#400 | MassMutual Apex VUL

When MassMutual rolled out Apex VUL in 2021, the name was unintentionally ironic. If you’re going to roll out a product and call it “apex,” it better be good. Apex isn’t an aspirational term. It’s a descriptor. A product called Apex had better be – quite literally – at the peak of the market in terms of competitiveness. Apex VUL wasn’t. Not even close. If anything, it was so far off of the peak that a more accurate term might have been Nadir VUL. Just doesn’t have the same ring to it though, does it?

The issue with Apex VUL was that it zigged while the broader VUL market zagged by optimizing competitiveness for moderately overfunded scenarios. Most modern VUL products follow the traditional methodology of recapturing commissions primarily through a 10-year “Base” policy charge structure while keeping the other pricing elements such as COIs and premium loads fairly lean. For example, Lincoln Asset Edge VUL on a 45 year old Preferred Male for $1M of death benefit has a 10-year Base charge of $5,690 for a total charge over 10 years of $56,900.

Apex VUL, by contrast, had $15,720 in Base charges in the same cell. But over 10 years, the total charges in Apex VUL are actually higher than Asset Edge VUL assuming a maximum non-MEC 8 Pay funding pattern. The difference, of course, is in premium loads and loaded COIs. Lincoln charges a 3.5% premium load whereas Apex VUL’s was nearly 8%. That’s quite a lot of money in a maximum non-MEC funding scenario. On COIs, Lincoln tallies up to a little over $15,000 in the first 20 years (assuming Option 2 all years) and Apex VUL rang in at over $42,000. The net result is that Apex VUL was calibrated more for scenarios where premiums are lower but longer. That makes sense for career distribution, but not necessarily for the independent market.

But Apex VUL zagged in an even more important way. Apex VUL carried a relatively large burden of fees on the assets rather than in explicit policy charges. Consider a simple question – would you rather the carrier make its profit in the first year through a discrete charge or over the life of the contract through a fee as a percentage of Account Value? You’d much rather have the charge in the first year. The asset-based fee has to be discounted by the carrier’s cost of capital, usually 10% or more, and then further discounted by lapses, surrenders and deaths.

On top of that, the carrier has to make assumptions about how the policy will be funded and will perform to calibrate the fee. If you overfund your policy or it performs very well, you’re going to be overpaying in terms of asset-based fees. For these reasons – and probably a few more – life insurers have generally moved away from pricing profitability from an asset-based fee. They generally try to just charge asset-based fees in order to cover asset-based expenses*. Otherwise, asset-based fees will chew up a huge portion of illustrated performance with essentially no pricing benefit. It’s a very inefficient way to recapture profitability because of the drag on illustrated performance.

In fact, most carriers in the VUL space have gone the opposite direction by offering persistency bonuses that can – as we’ve covered in other articles – actually generate near-zero or even negative net asset-based costs even after taking the fund expenses into account. In keeping with the trend, Apex VUL actually had a 0.25% Persistency Bonus that started in the 16^th year. That’s a pretty standard structure. What wasn’t standard, however, was the fact that the product had a whopping 0.8% in separate account asset-based fees for the first 10 years that dropped down to 0.4% thereafter. The Persistency Bonus didn’t even offset the asset-based fee drag – and it certainly didn’t offset the fund expenses. As a result, Apex VUL was hamstrung in terms of long-term performance.

The new version of the product, Apex VUL 2024, remedies the problem. Apex VUL 2024 drops the premium load to a scant 4% while slightly increasing the Base charge and the COI loading in a way that is congruent with the slightly higher Target premiums, especially for Option 2 death benefits. But more importantly, it solves the problem of long-term performance by dropping the asset charge to just 0.1% while maintaining the Persistency Bonus at 0.25%.

The net effect on illustrated policy performance in overfunded scenarios is massive. Below is a chart showing the IRR curves for accumulation VUL products from John Hancock, PacLife, Securian, Symetra, Nationwide, Prudential, Protective, Penn Mutual and Lincoln against the 2021 and 2024 versions of MassMutual Apex VUL. The other products are in gray and the two versions of Apex VUL are in differing shades of blue. Take a look.

Finally, Apex VUL lives up to its name – it’s literally at the peak of the market except for when its steep tail mortality slope starts to bite after age 90. However, there’s a bit more to the story. The illustrations above for all of the other products use the weighted average of the funds. Most of the products use standard, loaded variable funds with an average expense ratio between 0.5% and 0.7%. A couple of them – PacLife and Penn Mutual – have low-cost, unloaded funds that have average expenses of around 0.2%. Apex VUL, however, has both a “passive” and a non-passive fund lineup option with radically different expenses. Take a look at the fund lineup coded by category:

The average expense ratio for the Passive sleeve is just 0.18%. But for the overall product, it’s 0.59% – in line with the other products. If you select the weighted average of all of the funds, the relative performance for Apex VUL shifts quite a bit, as you can see below.

