the same underwriting program as Secure Wealth Plus. Will agents go for the tradeoff of compensation for liquidity, performance (at least in the case of SWP) and ease of sale? We shall see.

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The analogy I’ve been using in presentations recently is that all of the product changes in 2021 due to the new 2% 7702 Rate were something akin to the flop in poker – and now all of the insurers are reevaluating their cards and figuring out how to play their hand. We’ve already seen some action. Guardian released a 3% 15 Pay product to complement their 2% 10 Pay offering. MassMutual made the same move, but with a 12 Pay. Both companies were trying to give their agents a product with richer guarantees, but less accumulation potential, than the pure-bred 2% 10 Pay products.

New York Life, however, played the open differently. NYL has long filed all of its Whole Life pay periods under a single Custom Whole Life chassis, which meant that all of the pay periods used the same 3% rate. As a result, New York Life’s 3% Custom Whole Life (CWL) funded as a true 10 Pay looks very different than MassMutual’s, its chief competitor. For a given level of premium, New York Life’s death benefit is higher, guaranteed values are stronger and illustrated cash value performance is lower. There’s a clear market for a product like that, as evidenced by the fact that both Guardian and MassMutual have released 3% short-pay products, but my understanding is that although New York Life’s 10 Pay sales have grown, it pales in comparison to MassMutual’s 10 Pay. Now, it’s time for New York Life to play the flop.

Enter Secure Wealth Plus (SWP), a 2% 10 Pay product that is designed to be sold exclusively for accumulation. In theory, reducing the guaranteed rate in a Whole Life product produces higher premiums, weaker guarantees and stronger illustrated cash value performance. That’s exactly what we see in SWP, which sports premiums that are 55% higher than CWL for a 45 year old male. As a result, guaranteed performance is weaker. CWL produces long-term guaranteed cash value IRRs of nearly 2%, but SWP barely cracks 0.6%.

What about illustrated performance? This is the first time we’ve been able to compare a 3% 10 Pay directly against a 2% 10 Pay issued by the same company. Compared to CWL, Secure Wealth Plus has higher initial values and better long-term performance, but actually performs slightly worse than CWL in intermediate periods. Take a look at the illustrated cash value IRRs for both products over time on a 45 year old Male:

At first blush, the results are a bit counterintuitive. Why would SWP have so much early value and then lag CWL, only to then blow past it in terms of long-term IRR? In my view, we can chalk this up to two things.

First, a 10 Pay product at 2% will naturally materialize cash values differently than a 10 Pay product at 3%. Both products have to accelerate guaranteed cash values quickly during the premium payment period because afterwards it’s just a matter of deducting the 2017 CSO expense and crediting the guaranteed interest rate. The lower the rate, the faster the acceleration in guaranteed cash values. After 10 years, for example, guaranteed cash value in SWP is 59% of the guaranteed death benefit. In CWL, it’s 50%. But CWL has a death benefit that is more than 1.5 times the death benefit in SWP, which means that total guaranteed cash value in year 10 must be substantially higher in CWL. Take a look:

In my view, the fact that SWP lags CWL by year 10 is a simple function of that fact that CWL is a relatively cheap product with strong guarantees. 93% of the current cash value in CWL in year 10 is from guarantees compared to just 79% in SWP. But after year 10, the guaranteed cash value growth slows down and becomes a smaller and smaller proportion of the overall performance. By age 100, guaranteed cash values are just 26% of total illustrated cash values for CWL and 14% for SWP. In the short run, guarantees dominate. In the long run, it’s all about illustrated performance.

There, SWP has a built-in advantage over CWP. The lower guaranteed rate in SWP manifests not only in higher premiums, but also in a tighter CVAT corridor, which means that every dollar of cash value in SWP requires less death benefit than in CWL. For example, the death benefit to cash value ratio in CWL is 1.49 at age 70 and drops to 1.09 at age 90. For SWL, it’s just 1.29 at age 70 and 1.04 at age 90. As with any 2% product, the fact that SWP has to carry so little death benefit means that, all else being equal, SWP should smoke CWL in terms of illustrated performance – and it does. Long term IRRs in SWP, as shown above, are 35bps higher than in CWL. How much of that is simply due to the lower guaranteed interest rate and lower death benefit corridor? A lot of it.

