On Sept. 1, 2015, the National Association of Insurance Commissioners implemented the first phase of Actuarial Guideline 49. AG49 set new standards for illustrations for life insurance policies that offer interest rates linked to a stock index or other index. The standards are supposed to help consumers consumers compare index-based policies on an apples-to-apples basis.
Some wondered if AG49 might hurt sales of indexed universal life. Instead, IUL sales have been strong.
(Related on ThinkAdvisor: Indexed Universal Life Insurance Sales Hit New High)
To differentiate themselves under the new AG49 rules, carriers are expanding use of old methods to strengthen their illustrative performance.
The key features carriers are using to enhance the perceived value of IUL products are interest bonuses, spread death benefit options, alternative crediting approaches, and volatility control accounts.
The most prevalent accompaniment to IUL products has been interest bonuses, which were not addressed within AG49 regulations. Interest bonuses help rejuvenate the optimism of the IUL sale by bulking the returns on an illustration without violating any rules set forth by AG49. Many interest bonuses have guaranteed components, which have proven to be a differentiator for many who are selling IUL products. Ultimately, though, IUL products are designed to shine on the performance of their non-guaranteed elements.
Interest bonuses go by a variety of names (e.g. persistency credits, account value enhancements) and take a number of forms. The most common is a flat percentage, typically less than 1%, added to the indexed return beginning in either year six or eleven. For instance, once the interest bonus has kicked in, during a year with a 5% indexed return, an IUL product with a 0.5% interest bonus would illustrate 5.5% growth on the policy. Other versions include multipliers and charge reimbursements.
Our firm, LifeTrends, evaluates the competitive positioning and offering of over 40 IUL products. Nearly all of these products sport some variety of interest bonus, making this one of the most widespread trends among IUL products. Following AG49’s standardization of maximum illustrated rates, carriers clearly view interest bonuses as a reliable manner of boosting their IUL performance.
Functionally, index multipliers can be considered interest bonuses, as they also serve to bolster the return on the crediting rate. This approach earns its own distinction here because several carriers now offer this bonus at policy issue, as opposed to being packaged as a persistency credit. Index multipliers fulfill their purpose by multiplying the indexed return instead of adding to it. For instance, in a year with a 6% indexed return, an IUL product with a 10% index multiplier would earn 6.6% growth on the policy.
(Photo: Allison Bell/TA)
By giving the cash value a boost from day one instead of waiting five to ten years into the policy, index multipliers effectively create a new, enhanced crediting rate for the policy, even while capping the maximum illustrated rate according to regulation. This standout effective rate results in improved performance, especially when comparing products at the same illustrated rate.
(Related on ThinkAdvisor: 18 Reasons for Making Indexed UL Part of Your Portfolio)
In March 2015, before AG49 was implemented, Nationwide was first to debut an index multiplier beginning in year one. In the post-AG49 world, Prudential and Penn Mutual have followed suit, adding this unique design to PruLife Index Advantage UL (2016) and Accumulation Builder Select IUL, respectively, in October 2016.
In February 2017, Minnesota Life and Pacific Life ushered in potentially the next version of interest bonus—the dynamic multiplier—with Orion IUL’s Annual Policy Credit and Pacific Discovery Xelerator IUL’s Performance Factor. What makes these multipliers unique is their completely fluid nature. Not only are the bonuses non-guaranteed, the two carriers do not multiply the indexed return by a fixed percentage. Instead, each carrier subjectively multiplies the account value or indexed return based on its own valuation of policy structure, client, and market performance. Though both carriers have shunned the interest bonus nomenclature when discussing these credits, each products’ spectacular performance is largely due to its dynamic multiplier.
Spread Death Benefit Options
The emergence of spread death benefit options is particularly unique, as this trend is comprised of a clear, upfront actuarial tradeoff. In exchange for the consumer spreading some or all of the death benefit over a predetermined number of years upon the insured’s death, the carrier will either add to the policy’s account value or reduce cost of insurance, or COI, rates while the policy is in force, expanding the policy’s ability to grow its cash value.
Accordingly, this trend is mainly geared toward the accumulation sale. Though the death benefit is still important for accumulation-oriented products, consumers have shown a far greater tolerance for deferring some or all of the death benefit when the policy is designed to maximize the available cash while still alive.
