It's been nearly 30 years since consumers were first offered the benefits of universal life insurance. With UL came flexibility in premium payments, death benefit options, coverage amounts and all sorts of other things that they never dreamed of.
Now, fast forward to 1997 when the first indexed UL was introduced. This was just like any other UL, but it had a different way of crediting interest, based on the performance of an external index (such as the S&P 500).
Sales of indexed UL–or IUL, as it is often called–were just a drop in the bucket at first. Seven carriers brought in just under $65 million in premium in 1998.
Skeptics prophesized that the product line would not last long. Little did they realize that the appeal of the product's higher upside potential would keep consumers interested during low interest rate environments and that its downside guarantees would be especially important (particularly for those who saw the stock market tank after the turn of the century).
So, where is IUL today? Not only are sales burgeoning, but carriers are jumping to get into this emerging market. Active carriers are revamping product, doing what they can to offer value-added benefits and trying to catch the attention of agents.
At the close of 2005, sales nearly had tripled over 1998 levels–to $185.7 million. Today, 22 carriers compete–a remarkable increase considering that only 12 carriers were offering product a year ago. Another 20 carriers are on the radar, toying with the idea of developing product within the next year or so, and of those, seven will definitely enter within the next year.
All of this excitement leaves existing carriers that once had large market shares of a smaller IUL world competing to differentiate themselves in an increasingly cutthroat market. Where once there were very few IUL designs, now there are many, including IUL with extended no-lapse guarantees, single premium plans, survivorship life policies and even a return-of-premium design. This design variety will only intensify in coming years.
How does IUL differ from traditional UL? Much depends on carrier and pricing level, but here are some general points:
Fixed strategy rate. The IUL has a company-declared rate on the fixed strategy (if any); this rate would be comparable to traditional UL rates. Fixed strategy rates on IULs today range from 3.75% to 5.27%.
Guaranteed rate. This is the underlying minimum guaranteed interest to be credited on the policy. On a traditional UL, these minimum guarantees usually run 2% to 3%, whereas on IULs, they typically credit 1% to 2% due to the IUL's higher potential for credited gains. (Note: Minimum IUL guarantees are not always credited annually; some credit over a five-year period or even over the lifetime of the policy.)
