INDEXED UNIVERSAL LIFE
Understanding indexed life illustrations
At what rate do we illustrate the cash value growth of indexed life
insurance products?
This is a question that has plagued the life insurance industry since indexed universal life (IUL)
was developed in January 1997. The National Association for Insurance Commissioners (NAIC)
adopted the life insurance illustration model regulation two years before the development of
IUL; it did not address how one should illustrate these unique products promising downside
protection and upside potential. So, how should one illustrate indexed life?
Sheryl J. Moore is president
& CEO of Wink, Inc. She has
authored books and her articles
are featured in dozens of industry
trade publications. Neither Sheryl
J. Moore, nor Wink, Inc. sell or
endorse any financial services
products. She can be reached at
[email protected].
History
Insurance companies did their best to interpret their responsibilities, as it relates to the
illustration regulations. As a result of the gap in guidance with the existing NAIC’s life insurance
illustration model regulation, insurance companies developed a method for determining
illustrated rates on indexed life themselves. They used their own discretion for illustrating
“reasonable” expectations for non-guaranteed current values on indexed products for nearly
19 years. The most obvious problem was that there was no uniformity in companies being
given their own discretion to determine illustrated rate lookback periods. At one time, there
were ten different methods that insurance companies used, in determining the rate at which
IUL illustrations should be run! The more important matter, however, was that there were IULs
being illustrated at rates in excess of 10%. Given that Variable UL was being illustrated at a rate
of 8% or less, the industry called for reforms.
Eventually, the American Council of Life Insurers (ACLI) stepped-in and attempted to obtain
consensus in the life insurance industry on the matter of indexed life illustrated rates. The
work done with the ACLI was the basis for the NAIC’s Actuarial Guideline 49 (AG49) regulation,
which provides guidance on indexed life illustrated rates. There were initially two phases of
AG49: the first leg addressed maximum illustrated rates in September of 2015, and the second
addressed loan rates in March 2016.
To simplify matters — under AG49, the maximum illustrated rate for any indexed life indexed
crediting strategy cannot exceed a historical lookback rate of the product’s S&P 500 annual
point-to-point strategy, assuming 100% participation rate, with a cap but no spread rate, and
a floor of 0.00%. The lookback rate is determined by averaging the annualized rates from all
the 25-year rolling periods over the past 65 years of S&P 500 index returns. It is important to
note here that two insurance companies with different S&P 500 annual point-to-point caps will
calculate different maximum illustrated rates. More on that later…
Ultimately, AG49 reduced
the maximum rate at
which indexed life was
illustrating a mere 0.95%.
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Perspectives
Q2 2019
An oversight in the regulation
There were loopholes with the standards set by AG49. In May 2015 the indexed life market
was marked by the addition of the very first “buy-up caps” in the industry. Simply stated, “buy-
up caps” gave indexed product purchasers the ability to have higher caps, in exchange for an
annual account value charge. Effectively, this gave the insurance company the opportunity to
subsidize their options budget. So, where an IUL purchaser may normally have a 12% cap, a
buy-up cap may provide the option for a 15% cap, in exchange for an annual fee of 1%. Would
the client receive 15%? Maybe. Maybe not. Would they experience an additional charge of 1%
each year? Absolutely. This innovation gave insurance companies the opportunity to increase
their illustrated rates under AG49. It also resulted in insurance companies charging the
policyholder as much as 6% annually, just for higher caps (and therefore illustrated values).
Product development is ahead of regulation
Yet again, product development was ahead of regulation with AG49. The month before the
first phase of AG49 was instituted, an insurance company introduced a “multiplier” on their
IUL, which multiplied any indexed interest earned by [10%]. While this was not reflected in the
“illustrated rate,” of the illustration, the non-guaranteed/current values of the illustration took
the multiplier into effect. So, although the illustrated rate may be [6%], the cash values may be
reflecting a rate of [9.3%] if there is a [50%] multiplier on the policy (6% x 150% = 9%). Most
salespeople don’t understand this, but more worrisome is that most distributors don’t either.
Many multipliers now have an annual account value charge for the feature. This has resulted
in insurance companies charging the policyholder as much as 7.50% annually, just for the
multiplier alone.
And this is all in addition to the charges for the life insurance. Typically, indexed life charges
are 10% – 20% of the premiums paid on a maximum non-MEC (Modified Endowment Contract)
cash accumulation solve. Take those charges, and add-in any buy-up cap charges and multiplier
charges, and what do you get?
It is important to remember that we are discussing non-guaranteed/current values on an
illustration (or what I call “best case scenario”). It behooves us all to remember that some
insurance companies have actually increased their insurance charges on inforce blocks of
universal life policies. It is also relevant that insurance companies have not been afraid to
reduce their caps/participation rates, or increase their spread rates, on inforce indexed life
business. Could the annual fees for buy-up caps increase? You bet. Could the caps afforded
through the buy-up options go down in years 2+? Yep. Could multipliers be reduced, once the
policy is inforce? Without a doubt. Could those inforce charges increase? You betcha.
Indexed life is a fabulous product. It provides an invaluable ability for the purchaser to
earn more than the paltry 3.56% average rate being credited on traditional UL today, while
still protecting them from market risk. However, it has never been more important that the
advisor/agent selling indexed life understand what they are putting in-front of their client.
What you see is not what you get! Prepare your agents, so that they can be educated on what
they are presenting to their clients.
Today, the charges
on IUL are as much
as 121% of the
premiums paid,
depending on
the company and
product.
www.nailba.org
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