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Life Health > Life Insurance > Permanent Life Insurance

Valmark CEO Sees Indexed Universal Life Marketing Woes Getting Worse

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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.

What´s Changed?

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.

But Rybka said the NAIC needs to do more, in part because of increased consumer use of borrowed money to pay for IUL policies.

“Consumers of various economic means are unknowingly betting significant parts of their liquid net worth on the arbitrage between bank loans and what they believe will be credited to IUL policies,” Rybka said. “This is an uninformed bet against loaded dice with little or perhaps no prospect of winning for the policyholder.”

One problem, Rybka said, is that IUL sellers who have only insurance licenses, and no securities-related training or oversight, may not fully understand the products or the sales materials

Insurers’ Reaction

Brian Bayerle, a senior actuary with the American Council of Life Insurers, wrote in a comment letter that offering a feature such as a fixed-interest bonus can be a good way for an insurer to share its own cost savings or revenue with the policyholder.

“If regulators believe the level of the illustrated values is unreasonable, we would ask regulators to provide clear objectives for a revised guideline, so industry can work with regulators to address their concerns,” Bayerle wrote.

Brian Lessing, a senior director at Equitable, and Aaron Sarfatti, Equitable’s chief risk officer, suggested that regulators could address the concerns by tying illustrated index performance to what the issuer is spending on the options used to manage index risk, and by imposing a guardrail limit on the assumed excess returns.

“We think such an approach would be sensible under a ‘no free lunch’ assumption,” the Equitable executives wrote.


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