But not all of it. That brings us to the second consideration – design. It would be unfair to say that SWP is just CWL with a 2% guaranteed rate. It is much more than that. New York Life is clearly trying to dominate the 2% 10 Pay market currently held by Mass Mutual and Guardian with a three-pronged attack – short-term liquidity, long-term illustrated performance and, finally, the underwriting process.

New York Life has traditionally geared its products towards restricted initial liquidity but strong long-term performance. Both the current 3% CWL and the former 4% CWL had zero cash value in the first year. The problem, though, is that Whole Life is increasingly sold for asset repositioning. Zero initial values make that harder, especially with the massive premiums in 2% products. Mass Mutual offers first year liquidity in the 38% range (for this cell). Guardian is around 41%. SWP clocks in at 53% – not exactly enhanced cash value territory, but not zero, either. For New York Life, it’s a departure from the norm and SWP handedly beats its closest competitors in terms of first year cash values.

Typically, stronger short-term values means reduced long-term performance. That’s not the case with SWP. Take a look at the cash value IRRs over time for SWP, CWL, Mass Mutual and Guardian in the same cell:

What’s really interesting, though, is how SWP does it. Take a look at the same 4 products over the same period, but this time rather than looking at cash value IRR, we’re going to look at year-over-year illustrated cash value growth:

SWP quite clearly accelerates the cash value growth after the 10^th year in a way that none of the other products – including CWL – do. Consider the fact that New York Life’s dividend interest rate is 5.8%, which is lower than the year-over-year cash value growth in SWP in year 10. This is a design feature of SWP. The product looks like it constrains intermediate cash values a bit in order to provide stronger long-term benefits. For a product that is designed for long-term accumulation, it’s hard to argue with NYL about the merits of that tradeoff.

In terms of illustrated income, which is a big part of the sales pitch for these products, New York Life (probably begrudgingly) followed Mass Mutual’s lead in dropping their guaranteed minimum loan rate to 3%. Last year, when New York Life was presumably working on this product, that would have meant that SWP would illustrate loan rates near the guaranteed minimum just like Mass Mutual’s 2% 10 Pay was doing at the same time. However, rates have come up so much that the guarantees are no longer in play. Mass Mutual and New York Life’s loan rates are now largely in sync. Guardian, by contrast, using direct recognition loans – and, as I’ve written before, that’s not necessarily a bad thing, particularly when you consider that the long-term IRR of SWP is below the current policy loan rate.

The final dimension of attack is, in my view, probably the most interesting – underwriting. I’ve long contended that high-funded policies should be underwritten more leniently than thin-funded policies for the simple reason that mortality impact on a high-funded policy is a rounding error. Being wrong on a high-funded policy has a very different financial implication to the insurer than being wrong on a thin-funded policy. You could upgrade every single Standard or better applicant to Preferred Best and the overall impact on IRR for a high-funded policy would be close to negligible.

We actually put this theory to the test in 2015 at MetLife with Enhanced Rate Plus, a program available only on our 10 Pay Whole Life product that upgraded every single Standard applicant to Elite without any medical exams or records in 48 hours or less (and had a 70%+ pass rate). To say that it was a success would put it mildly – we tripled our sales run rate almost overnight.

Since then, there have been a couple of other companies that have pursued similar tactics. F&G Life rolled out ExecuDex with Simplicity and the product had a Funding Bonus Rider, which basically allowed F&G to offer expedited underwriting with substandard mortality (think simplified issue) but if the product is funded to a certain threshold, a bonus kicks in to bring the performance up to where it would have been if the policy was issued at Preferred. Allianz just rolled out an upgrade program from Standard to Preferred Best, which makes sense given that Allianz is exclusively in the accumulation market.

This logic works. More companies should do it and I’m surprised that they haven’t. The lightbulb went off for me at MetLife when I ran a Standard 10 Pay illustration and an Elite 10 Pay illustration and the premium difference, for the same non-guaranteed values, was less than 5%. And that was on the old 4% Whole Life chassis that were cheaper and carried more death benefit than the current 3% and 2% 10 Pay products.