So what’s the “right” way to benchmark Apex VUL 2024? There’s no easy answer and, increasingly, that’s the problem with benchmarking Variable UL. There was a time when selecting “weighted average” for fund expenses was a reliable, universal benchmarking shortcut to create comparable illustrations because companies generally had similar fund profiles. That’s not true anymore. PacLife Admiral VUL has a smattering of low-cost funds interspersed with some higher expense funds for a weighted average fund expense of 21bps. Penn Mutual Accumulation VUL has 17 funds across a range of categories, but they’re all Vanguard. Symetra has 12 funds and they’re all low cost. Those all clearly fit in the low-cost category and default to a weighted average expense ratio that is justifiably low.

By contrast, other companies offer a slew of traditional funds but – as with Protective – two or three ultra-low cost funds, usually one equity and one fixed income. Is that enough to justify running the Protective illustration with an allocation only to those funds? Where’s the cutoff? If a product like Apex VUL has 9 solid low-cost funds across the major styleboxes that will fit most clients, can you make the argument that the proper benchmark is to use those Passive funds against the weighted average of other products that maybe only have one or two low cost funds? I think that’s plausible. But, by definition, it’s subjective. If clients don’t plan to allocate to those funds, then is it really an accurate representation of the mechanics of the product?

These are practical, not theoretical, questions. I’m often asked which company has the “best” Variable UL product and the implication is, always, that the best product means the best illustrating product. That’s not true of any life insurance product but, if there was a product where it is at least partially true, then it’s Variable UL for the simple reason that asset returns in Variable UL are not up to the life insurer’s discretion as in fixed life insurance products. However, comparing apples-to-apples in Variable UL requires a conscious choice about how to illustrate the fund allocation. And if you’re not conscious about it, you may be showing something you didn’t mean to show and drawing conclusions that you didn’t mean to draw.

There’s a better way to look at Variable UL. Forget the illustration. Pull the policy charge report and actually understand what’s going on. What are the loads? What are the base charges? What does the COI slope look like? Are there asset based charges and/or persistency credits? That’s one side of the equation. On the other side is the fund allocation. Does this particular client care about fund brand name? Do they want passive or active funds? Are they focused on cost or value? In other words, have the conversation that every investment professional should have in every client interaction, which is to focus on more than just pure performance or pure fund expense. The “right” answer is a blend of the two – and in the context of VUL, that includes the intrinsic policy charges too.

On that score, there’s a case to be made for Apex VUL 2024. Unlike VUL products that are built to illustrate well with only low cost funds, Apex VUL 2024 offers a full fund suite. And unlike VUL products that have traditionally fully loaded funds, Apex VUL 2024 doesn’t necessarily rely on fund revenue to fuel illustrated performance because the product still deducts an asset-based charge. It’s an interesting blend that delivers a compelling story with the Passive fund lineup, if that’s a fit for the client. But if your client isn’t going to be in those 9 funds, then be wary. You may be benchmarking this product – and lots of other products – incorrectly. The burden is on advisors to bring fund allocation to a head earlier in the process and, if that can’t be done, to disclose that fund choices will have a material impact on the overall illustrated cost ratio of the contract.

Interestingly, the fund lineup in Apex VUL 2024 was actually available in Apex VUL 2021 with one exception – the Vest US Large Cap 10% Buffer fund that is newly available in the 2024 version of Apex and has been in market with OneAmerica’s VUL for over a year. The story for this fund is way more than first meets the eye. It’s a defined outcome fund (DOF), as we’ve covered in previous articles, that offers indexed crediting in a mutual fund wrapper. It has point-to-point payoffs with buffers and caps, just like you’re used to seeing in other products. Crucially, the Vest fund also automatically spreads allocations across all 12 active monthly segments, so you’re effectively dollar cost averaging with each allocation. It’s a very slick story that lends itself to real competition against traditional indexed insurance products without MassMutual actually having to do the indexed crediting itself.

Apex VUL 2024 is unquestionably an improvement over the previous version. I think you could even argue that it gives the products offered by the established players in this space a run for their money. The fact that MassMutual, which has seemingly been content with growing to challenge Northwestern Mutual for the top spot in Whole Life, is now targeting Variable UL is a validation of the product category. The third largest Variable UL seller in the country isn’t Prudential, Lincoln or Pacific Life – it’s Northwestern Mutual. In my experience, advisors at NM position Variable UL as a complement to Whole Life, not a competitor. Both Whole Life and VUL are natural fits for a holistic financial plan, but they fit in different spots. There is no reason why MassMutual shouldn’t be able to make the same logic work with its own career advisors and – who knows? – maybe even reluctant third party distributors in the MMSD channel.

*A prime example of this is in fixed insurance products where C-1 RBC capital is asset-based. If you’re posting (for example) 6% in RBC on assets, then it makes sense to charge 0.6% in an asset-based fee to maintain a 10% target IRR. Variable UL doesn’t have C-1 because it’s a separate account product, but there are other asset-based capital requirements (C-4, even) that arguably should be covered with an asset-based charge. But it should be very small compared to a fixed product.