Burning The ‘Midnight’ Oil: INDEXED UL ACCOUNT OPTIONS – MORE THAN JUST VANILLA
Indexed universal life (IUL) is the seemingly hot life insurance product with sales increasing year after year. A slight drop in 2016 Q2 sales was just the second time IUL premium has dropped in a quarter in the last 10 years, according to LIMRA Insurance Research, who attributed much of the decline to the recent illustration regulation, Actuarial Guideline 49, which went into effect in September 2015.
The increased sales numbers have led to a continuous increased market share of overall life insurance sales (grown from 11% to 21% since just 2011, per LIMRA), particularly in place of other types of universal Life. Outside of the major whole life providers, the vast majority of insurance carriers now offer some form of IUL as part of their product portfolio. The buzz is certainly real.
While the array of features and differences amongst products is ever-increasing, one aspect that all of these IULs have in common is the account allocation option of the ‘1-year point-to-point S&P500’. As referenced in June’s blog, essentially, on a specific date, a ‘segment’ is created that will have an initial cash value. The interest credited to that particular ‘bucket’ will be dictated by the change in value of the underlying index, subject to a cap in the gain (‘upside potential’—usually in the 9–12% range) and a floor (‘downside protection’—usually 0–1%). Most of these will also have a 100% guaranteed participation rate, meaning you will receive the full (hence 100%) amount of said index change, subject to cap and floor, when calculating the dollar amount credited to your policy values.
However, this vanilla account is not the only option for your clients. We had a sale recently where the insured felt from his own research that the market over the next couple years was only going to return around 3-4% (lower than we’d illustrated), so we suggested allocating it to either a fixed account (so he would know the exact amount of his return) or a high-par account where the 3–4% return he was expecting would actually be multiplied to more closely resemble a 5–6% return. The downside was that if the market actually had a stellar year, he would be capped at a lower indexed credit. He was familiar with IUL but had no idea that these were options available to him, and he loved the idea.
The table below shows how differing returns from the S&P would be credited to an IUL policy using a typical offering of account options:
So, what is the ‘right’ indexed bucket to be in? In short, we don’t know. Nobody does.
But at Midnight, we like to do our homework on products to ensure that they offer flexibility and ultimately the highest probability of plan success. One recent training event on Penn Mutual’s latest individual IUL did a fantastic job of offering guidance on the account allocation options available, and the choices that might suit certain client mindsets—a summary is below:
And here is the hypothetical historical performance of the three options specific to the 1-year segment durations tied to the S&P500—you’ll notice there is no standout performer throughout:
So, what does this all mean?
I suppose the point here is that there is simply no ‘best choice’ when deciding on your account allocations within an IUL—the environment (and hindsight) will ultimately dictate the optimal returns for your policy. And while that uncertainty may not be music to everyone’s ears, the sheer option of flexibility and the ability to diversify should offer some form of comfort to those worried about policy under-performance and the knock-on effect that could have on their overall insurance planning.
To go a step further, we’ve mentioned participation rates, cap rates, floors, and segment durations here, but it goes much deeper than that – indexes such as the Russell 3000 and Dow Jones offer alternatives, and then you have international exposure options such as Euro STOXX 50, Hang Seng and MSCI Emerging Markets. Then there are dynamic blends and hindsight approaches which can offer a credited interest based on a best performing allocation option after they have occurred. Options are good!
IUL in the grand scheme of the permanent life insurance world is still a relative newbie. But carriers are dedicating a lot of resources to its development given its popularity within the cash accumulation space. The bottom line is knowing that you have the chance to diversify within these complex products, as well as the ongoing ability to maneuver with the markets to give your plan every chance of success.
Cheers to a brighter tomorrow.
*The above article is for educational purposes only, and should not be used as professional advice