With SWP, New York Life is employing the same logic. For premiums below $150k, New York Life simply requires that the client fill out the Part II and they’ll receive an offer typically within 24-48 hours. SWP has four underwriting classes – Premier Plus, Premier, Quality and Minor. Premier Plus is roughly best class. Standard to Preferred gets lumped into Premier. Quality is substandard. Kudos to the New York Life for that one. Hurt feelings and tough conversations averted. Next time, maybe they should just call it, I don’t know, Elite Preferred. Why not?

Over the long run, the cash value IRR difference between Premier Plus and Premier is a mere 10bps. It’s hardly enough to affect the buying decision. Don’t get hung up on the rate class. The important part is that the underwriting is easy. And why is it so easy? Because there’s so little mortality risk in this product. And I hardly think New York Life will be the last company to put the pieces of that puzzle together.

In short, SWP is a force to be reckoned with in the accumulation Whole Life space. It wins where it counts – liquidity, performance and process. It’s hard for me to imagine that SWP doesn’t emerge as the benchmark for 10 Pay Whole Life, although the margin is razor thin with MassMutual and dividend actions over the next few weeks may be enough to swing it one way or the other. New York Life is putting plenty of chips into the pile.

But NYL also decided to make a bit of a side bet with another Wealth Plus product – Market Wealth Plus (MWP), a Variable UL product also built exclusively for accumulation and sold with the same underwriting program as Secure Wealth Plus. I’ve written before that accumulation-oriented VUL underwent something of a miraculous growth spirt in 2021, topping a billion dollars in sales and a 128% sales increase from 2020. That trend has continued through Q2 of 2022, with the category posting 70% growth over Q2 of last year. It’s a good time to be in accumulation-oriented VUL.

Market Wealth Plus, however, isn’t your standard accumulation VUL. Unlike the vast majority of products in the market, it’s oriented towards early liquidity, with early cash values that nearly break even in the first year when illustrated at 8%. The tradeoff, though, is compensation. MWP pays compensation as a single-digit percentage of premium for the first 7 years then switches to a very thin asset-based compensation. Total compensation in MWP is about the same as a standard Variable UL policy that pays heaped compensation plus 3% renewals if both policies are funded to the maximum non-MEC premium. On a net present value basis, MWP likely has less compensation than a traditional Variable UL. If that’s the case, then it better blow the doors off of its competitors in terms of performance.

It doesn’t, at least not the way I looked at it. MWP isn’t exactly a cheap product. Its fund lineup has average expenses of around 65bps, which towards the higher end of the VUL market. It has a fixed “administrative charge” that is substantial and lasts for over 30 years and then starts to taper off. The M&E is currently 0%, but has a guaranteed max of 0.75%. The product also has a Persistency Credit of 0.25% to 0.40% that starts after year 10. But it only applies to balances north of $250,000 and only policyholders with attained age less than 44 can go all the way up to 0.4%, and only then if they have cash value over $500,000.

In my view, Market Wealth Plus is something of an experiment – will agents sell a simple issue, high liquidity Variable UL from a top-tier insurer even if the fees and long-term illustrated performance aren’t particularly competitive? Northwestern Mutual sells boatloads of its Variable UL even though it doesn’t exactly jump off of the page. Equitable has seen success with a similarly priced, positioned and compensated product, Equitable Advantage (VUL), in its career channel. New York Life might find a home for this product, as long as its agents can buy into the compensation structure. We shall see.

However, there is a bit of experimentation going on with Secure Wealth Plus as well. In terms of performance, New York Life knew exactly what it was doing and executed with aplomb. Secure Wealth Plus is designed to stake out turf in the accumulation Whole Life market and it’s hard to imagine that it won’t succeed compensation. But like Market Wealth Plus, SWP sports a leaner compensation structure than some of its competitors and its own Custom Whole Life stablemate. That’s going to make things interesting. For all of the talk about client best interest, there is no doubt that compensation drives business and behavior. By how much is the matter of debate – and SWP is going to serve as a very interesting data point.