IUL: The comeback kid

Indexed. The word carries weight with senior advisors today. Indexed annuities have provided advisors with a way to protect their clients’ money while giving that money the chance to grow if the market goes up. And seniors have responded. Sales grew during the past five or six years. (They dropped by 11 percent in the first quarter of this year, but assets in indexed annuities still grew). Some advisors have come to specialize in the indexed annuity products. Fixed indexed annuities are a good fit for many seniors in many situations.

Another product with ties to the same indices that make indexed annuities work is indexed universal life insurance. IUL, which has been on the market for little more than a decade, saw its star wane shortly after its inception due to the explosion of variable products that sought to take advantage of the rising interest rate environment of the late 1990s. But once the bubble burst, VUL lost a bit of its luster and IUL has been on the rise ever since. Last year, IUL sales hit $350 million, and that number is expected to rise further this year.

“What we’ve seen in the low interest rate environment is that people want downside protection,” says Doug Israel, the senior vice president of product development for AIG American General ( www.aigag.com ). “IUL sales have really spiked. In 2006, indexed sales almost doubled.”

Scott Fryklund, senior vice president and national sales manager for life insurance at Minneapolis-based Allianz Life Insurance Co. of North America ( www.allianzlife.com ), has a similar story. “Most companies coming in see it as a growth opportunity,” he says. “Our sales are up 50 percent over last year’s, primarily due to IUL.”

John Scheer, the regional vice president of AMZ Financial Services ( www.amzwebcenter.com ) in Waukee, Iowa, says AMZ’s compound annual sales growth rate has been 30 percent over the last five years. He says many industry experts believe sales may top $1 billion by 2010 or 2011. Advantage Compendium estimates first-quarter index life sales were more than $103 million, a 31 percent increase over the first quarter of 2006, putting IUL on pace for more than $400 million in sales for 2007.

Growth like that is sure to catch more advisors’ eyes, which can only fuel further growth. But the folks at the life insurance carriers, the people who work with and design these products, want advisors to understand a couple of things and be able to pass the knowledge on to consumers. Fryklund says that IUL is built on a universal life chassis, which makes it a general account product. That brings up two points advisors should remember. One, the products are backed by the size and strength of the issuing carrier, whereas a product like variable life is backed by outside performance. Which leads to the second point: Even if the index the product is linked to goes through the roof, there is still a chance the consumer can be left out in the cold, because, as stated in the first point, the product is backed by the insurance company. If the company manages to falter while the market does well, IUL products can fail to pay what they promised.

“Don’t say to prospects, ?You’re going to get returns in the stock market.’ This is backed by the assets of the company,” Israel says. “It’s a general account sale. If the company can’t back it, the index means nothing.”

And unlike variable products, where the death benefit means less than the accumulation potential to many consumers, IUL is a death benefit-based product.

Good candidates

“There has got to be a life insurance need,” Israel says, responding to a question about who IUL is a good fit for.

Whether it’s for the death benefit or estate planning or supplemental retirement income or the new and improved living benefit options, he firmly believes the need for life insurance must exist. If a senior still wants to take a little risk with some of his money, Israel says, that person can be put into a true investment vehicle or a variable product.

Another thing that has to be present in a consumer for IUL to work appropriately is a long-term commitment. Any client or prospect has to understand that IUL works best when the money in it is left alone for the long haul.

“I like index life better than an index annuity because life insurance is longer term,” Fryklund says. “You give up some of the top-end growth potential vs. a variable product [but most seniors aren't looking for that anyway].”

“These products need 10 to 12 years to get over the hump,” says Jason Konopik, AMZ’s CFO. He explains that’s because insurance companies tend to invest life insurance premiums over a longer time horizon than they invest annuity premium, for example. This allows IUL to carry higher cap rates, but it also means people need to remain in the product longer, but with retirement lasting as long as it does anymore, thinking long-term isn’t a bad idea. “I’ve rarely seen a case where an IUL product couldn’t beat an [indexed annuity] over the long term.”

Israel agrees. He sees someone who has a 15-year horizon and who doesn’t need the money now as being an excellent candidate for IUL.

“This is not a product for someone who says, ?I need all my money in four years.’ It’s appropriate for long-term accumulation and slow withdrawal, as a supplement to retirement income,” he says

So clients in their mid- to late-50s – and even people in their early to mid-60s – are solid candidates, if they are still in good health.