Carriers ’ response and the impact on products
In 2015 , when AG 49 was enacted , carriers were facing five years of historic low interest rates with no end in sight . That downward cap pressure combined with new regulation drove many IUL carriers to develop bonuses and multipliers to illustrate more favorable long-term performance potential .
For example , a carrier could charge an additional 4 percent on the account value in exchange for a 200 percent multiplier on credited interest . If the illustrated rate was 6 percent , the combination of the multiplier minus the account value charge would increase the illustrated growth in the account value from 6 to 8 percent . It ’ s important to understand that even if there ’ s a year with a zero percent credited rate and no bonus is applied , the policy is still saddled with the 4 percent annual expense charge in addition to all traditional expense charges within an IUL .
While the features themselves aren ’ t inherently good or bad , it made the illustrations look like they did pre-AG 49 , attracting attention and sales for products that likely would underdeliver on the projections — for instance , if a zero was credited . As you can see , the performance is drastically affected .
The effects of 0 % indexed interest every fourth year
Standard : Based on hypothetical illustration based on best-case market scenario 1 0 % 4th year : Based on hypothetical illustration based on typical market scenario 2
120,000
100,000
80,000
60,000
40,000
20,000
0
77,366
49 % decrease from best-case 39,115
Carrier A
Illustration assumptions : Male , age 45 preferred non-tobacco , $ 25,000 premium ages 45 – 64 ( 20-years ), max distributions ages 65 – 84 ( 20-years ) using the illustration default variable income loan rate .
100,265
1 “ Best case market scenario ” uses AG 49 max illustrated rate every year 2 “ Typical market scenario ” uses AG 49 max illustrated rate with 0 % every 4th year
65 % decrease from best-case 34,779
Carrier B
118,020
AG 49A means a more conservative IUL illustration . However , the silver lining is that performance is likely to exceed client expectations .
79 % decrease from best-case 24,994
Carrier C
The NAIC saw how this might lead to potential risk and confusion and updated AG 49 with additional guidelines intended to provide more protection to clients .
What ’ s new With these updates , dubbed AG 49A , the illustrated rate will be tied to carrier economics rather than cap rate , index , crediting strategy , or other features offered at any given time . Meaning , they will assess a carrier ’ s ability to buy options to back a product and translate that to a cap rate . The backtesting of that cap dictates how much growth can be illustrated . Additionally , maximum arbitrage will drop from 1 percent to 50 basis points . This naturally leads to a more conservative illustration , increasing the importance of selling IUL off benefits rather than projected performance . To many , this could be a rude awakening .
What it means to the industry
Although carriers will no longer be able to use bonuses and multipliers to illustrate their product more favorably , it doesn ’ t mean they won ’ t be able to offer them . Whether they do , remains to be seen . Either way , client-conscious carriers will differentiate based on pricing and product development advantages .
Illustration changes are likely to have a drastic effect on the industry but vary depending on the type of sale , e . g ., premium finance , supplemental retirement income , or estate and business planning . However , if an aggressive illustration is needed to sell IUL — you ’ re likely speaking to the wrong client .
AG 49A continued on page 18
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