Index UL Facing A Big Year

Today, insurance companies use 8 different methods for calculating illustrated IUL rates. Furthermore, two insurers using the same methodology may use entirely different calculations for determining the illustrated rate. Ultimately, the aggressive, unsupportable illustrated rates in this market will force regulators to make mandates regarding ILU illustrated rates.

Today, there are IULs illustrating current cash values at rates as high as 10%. Compare this to risk-money products such as variable UL that are being illustrated at 8% and you are bound to get somebody's attention.

The last big story in the IUL market for 2010 will be litigation. Lawyers are going to start crawling out of the woodwork, looking for the next "big opportunity." The once-sleepy IUL market could likely become the next victim for bloodthirsty ambulance chasers.

Three major issues make IUL a target for class action litigation. First, many have not set realistic expectations for what consumers can expect to receive in terms of indexed interest on their IULs. In plain English, those illustrated rates are too high; consumers are going to get upset when they get zero instead of 10%.

Next, variable loan interest is compounding the unrealistic expectations. What is going to happen when the client gets 0% credited, but they owe 9% in loan interest? This is a far different story than the 10% interest and 6% loan rate the client was sold on the illustration. ("What? I'm not making money by taking max loans from my life insurance policy?")

The last major issue is inappropriate sales concepts. For years, insurance agents have been taught how cash accumulation life insurance products such as IUL make a great vehicle for concepts such as hyper-funding and equity harvesting. However, these concepts are largely based on the sustainability of interest rates. When these rates don't come to fruition, it results in unhappy clients.

Ultimately, the success of IUL will not be squashed by market conduct issues and a lack of regulation. However, now that the product line is becoming mature, regulators need to step up and ensure that consumers are protected. If not, this viable insurance product may eventually be damned with the same negative image as its sister product, the index annuity.

If 2010 is the year these issues get resolved, it could be that IUL sales will soon eclipse its variable counterparts.

Sheryl Moore is president and chief executive officer of AnnuitySpecs.com and LifeSpecs.com, an indexed product resource in Des Moines, Iowa. Her e-mail address is [email protected].