BURNING THE ‘MIDNIGHT’ OIL: A DECADE OF INDEXED UL PERFORMANCE
“Upside potential with downside protection”—we’ve all heard this phrase when it comes to trying to offer a concise benefit of indexed universal life (IUL). As we all know (and AG49 can attest to), comparing IUL products can be a tremendously difficult task, especially with insurance companies taking separate marketing approaches when building their product, e.g., higher initial cap vs. higher internal charges, etc.
The one constant, however, that you tend to find in any IUL is the indexed account allocation option of the ‘1-year point-to-point S&P500’. Essentially, on a specific date (e.g., the 15th of each month in this example), a “segment” is created that has an initial cash value. The interest credited to that particular ‘bucket’ will be dictated by the change in value of the underlying S&P500 index, subject to a cap in the gain (‘upside potential’—usually in the 9–12% range) and a floor (‘downside protection’—usually 0–1%).
Whilst there is a mountain of data available for analysis from the history of the actual S&P500 index, the notion of indexed UL as a life insurance product is still a relatively new one, so it’s often difficult to analyze its historical efficiency or effectiveness, particularly when clients are looking for that supporting data. However, a recent marketing piece we stumbled across from Pacific Life (a leader in the IUL space), does a great job looking back at the actual 1-year indexed account segment interest rates since they released their portfolio of products in September 2005. This allowed us to do something we truly love at Midnight—number-crunching; the key findings are listed below:
- 129 total segments, beginning 9/15/2005
- 60 hit the cap for the best possible return, which has ranged from 11-13% since inception (46.5%)
- 40 offered a positive return below the cap (31.0%)
- 29 hit the 0% floor as a result of a down market (22.5%)
- 21 of those 29 floors were consecutive from 1/15/2007 through 9/15/2009, meaning there were only
8 segments with no return, outside of the 2008 financial crisis timeframe
- 26 consecutive positive returns followed the above-mentioned run of 21 zeros
- 15 of those 26 hit the cap, and only 3 of the 26 were below 6.80%
- 34 segment maturities (a spell from 08/15/2011 through 05/15/2015) saw the most attractive window of positive performance, with 28 caps in that period and a lowest return of 8.29%
Illustrations are one of the most important tools at our disposal, as they ultimately display the numbers and the math behind the complexity of the product. While no one can predict future events, it’s often said that the only thing we do know for certain is that the policy won’t perform as shown—but, we still have to show something to help clients to understand the life insurance concept.
Rightly or wrongly, partly as a result of the hand-tying rules of AG49, an often-used assumption in an attempt to ‘level the playing field’ on IUL illustrations is 6.00% occurring each year (even though the analysis above shows the actual performance seems far more likely to be an up-up-down experience than level). Either way, we wanted to see how that 6.00% figure could be put into context as a benchmark—see below:
- 44 of the 129 segments were below 6.00% (34.1%)
- 15 of those 44 were positive returns (above 0% floor)
- 85 of the 129 segments were above 6.00% (65.9%)
- 25 of those 85 were below cap
So, what does this all mean?
At a glance, it would seem that good tends to outweigh evil when it comes to the pros and cons of this often misunderstood product. But this just scratches the surface. It’s important to note that positive indexed interest crediting rates do not guarantee cash value growth, as there are numerous deductions to factor into the equation (yes, positive S&P returns can, and do, result in a negative net effect on cash values). However, on the flip side, we’ve not even peaked at the power of multipliers, bonuses, and other creative product features that boost policy performance and ultimately leave clients happy.
However, in terms of raw data, we hope this little breakdown of the numbers can help you in your next discussion on the benefits of IUL. Caps can change, markets are unpredictable, but conceptually, for the client looking for optimal cash accumulation, we are big fans of the IUL, and it seems the industry is also.
Cheers to a brighter tomorrow.
P.S. segment maturities in 2017 have all hit cap so far!
*The above article is for educational purposes only, and should not be used as professional advice