When it comes to investment options for universal life insurance (UL), it is all about the management expense ratio (MER). The ratios are gaining ever more importance as the variety of options grows and more insurers are offering managed fund investments.
While it is commonplace to evaluate the MER’s effect on returns when it comes to mutual funds, doing the same for UL is less common. Advisor and independent actuarial consultant Ashley Crozier, estimates that more than a quarter of all advisors don’t even understand the full impact of total MERs on UL investment returns. Further, he figures that up to half of all advisors don’t adjust their performance illustrations to account for differing MER impacts on return rates.
The problem is that the total MER paid out by a policyholder is a bit murky. With the more complicated managed options, for example, MERs tend to double up. Besides the MER paid to the policy issuer, consumers also have to pay the MERs of the underlying mutual funds.
That becomes especially important when it’s time to judge the investment value of a UL policy. Since UL investment options require additional fee payments, the total return is bound to be lower.
That is part of the reason why experts like Mr. Crozier and advisor Robert Haisman at Assante Estate and Insurance Services insist that UL should be sold foremost as insurance rather than as an investment. To do otherwise is to lose credibility, according to Mr. Haisman. It is clear that as far as investments go, there are better opportunities elsewhere.
On the other hand, if the policy is sold first as insurance, then the consumer will more easily understand the relative value of the immediate death benefit. They lose out on some percentage gains, but in return they get immediate coverage with a defined benefit amount.
As far as investment values go, Mr. Crozier cautions that in many cases the fees for managed fund investment options are higher than those for traditional options. Furthermore, the returns in illustrations for those options do not clearly state that the returns shown are net of the funds’ MER.
Transamerica Life Canada, for one, has decided to cut through the total rate uncertainty by offering a guaranteed rate on total MER. For example, all its passive index-linked options have a guaranteed total fee of 3%. Of this, 0.5% goes to commissions, 0.75% goes to premium tax, about 1% to the bonus paid back to the policyholder, 0.25% to management, and 0.25% to making a profit. The total 3% fee is guaranteed.
If the client also chooses to rescind the bonus, then the MER they will pay comes down further, says Joe Kordovi, pricing actuary and assistant vice-president for life product development and marketing at Transamerica. Another nuance: the amount of the bonus is fixed. It does not depend on the total accumulated funds. The guarantee on the total MER payment is a first in Canada, according to Mr. Kordovi.