Minnesota Life pioneered this unique spread death benefit concept with the development of Omega Builder, which was originally created as a proprietary product for a select marketing organization and then introduced to the open market in August 2014. Omega Builder features a mandatory rider that spreads at least half of the death benefit payout over a minimum of ten years. The more death benefit that is spread (up to 100%) and the longer it is spread (up to 30 years), the greater the discount on the COIs will be. Since AG49 went into effect, Pacific Life, American General, and National Life have each unveiled similarly structured riders that may be elected with each of their IUL offerings.
Utilizing a carrier’s maximum possible spread can result in distributions roughly 5% to 10% greater than what would be illustrated without the spread. Though not directly correlated with any portion of AG49 regulations, spread death benefit options have come to be seen as a sensible, mutually beneficial method for carriers to distinguish their income-oriented IUL offerings in the aftermath of AG49.
Alternative Crediting Approaches with the S&P 500
1. High-Cap Accounts:Within AG49, the S&P 500 must be used to determine a product’s maximum illustrated rate. As a result, carriers seem to be moving away from alternative indices and toward different crediting approaches with the S&P 500, such as high cap accounts. In exchange for the higher cap, a carrier will either charge the indexed return or reduce the interest bonus by a fixed percentage.
(Related on ThinkAdvisor: The Huge, Untapped Audience for IUL Marketing)
The high cap is definitely an optimist’s account, as AXA indicated when introducing BrightLife Grow in April 2014: “The Plus options offer greater upside potential, but will not perform as well as the Core options when the markets perform negatively to moderately because the Core options do not have a segment charge.” In 2016, similar accounts were introduced with American General’s Max Accumulator+ IUL and Pacific Life’s full IUL product suite, while Minnesota Life’s new Orion IUL joined the high cap crowd in February 2017.
2. Uncapped Accounts:Uncapped accounts preceded AG49 but have since become more prominent. In exchange for an uncapped return of the S&P 500, a carrier will charge the indexed return before crediting the policy. This is most commonly done by subtracting a flat, non-guaranteed percentage from the uncapped return (usually referred to as a spread, between 4% and 6%), such as with American National’s Signature Plus IUL. Other products, such as Mutual of Omaha’s Income Advantage, simply credit the policy with a non-guaranteed percentage of the indexed return (referred to as the participation rate, between 50% and 65%).
Illustrations with uncapped accounts are still subject to a maximum illustrated rate determined by AG49, using the cap of the product’s regularly capped S&P 500 index account. This rate tends to be lower than what the uncapped account could otherwise justify, under current assumptions using AG49’s historical lookback calculation, even after charging the indexed return.
3. Volatility Control Accounts: Though carriers have increasingly abandoned non-S&P 500 indices, the market has still shown some appetite for an S&P 500 alternative. Filling this void are volatility control accounts. Instead of merely placing faith in a different index, these accounts are distinguished by controls that shift away from volatility within an underlying set of indices in order to stabilize the interest returns. Allianz has long been highlighting the Barclays US Dynamic Balance Index (BUDBI) in the Allianz LifePro+ product line, while American General released the Merrill Lynch Strategic Balanced Index on its Max Accumulator+ IUL in May 2016. Most recently, Minnesota Life released two S&P 500 Low Volatility accounts on its Orion IUL in February 2017.
Volatility control accounts have gained traction in the annuity space. Historically, that has been a staging ground for the life insurance market; however, these accounts have not caught on quite as quickly as some had predicted with IUL products.
Perhaps nothing is more indicative of the advent of these trends than Minnesota Life’s Orion IUL, released in February 2017, which offers each of the above features. Though these regulatory responses have not been adapted universally — even interest bonuses, increasingly ubiquitous as they are, have taken on many unique shapes and forms — carriers are clearly directing significant creative effort toward distinguishing themselves within the boundaries of AG49. As an industry leader in competitive and marketing intelligence, our firm will continue to monitor market trends and appropriately enhance our commentary relative to this subject.
— Read How Do I Find the Right IUL Marketing Partner? on ThinkAdvisor.