Index universal life sales in 2008 were a record-breaking $539 million. Never have the environment and market conditions been so favorable for this product.
Millions of Americans are leaving the equities markets, where values are being depleted, in favor of the safety and stability of products with guarantees. These drivers, coupled with the value proposition of earning greater interest than traditional fixed products, have positioned IUL to benefit, where other products may fail.
However, first quarter 2009 sales results are no indicator of this golden opportunity. IUL sales are down an astounding 33% from fourth quarter 2008 levels. In addition, sales are off more than 14% from their levels in the first quarter of 2008.
Several factors have contributed to the decline in sales, and numerous companies stand to benefit from the market shift.
2001 CSO requirements. In the late 1980s, Congress added a requirement under Internal Revenue Code Section 7702(c)(3)(B)(i), limiting life insurance mortality charges that could be reflected in computations (on certain contracts) to those that are reasonable.
Then, just before year-end 2007, the Internal Revenue Service issued another notice, stating that companies offering life insurance would need to reprice their products using the 2001 Commissioners Standard Ordinary tables prior to January 1, 2009. Sales of products using the previous 1980 CSO tables would not be permitted after December 31, 2008.
This specific requirement has triggered a tidal wave of life insurance repricing. Although some insurers initiated their repricing soon after the IRS notice was issued in 2007, many others waited until the final hour to introduce their 2001 CSO products. Some introduced their new products one week before year-end 2008.
The lag in product development for these carriers has resulted in a nearly overnight decline in sales, due to training issues. Once distribution has had time to get comfortable with these products, though, IUL sales should be on the uptick.
Ratings issues. In the past few months, nearly half the companies in the IUL market have been downgraded by ratings firms such as A.M. Best, Oldwick, N.J., and Standard and Poor’s, New York.
To industry professionals, it is no surprise to see such downgrades in the aftermath of catastrophes like Lehman Brothers, Merrill Lynch, and the like. However, these ratings downgrades can also make the difference between an agent selling a company’s products, and being told that he or she is not permitted to sell the company’s products.
Many agents’ errors and omissions insurance policies will not cover should the agents choose to write business with an insurance company rated lower than ‘A.’ Also, many broker-dealers will not allow their registered representatives to sell with any company rated lower than ‘A.’
Another factor that may cause broker-dealers to ‘blacklist’ certain products is the insurer’s acceptance of money under the federal Troubled Assets Relief Program.
Some insurance giants have perfectly sound insurance subsidiaries, but are nonetheless experiencing negative publicity due to media coverage of the financial crisis. Unfortunately, this is translating to sales declines of over 75%.
Therefore, regardless of the fact that most insurance companies are in the same boat right now, ratings will continue to be an issue until the economy improves.
Timing. The fourth quarter of every year is a time for a big “sales push.” Agents are in a rush to get their cases into underwriting in order to qualify for incentives, promotions, and agent rankings.
This usually results in the fourth quarter being the strongest quarter of the year for most insurers. In fact, 2002 was the last year that fourth quarter IUL sales did not exceed all other quarters in the IUL market. Although some IUL companies’ sales dropped more than others in the first quarter of 2009, it was a tough quarter for everyone in every market.
For that reason, sales should be on the uptick when second quarter results are in.
All of these issues have made the life insurance marketplace very challenging over the past few months. But now is the perfect time for carriers who have been considering IUL to “get in the game.” These companies will be about even-keel with everyone else due to these challenges.
Ultimately, the companies that have the most solid financials and responsive product development/marketing stand to benefit during this period of reflection. Specifically, four companies in the IUL market increased their sales by 75% or more from the fourth quarter of 2008 to the first quarter of 2009. That is amazing.
With prevailing low interest rates and market volatility, carriers wanting to increase sales in the IUL market now have a golden opportunity.
Sheryl Moore is president and CEO of AnnuitySpecs.com, an indexed product resource in Des Moines, Iowa. Her e-mail address is firstname.lastname@example.org