In a past blog entry entitled, What You (as Trustee) Need to Know About Equity Indexed Universal Life, I wrote about this popular life insurance product, Indexed Universal Life. One of the problems I spoke about was the sales practices of the agents (and carriers) providing the product. In the blog entry, I mentioned that some carriers and agents assume crediting rates in the policy that “exceed 8%, which many feel is rather aggressive.”
Now it seems that the regulators are taking notice. In a September 21st article in the Wall Street Journal, Leslie Scism reported that New York Financial Services Superintendent, Benjamin Lawsky, was looking into sales of Indexed Universal Life (IUL). At issue was the concern that “some insurance companies may be giving buyers overly optimistic projections of potential gains in the policies.” Mr. Lawsky has reached out to carriers via a letter asking for information about the carriers’ “presentations of potential gains to prospective buyers.”
Concurrently, the industry itself is attempting to develop standards around the selling of these products. Of course, politics is involved with those carriers that do not offer the product lining up against those that do. While there are competing proposals about this issue, a representative of the American Council of Life Insurers did admit in a MarketWatch article that the industry agrees that "tighter rules are needed."
At ITM we have seen an onslaught of these products, either as new policies to a trust, or more often, as a replacement asset for a trust. Citing “downside protection” and “upside potential,” agents are touting these products as more conservative than Variable Universal Life and more attractive than Current Assumption Universal Life or Whole Life policies.
As I mentioned in my past blog, “the risk that you, as trustee, take on is the risk that the policy will not perform as illustrated.” That is the focus of the regulators, as it should be.
In a follow up blog written earlier this year entitled, Illustrating Equity Index Universal Life Policies, I point out a web based Indexed UL Rate Translator that one carrier believes “represents one approach to translating an assumption of long-term performance of the selected index into a hypothetical assumed rate for the purposes of the policy illustration.” This particular carrier sells Indexed Universal Life and is attempting to show one way to determine a reasonable expectation for the interest credited to the policy. In the modeling I did for that blog entry, I assumed a 100% participation rate, 10% cap and 0% floor. (Note: If you do not understand these terms or how IUL works, refer back to those earlier blogs). In that scenario, in order for the policy to be credited with a 6.52% return, the Translator determined that the actual return in the Index would have to be 12%.
Let that sink in. And think about that the next time you are shown an Indexed Universal Life policy illustration outcome with a hypothetical return of 7% or more. Because according to this Translator, that would mean that the corresponding Index return would have to be 12% or greater. Does that seem plausible?
What should you do if you are a trustee of one of these policies? As I suggested in my earlier blog, “if an advisor is suggesting a 7.5% return, ask to see the outcome at 5% also, which might be more in line with reality. It is not wrong to fund a policy based on a lower return expectation, knowing that funding in later years can be decreased if a higher return is obtained. In the past the opposite has often occurred, with illustrations designed to show the lowest possible outlay shown. This often resulted in disappointed clients.”
We will keep an eye on both industry and regulatory developments and report back in future blogs, as warranted. This is an important industry issue and one that you, as a TOLI trustee, need to be aware of.