Timothy C. Pfeifer, FSA, MAAA Pfeifer Advisory LLC October 15, 2012

2 The Question to be Addressed Over the next five to ten years, what will be the landscape for universal life products which are structured to build attractive cash accumulation values or provide income benefits rather than focus on death benefit protection?

3 Declared Rate Accumulation Universal Life Indexed Universal Life Variable Universal Life Interest Indexed Universal Life Survivorship Universal Life Guaranteed Lifetime Income Features

4 Interest Rate Levels Demographics Securities/State Regulation Securities/State Regulation Overall Economy Equity Market Volatility Shape of Yield Curve Federal Tax Changes/Rules Industry Capital

5  Little story as long as medium-long interest rates are so low.  The minimum needed rise in market rates to energize story is at least 200bps, and even that is probably insufficient.  Heavy persistency bonuses and reverse select and ultimate COIs and expense loads can sweeten story, but products may become very lapse supported.  Over the next five years, carriers who credit interest under a portfolio strategy have the greatest chance of success

6 Showcase for next 5-10 years Greater demands on product–accumulation, death protection, income Increase in participating carriers–to virtually all Some registered versions of product Market share of Universal Life sales 40% Level of interest rates determines breadth of indices

7 Market will still be dominated by a half-dozen companies with captive distribution B/Ds, Banks, and Wirehouses will continue turn to Indexed UL Only Hope for Greater VUL Penetration Embrace Guaranteed Benefits, which can be done given profit sources Leverage exemptions from AG38, illustration regs

8 Premise: Promise rising credited rates if rates rise Credited rate can be linked to external index like Treasury rates or Bond index Other policy components (e.g., death benefit) can be linked to rate movements Market hedging needed to lock-in liabilities Addresses anti- selective lapses if rates rise Product is virtually non-existent today

9 Generally not thought of as an accumulation product, but rather as a protection oriented estate planning vehicle But… Can be a very efficient tax- deferred cash accumulation vehicle for certain policyholders due to the low mortality cost drag: Middle income couple Business partners Income uses First-to-die rider adds flexibility College funding Indexing

10 Impact on Death Benefits, Riders, and other features Use of Policy Loans and Withdrawals to Deliver Income Income may be provided by General Account Insurer Guarantee A “cousin” to Annuity GLWBs, only better Biggest uncertainty is FIT treatment Use of Benefit Base concept or Account Value definition Another Similar Future Direction is a GMAB on an Indexed,Variable UL

Timothy C. Pfeifer, FSA, MAAA