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AG 49 Targets Fantasy Returns in IUL Illustrations, Policy Loans

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The National Association of Insurance Commissioners (NAIC) ushered in a new era in the illustration of indexed universal life (IUL) products last month when Actuarial Guideline (AG) 49 went into effect.

AG 49’s latest provisions focus on policy loans and illustration disclosures used to map out the future growth of cash values and death benefits. Some observers say the changes will install some long-overdue corrections in what they described as questionable behavior.

“Actuarial Guideline 49 means nothing to the agent presenting realistic proposals to their indexed life prospects,” said Sheryl J. Moore, president and CEO of Moore Market Intelligence, the publisher of Wink’s Sales & Market Report. “However, to agents that are trying to pitch indexed life as a way to ‘make money off your life insurance,’ it has an impact. Gone are the days of illustrating 10 percent returns and 4 percent loans, which results in a positive arbitrage of 6 percent. Now, you are forced to undersell and over deliver.”

But what will agents be able to show? Companies will need to help fill in the blanks.

“The carriers will need to come up with disclosure language — and a heavy dose of training for the agents,” said Richard Weber, managing director of The Ethical Edge, a fee-only insurance advisory in Pleasant Hill, Calif.

A heavy dose, indeed.

AG 49 limits interest rate differences that can be illustrated between the rate credited to the loaned amount and the corresponding loan rate charged to the loan balance.

If the illustration includes a policy loan, the illustrated rate credited to the loan balance cannot exceed the illustrated loan charge by more than 1 percent, according to a product bulletin issued by American International Group (AIG) in August.

That means that for a carrier charging 6 percent loan interest, for example, the maximum illustrated rate on the loan balance cannot exceed 7 percent.  In other words, AG 49 slammed the brakes on wide interest-rate differentials, also referred to as “loan arbitrage,” which played into the hands of skilled agents.

Separate from the loan illustration disclosures, agents also have to present three other new illustration disclosures as of March 1.

New disclosures include, according to the AIG product bulletin:

» A ledger illustrated at the fixed account interest rate. If the illustration includes a loan, the illustrated rates credited to the loan balance cannot exceed the illustrated loan charge.

» A table showing the minimum and maximum of all the 25-year look-back rates derived under new maximum illustrated rate calculations.

» Another table showing actual historical performance over the most recent 20-year period for each index account, along with hypothetical interest rates that would have resulted based on the product’s cap, participation and floor rates.

The illustration disclosures are designed to help agents and clients better understand how IUL products perform over time.
Weber said the changes are “just another moving part amongst the many, and it is not easy to see the interaction between all those parts.”

Leveling the Playing Field

In September 2015, the first of AG 49’s changes took effect for new IUL policies by lowering the maximum crediting rates that could be illustrated. This was a first attempt to reconcile the fact that any constant rate assumption cannot accurately reflect the way index returns will ultimately affect a policy under “real-world,” volatile conditions.

To get a sense of the changes AG 49 brought to rate illustrations, one of three iterations within AIG’s Value+ IUL product line, for example. Based on caps and participation rates from Aug. 12, 2015, it went from a maximum illustrated rate of 6.86 percent to a maximum illustrated rate of 6.06 percent, the AIG document shows.

One of AIG’s two Elite Index II IUL configurations from the same date dropped from 7.51 to 6.56 percent.

Proponents of AG 49 said the changes would help most agents compete on a more level playing field as index returns calculated with the same metrics — absent loads and charges — turned up the same result.

Although, ideally, two agents illustrating the IULs using the same index selection and product structure from two different carriers should be identical or nearly identical, there are still differences in policy expenses and other factors between different carrier products that cannot be readily addressed by regulation alone.

De-emphasizing high assumed crediting rates should allow agents to emphasize contractual elements such as loads and charges that aren’t projected as part of the index return, said Tim Pfeifer, president of Pfeifer Advisory, an insurance and annuity specialist in Libertyville, Ill.
“This guideline does a good job of strengthening uniformity,” he said.

Nor can carriers and financial advisors cherry-pick the look-back period used to derive illustrated index returns, whereas in the past some carriers would look back 15 years while others would look back 25 years when making annual point-to-point comparisons, the crediting method used for the bulk of indexed life sales.

Recent studies reviewing point-to-point annual returns in a 12-month look-back period from August 2011 to August 2010 found that the one-year Standard & Poor’s 500 index returns (before applying the guaranteed minimum or cap) ranged from -.03 percent to 16.82 percent, Weber said.
“So the point is, we can make the illustrations show just about anything we want — but what does the client want and need?” Weber said.

“Remember that the word ‘illusion’ is contained in the word ‘illustration’!” Weber also said. “It’s much safer to use a conservative crediting rate assumption at the outset, and then manage future payments to the actual accomplishments of the policy.”

Ravenous Appetite for IUL

The end of higher assumed rate illustrations, which in the past most benefited creative carriers and fueled the sales libidos of aggressive distributors with annual index projections of 8 percent, 10 percent or even 12 percent, injects a far more realistic long-term premium scenario to fund IUL policies.

That said, it’s also important for agents to remember that while AG 49 is a limitation on the maximum crediting rate assumed in the illustration, it has no impact on index performance and cap rates, Weber said.

“Again, all things being equal, a lower crediting rate assumption will result in a higher planned premium calculation,” Weber said.

Accurate renderings of how index performance affects policies over the long term should matter to agents and to policyholders, if for no other reason than the rise in volume of indexed life products being sold.

Consumers drawn to the idea that they can share in market gains while preventing the pain of market losses are buying IUL products at a steadily increasing clip. The result is that IUL products are growing fast, racking up growth far in excess of overall life insurance sales.

In the third quarter of 2015, IUL new annualized premium rose 20 percent over the year-ago quarter and was up 19 percent year-to-date compared with year-ago numbers, according to the latest data available from LIMRA.

IUL represents 54 percent of universal life and 21 percent of all individual life premium sold during the first three quarters of 2015, LIMRA also reported.

For a longer-term perspective, annual indexed life premiums reached $1.56 billion in the fourth quarter of 2014, a 15 percent increase over the year-ago quarter, according to Wink’s Sales & Market Report.

Third-quarter year-to-date 2015 indexed life sales were already at $1.31 billion, and 2015 is expected to be a record year for indexed life sales, according to Moore of Moore Market Intelligence.

In 2004, annual indexed life premiums registered only $139 million in the fourth quarter, according to Wink’s.

IULs offer more planning flexibility for mass affluent and even middle-class Americans in search of supplemental retirement income in a low-interest-rate environment, said John Crosby, owner of Individual Financial Services in Middletown, N.J.

Employees who have maxed out on their employer-sponsored savings plan but have another $10,000 or $20,000 to invest can invest in an IUL and derive tax advantages, build their savings and even consider premium waivers should they suffer a disability, he said. 

Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. He can be reached at [email protected] [email protected].


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