On Sept. 1, 2015, the National Association of Insurance Commissioners implemented the first phase of Actuarial Guideline 49. AG49 set new standards for illustrations for life insurance policies that offer interest rates linked to a stock index or other index. The standards are supposed to help consumers consumers compare index-based policies on an apples-to-apples basis.
Some wondered if AG49 might hurt sales of indexed universal life. Instead, IUL sales have been strong.
(Related on ThinkAdvisor: Indexed Universal Life Insurance Sales Hit New High)
To differentiate themselves under the new AG49 rules, carriers are expanding use of old methods to strengthen their illustrative performance.
The key features carriers are using to enhance the perceived value of IUL products are interest bonuses, spread death benefit options, alternative crediting approaches, and volatility control accounts.
Interest Bonuses
The most prevalent accompaniment to IUL products has been interest bonuses, which were not addressed within AG49 regulations. Interest bonuses help rejuvenate the optimism of the IUL sale by bulking the returns on an illustration without violating any rules set forth by AG49. Many interest bonuses have guaranteed components, which have proven to be a differentiator for many who are selling IUL products. Ultimately, though, IUL products are designed to shine on the performance of their non-guaranteed elements.
Interest bonuses go by a variety of names (e.g. persistency credits, account value enhancements) and take a number of forms. The most common is a flat percentage, typically less than 1%, added to the indexed return beginning in either year six or eleven. For instance, once the interest bonus has kicked in, during a year with a 5% indexed return, an IUL product with a 0.5% interest bonus would illustrate 5.5% growth on the policy. Other versions include multipliers and charge reimbursements.
Our firm, LifeTrends, evaluates the competitive positioning and offering of over 40 IUL products. Nearly all of these products sport some variety of interest bonus, making this one of the most widespread trends among IUL products. Following AG49's standardization of maximum illustrated rates, carriers clearly view interest bonuses as a reliable manner of boosting their IUL performance.
Index Multipliers
Functionally, index multipliers can be considered interest bonuses, as they also serve to bolster the return on the crediting rate. This approach earns its own distinction here because several carriers now offer this bonus at policy issue, as opposed to being packaged as a persistency credit. Index multipliers fulfill their purpose by multiplying the indexed return instead of adding to it. For instance, in a year with a 6% indexed return, an IUL product with a 10% index multiplier would earn 6.6% growth on the policy.
(Photo: Allison Bell/TA)
By giving the cash value a boost from day one instead of waiting five to ten years into the policy, index multipliers effectively create a new, enhanced crediting rate for the policy, even while capping the maximum illustrated rate according to regulation. This standout effective rate results in improved performance, especially when comparing products at the same illustrated rate.
(Related on ThinkAdvisor: 18 Reasons for Making Indexed UL Part of Your Portfolio)
In March 2015, before AG49 was implemented, Nationwide was first to debut an index multiplier beginning in year one. In the post-AG49 world, Prudential and Penn Mutual have followed suit, adding this unique design to PruLife Index Advantage UL (2016) and Accumulation Builder Select IUL, respectively, in October 2016.
Dynamic Multipliers
In February 2017, Minnesota Life and Pacific Life ushered in potentially the next version of interest bonus—the dynamic multiplier—with Orion IUL's Annual Policy Credit and Pacific Discovery Xelerator IUL's Performance Factor. What makes these multipliers unique is their completely fluid nature. Not only are the bonuses non-guaranteed, the two carriers do not multiply the indexed return by a fixed percentage. Instead, each carrier subjectively multiplies the account value or indexed return based on its own valuation of policy structure, client, and market performance. Though both carriers have shunned the interest bonus nomenclature when discussing these credits, each products' spectacular performance is largely due to its dynamic multiplier.
