When comparing permanent life insurance solutions for clients, some producers are drawn to indexed universal life insurance (IUL). Universal life’s flexibility and its potential for cash value growth are a powerful combination that can outpace traditional life insurance policies in today’s low interest rate environment. Some producers may be choosing IUL generally, and individual company IUL products specifically, because of how well they illustrate cash accumulation and distribution.
It’s the last point that is most concerning today. Carriers understand higher illustrated values will often produce more sales, whether or not the higher numbers are warranted. As carriers continue to roll out their next versions of IUL, some are making them more expensive for the policyholder. Today’s IUL product may be two, three or more times more expensive than the product that was available as little as two years ago. What would drive a carrier to increase expenses by this much? There’s really only one reason—illustrative performance.
By increasing expenses, more money can become available to provide bonuses or, more often, multipliers. While these features have the potential to create higher performance, there is certainly no guarantee that this higher performance will materialize—a challenge that becomes more acute if the features are not guaranteed by the carrier.
This practice also adds risk to the policyholder who may not be aware of it. The risk comes in the known higher charges, which increase the downside risk as well as greater reliance on non-guaranteed elements.
The above table shows representative IUL policies with cash values and charges when they are highly funded.
Today’s financial world is one in which our regulators are increasingly focused on the price a consumer pays for their product. John Bogle, founder and retired chief executive officer of The Vanguard Group, and Vanguard funds have been preaching expenses for years.
Retirement plans, by regulation, publish their expense ratios for various investment options. The recently defunct DOL Fiduciary Rule was promulgated with an eye to the expense charged the customer. To increase expenses to the levels we are now seeing flies in the face of this regulatory trend and would seem to be baiting the lion in her den.
Policy costs had been kept in a narrow band for a number of years, but with recent introductions we are seeing a change in approach. The trend with IUL product design is clear—more and more risk is being transferred onto the shoulders of the policyholder, while at the same time the illustrative performance of these newer products creates the unbalanced expectation of increasingly higher returns.
Price is what you pay for something and value is what you get. As carriers continue on the current trend, it is clear that price is rising. Whether or not the expenses will be charged is not in question.
The real question is whether these expenses translate into actual value to the customer. When the rest of the financial world is focused on reducing cost to the consumer, we should question if our corner of the industry should be raising costs. And, if we are raising costs, does this bring real value or merely illustrative enhancement?
As the provider of financial services and advice, you have choices in which products you select for your customers. Some companies continue to deliver value by providing strong products with low expense levels; others have chosen to go the route of illustrative performance measures provided through high expense margins. As a financial professional the recommendations you make have a lasting impact on the security of your customers. The history of life insurance illustrations is littered with unmet promises—choose wisely.
CLU, is vice president, life product marketing, for Ohio National Financial Services in Cincinnati, Ohio. Kreunen can be reached by telephone at 513-794-6168. Email: [email protected]