Index Universal Life Changes


Index Universal Life (IUL) Changes (April 2015)

A level playing field is here with the expected phased implementation of new regulations for IUL illustrations (AG49). Read about it here – New IUL Illustration Rules. While the focus is on regulating how the product is illustrated, it has already caused sweeping changes in IUL product development with more new product launches to follow.

Why? Some products were being illustrated at rates in excess of 10% and many carriers permitted >8%. For most products, maximum illustrated crediting rates will now be limited to rates of under 7%, depending on how the product works. Thus, all of the product complexity found in most existing IUL products designed for crediting high rates when markets rise won’t matter much: You can’t sell what you can’t illustrate. So the next wave of products will be IULs that perform well at lower assumed rates. To accomplish that, carriers are bringing back some old product features from the 1980s and 1990s. Expect new products to feature persistency, mortality or related bonuses which credit higher interest rates or lower charges in future years. For example, Lincoln has introduced a new product which features a guaranteed persistency bonus in year 16+ of 55bp plus a guaranteed cap reduction “bail-out” feature. Also, expect lower early policy loads and lower early expense charges in new IULs that are more “protection” focused. So while “max funded” sales will continue, the end result of the new changes is likely to be intense competition for lowest premium rather than highest cash value. But, be careful. Some features will be guaranteed while others will not. Remember: A mostly non-guaranteed IUL is only as good as the carrier offering it says it is! And we should not forget what happened in the 1990s when UL and VUL products were sold at “minimum” premiums…

So, the game of “race to the top”, based on touting the highest interest rate, is shifting to a “race to the bottom”, where low expenses and premiums will become the norm. We expect that carriers may choose to make more frequent cap changes than they have in the past and may compromise their corporate ROE targets for the product line for tactical sales advantage.  We have been tracking these ongoing developments so contact us for assistance with making good choices for your clients.

Summary

  • Standard lookback and historical percentile methodologies
  • Reduced maximum illustrative rates
  • Required “alternate scale” assumed rate ledger
  • Dissuades designs that select an index account primarily for its ability to illustrate high returns
  • Limits illustrated loan leverage

September 1, 2015 AG49 implementation

March 1, 2016 implementation

  • “Alternate scale” ledger
  • Maximum loan leverage of 1%
  • Historical percentiles

For a primer on IUL and the reasons behind the upcoming changes, please read this AALU Washington Report Newswire from October 2014 on Developments in the IUL marketplace.