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Tie IUL Illustration Crediting Rates to Reality: Advocacy Group

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The full membership of the National Association of Insurance Commissioners (NAIC) is preparing to vote on an actuarial guideline that could affect illustrations of the possible future of performance of index universal life IUL) insurance policies.

The Center for Economic Justice, an advocacy group, is still asking for a last-minute change: prohibiting IUL performance illustrations from implying that the rate a policy will pay the policyholder could be higher than the rate the policyholder would pay to borrow from the policy.

If an IUL seller can create an illustration using a crediting rate that’s higher than the policy loan rate, then “the IUL will illustrate like a riskless ATM,”  the center says in comment letter addressed to the NAIC’s executive committee and plenary.


The NAIC’s executive committee and the plenary are preparing to consider adoption of the new actuarial guideline, “Actuarial Guideline 49-A — The Application of the Life Illustrations Model Regulation to Policies with Index-Based Interest,” at a web-based session set to take place Friday.

“The plenary” refers to a meeting that includes all voting members of the NAIC.

The NAIC is a Kansas City, Missouri-based group for the regulators who oversee insurance oversight efforts for states and other, similar types of jurisdictions, such as the District of Columbia and Puerto Rico.  It has 56 voting members.

The current version of the new actuarial guideline, “Actuarial Guideline 49-A — The Application of the Life Illustrations Model Regulation to Policies with Index-Based Interest,” would let the crediting rate in an IUL illustration be up to half a percentage point higher than the policy loan rate.

The center says the current version would, for example, let a life insurer show account value credits at 6.5% every year, and a policy loan cost at 6%.

In this scenario, “the consumer can borrow money at one rate and use it earn a higher rate of return without any risk,” the center says. “This is analogous to taking out a mortgage on your home and using that money to invest in the stock market — because the market has averaged returns of, say, 8%, while your mortgage loan rate is 3%.”

Giving a consumer that impression is a bad idea, because the cost of a mortgage loan, or a policy loan, is fixed, the center says.

“You have to pay the interest regardless of what your investment returns might be, and the investment returns are erratic and may be negative in several years,” the center says. “By being able to illustrate riskless loan arbitrage, IUL illustrations are used to present future loans on the policy as cash disbursements that never need to be paid back, because the policy is continuing to earn the constant better-than-loan-interest-rate returns.”

In the 1980s and early 1990s, when interest rates were very high, many life insurance agents sold universal life policies designed in such a way that the interest on the account value was supposed to pay the premium bills and, in effect, make the premiums vanish. When interest rates dropped, earnings on the account value dropped, and many holders of vanishing premium policies ended up having to pay premium bills.

The Center for Economic Justice predicts that letting consumers assume that IUL crediting rates will be higher than policy loan rates could create a new version of the life insurance vanishing premium crisis.

The center is also asking the NAIC to adjust the current AG49-A language so that the illustration requirements would apply to policies that are already in force as well as to new policies.

— Read AG49: Carriers Face a Life Marketing Changeon ThinkAdvisor.

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