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Life Health > Life Insurance

Phase two of AG 49 targets projected values, policy loans

By Tom Doruska

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On March 1, 2016, the second phase of Actuarial Guideline XLIX (AG49) takes effect, further defining — and refining — indexed universal life (IUL) illustration practices. Back in August, I reviewed the first phase of AG49, which brought consistency in illustrated crediting rates. As of March 1, even more changes will be required to help level the playing field among illustrations and provide greater transparency for customers. 

First and most noticeable will be the inclusion of an additional set of projected policy values. Currently, illustrations are required to project values on both a guaranteed and a non-guaranteed basis. AG49 requires an additional set of non-guaranteed projected values using a specified interest rate, frequently the declared rate for the policy’s fixed account. Illustrated values at two different non-guaranteed interest rates will help to increase consumer understanding of the effect of non-guaranteed interest rates on their policies.

Second, a table of hypothetical indexed interest crediting rates will be required. The policy’s current non-guaranteed rate, such as the cap, will be applied historically to actual index performance within the table. The resulting hypothetical indexed interest crediting rate will be displayed. A second new table will also be required listing additional hypothetical historical interest rates. Both of these tables are additional tools to help explain the potential variability of the product’s interest crediting.

AG49’s second phase also focuses on policy loan illustrations, which reflect both an interest rate charged, as well as an interest rate credited, on loaned values. One or both of these interest rates may be non-guaranteed. On some IUL policies today, loaned funds earn indexed interest credits. Regulators sought to restrict the potential variability this introduces to rates charged and credited on loaned funds within illustrated values.

For sales on and after March 1, 2016 illustrating this type of loan:

  • Within the current non-guaranteed values, the difference between the rate credited on loaned funds and the rate charged will be limited to no more than 100bps.
  • Under the new, additional set of non-guaranteed values, the rate credited on loaned funds cannot exceed the rate charged at all.

Companies will need to adjust the rate credited on loaned funds and/or the rate charged within the illustration. These changes may result in illustrated rates differing from actual policy provisions, so care should be taken to understand the impact of this requirement.

As the industry moves forward, the changes of AG49 will go a long way in helping to demonstrate how IUL policies operate. The industry should consider adopting the changes as best practices across other products with similar loan features, such as whole life. Change, though, is rarely easy, and IUL carriers are being forced to look at things differently as they revisit some longstanding practices. In the end, though, the changes will bring greater clarity and understanding to the IUL marketplace.

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