Actuarial Guideline XLIX Will Mandate More Realistic Assumptions for Index-Based Life Insurance Policies

We have written, as recently as June of this year, in Life Insurance Illustration Assumptions…a Trustee’s Dilemma, about the investment assumptions used in life insurance sales illustrations. In most illustrations, all else equal, the higher the return assumed in the investment backing the cash value, the lower the premium shown to carry the policy. Historically, this has led to aggressive sales presentations that illustrate well, but ultimately do not hold up. In the last few years we have published a number of Blogs referencing Indexed Universal Life (IUL) policies sold with what we believed were aggressive assumptions. It appears that that will be ending. As of today, Actuarial Guideline XLIX (AG 49) will limit the crediting rate shown on all “new business and inforce life insurance policies” where “interest credits are linked to an external index or indices.”

The new regulation from the National Association of Insurance Commissioners (NAIC) was the result of their Life Actuarial (A) Task Force and came after the New York State Department of Financial Services (NYDFS) began an investigation in September of last year into industry sales practices (New York State Regulators Eying Indexed Universal Life Sales Practices – What Every Trustee Should Learn From This). Life insurance carriers lined up on opposite sides of the discussion, offering opinions based primarily on whether or not they sold the product. In general though, most carriers have reached agreement that creating a standard and uniform approach to IUL sales illustration assumptions is best for the industry and the consumer.

The new standard will limit the maximum crediting rate that can be shown on both sales and inforce ledgers to approximately 7%, with slight carrier and product variation based on specific methodology used.

In addition, the regulation limits “the illustrated rate credited to the loan balance” to an amount that “shall not exceed the illustrated loan charge by more than 100 basis points.”   This limit is in apparent response to “loan arbitrage” sales strategies that sprung up in the industry. This new limitation, along with other disclosures to be included in the illustration, such as an alternative scale rate that must be shown “with equal prominence,” and a table showing historical index performance over the last 20 years, will have an effective date of March 1, 2016.

We at ITM|TwentyFirst have long opined that sales illustrations should be conservative in nature and have in the past (What You (as Trustee) Need to Know About Equity Indexed Universal Life) suggested that when an Agent is projecting a crediting rate above 7% on a sales illustration, that you, as Trustee, “ask to see the outcome at 5% also, which might be more in line with reality.” As we mentioned in that Blog, “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.”