20-Plus Years of Investment in Variable Life - Part 2

When variable life was first introduced, critics questioned the competency of insurance companies to manage equity accounts. This criticism has been dealt with in two ways. One way has been to hire the best outside money managers available from the mutual fund world to manage similar sub-accounts within life insurance policies. Insurance companies give the policy owner a number of choices among management firms with which they are familiar and which are well regarded. Policy owners find that they have two managers working for them in these policies.

First, the insurance company searches the world for the best managers to manage the assets in the sub-accounts and then performs the on­going task of monitoring their performance and replacing the ones they find lacking. Then, for example, if the insurance company hires a Fidelity manager, Fidelity also is monitoring that manager and will work hard to make sure its best talent is managing the account. This gives the policy owner the opportunity to move money among the sub-accounts of a policy without having to pay income taxes or expenses, and across fund families as provided within the contract by the manager of managers. This is almost impossible to do within taxable mutual fund accounts without exorbitant expense and taxation.

In addition to hiring outside money managers, the life insurance industry itself has been proved to have some of the best. Tyler Smith of Equitable Life Assurance Society created common stock fund on January 13, 1976, and managed it through the year 2000, a period of 24 years during which he provided Life Insurance investors in his fund an average annual compound rate of return of 14.62 percent.

Variable life provides the potential for future growth of the death benefit if the investment experience proves to be favorable. A LIMRA study entitled Tire Performance of Variable Life reported that only three companies sold equity-based variable life insurance before 1981. Variable life sales from 1976 to 1980 represented only about 1 percent of the life insurance market. By 1981 approximately 10 companies were selling the product, and market share increased to 2.5 percent of the ordinary life premium. LIMRA reported that variable life sales remained fairly flat at 3 percent in 1986. This seems a rather inauspicious beginning for the product born in 1976. Its growth was inhibited by the cost to the companies of the development of the product, the licensing requirements for agents, and the agents' discomfort with mutual fund products.