By Erick Deam
Imagine offering your clients a life insurance product that can accumulate cash at a rate rivaling many securities during periods of market growth, but that also provides a minimum guaranteed rate of return when the market is down.
This is equity-indexed universal life, a new generation of life insurance. It debuted in the second half of the 1990s, but its unique features are just now starting to shine. Here is why.
EIUL policies offer contract owners the opportunity to accumulate cash at a higher rate of return than most traditional universal life policies can deliver, while providing a minimum guaranteed rate. This result is achieved by linking the policys accumulation value to the performance of a specific index of securities. Currently, most EIUL products are linked to the Standard & Poors 500 market index.
Securities? Market indexes? Sounds like variable universal life insurance. But EIUL policies are not securities, nor are they VUL. In fact, no National Association of Securities Dealers registration is required in order to sell them.
Why consider buying (or selling) the products? Some clients and advisors may think EIULs are too complex, but producers who work with them find they sell like a traditional UL policy. Moreover, EIULs can generate returns that rival those found in VUL policies, even during up markets, while providing a guaranteed minimum rate to protect against periods of market decline–a feature not found in VUL.
How, you may ask, can an EIUL insurer do all that with this product? Following is a brief explanation of some of the behind-the-scene technicalities that make it all happen.
The insurance company provides for the guaranteed minimum rate of return by purchasing fixed income assets, such as bonds, with a portion of the premiums paid (minus policy charges and fees).
It uses the remaining EIUL premium to purchase stock market index call options, such as call options on the S&P 500. Any gain realized as a result of exercising the call options passes on to the policy owner.
The amount of the gain is a function of the gain in the chosen index, adjusted by the EIULs participation rate or cap. (The policys participation rates and caps are set each year, depending on call option prices and bond yields. See chart for a depiction of these relationships.)