Variable Life Insurance Product Design

Abstract

Companies wishing to offer variable life insurance policies will have a range of choice as to various aspects of the actual product design, and the purpose of this paper is to discuss a number of the areas involved. The three main types of variable life insurance benefit designs which have recently been proposed for issuance in the United States are described. Tables are presented and discussed which show illustrative face amounts under these three designs for various assumed levels of actual net investment performance. Other aspects of product design, apart from selection of the basic design to be used, are outlined and various alternative approaches are set forth. The final section of the paper deals with the main aspects involved in pricing variable life insurance policies. During the last several years, there has been considerable discussion of variable life insurance policies which would have the following two primary characteristics: (1) The insurance company would hold the entire reserve for the basic life insurance benefits under the policy in a separate investment account, the assets of which would be invested primarily in equities. (2) The policy would be issued for a specified initial face amount. Thereafter, benefits would be appropriately adjusted so as to reflect the actual net investment performance of the separate account. However, the investment risk borne by the policyowner would be modified to the extent that the insurance company would guarantee that the death benefit would never be less than the initial face amount, even if the net investment performance Walter N. Miller, B.A., F.S.A., is Second Vice President and Actuary of the New York Life Insurance Company. He is a member of the American Academy of Actuaries and is Chairman of the Committee on Continuing Education of the Society of Actuaries. This paper was presented at the 1971 Annual Meeting of A.R.I.A. of the separate account turned out to be unfavorable. Considerable progress has been made in the area of amending state insurance laws to permit the issuance of this type of variable life insurance policy, and discussions are going forward with the SEC regarding the important question of the extent, if any, to which such policies will become subject to regulation under Federal Securities Laws. The purpose of this paper is to discuss various aspects involved in designing this type of variable life insurance product.