What You Need to Know
- Life insurers and life product distributors have been sparring over IUL illustrations for years.
- Actuarial Guideline 49 now regulates illustrations of the effects of some IUL features.
- The critics say some life insurers use other types of features to make product performance forecasts look unrealistically good.
Larry Rybka and other life insurance distributors say some insurers are using unrealistic predictions about how indexed universal life (IUL) insurance policies will perform to trick them into using borrowed money to buy the policies.
Rybka, CEO of Valmark Financial Group, told the IUL Illustration Subgroup — an arm of the National Association of Insurance Commissioners — in a comment letter of his own that some IUL marketers are misleading consumers by combining new, untested indexes with aggressive performance illustration strategies.
Rybka and other life industry veterans, including Ben Baldwin Jr. and several actuaries, told the subgroup in another comment letter that one problem is marketer use of fixed-interest bonuses along with indexes that are supposed to be designed in such a way that the managers can control index volatility.
The use of the bonus feature makes the illustration look better without improving the likely performance of the IUL policy, Rybka and colleagues argued.
Rybka said in another letter that marketers often create illustrations that imply that the policy terms will be fixed.
The issuer of an IUL policy promises to pay the holder a minimum crediting rate on the account value. The holder may earn a higher crediting rate if designated investment indexes perform well.
An issuer may use a “participation” rate to limit the percentage of investment index gains that flow into the crediting rate, and a “cap” to set a firm numerical limit on index gains that flow into the crediting rate.
A life insurer usually can, and will, change parameters such as cap rates and participation rates when conditions change, but the illustrations rarely provide clear warnings about that, Rybka said.
Rybka and his colleagues have been calling for tougher life policy performance illustrations for years, and one result has been NAIC approval of the Actuarial Guideline 49 illustration rules.