The insurance industry tends to sell what illustrates the best. I know that comes as a shock to everyone. This is generally fine as long as the illustrations are reasonable and achievable. Historically, the industry has always sold the best illustrating product by taking the asset type that performs the strongest and plugging it into the insurance wrapper. Whole life sold the best with dividend credits prior to the rise in interest rates in the 1970s and 80s. At double digit interest rates, the industry chose to put CDs inside the insurance wrapper and called it universal life. During the 1990s dot-com frenzy, it elected to favor the placement of equities within the product and hurled variable universal life to the top of the illustration charts. The dot-com crash and the financial crisis years later turned VUL completely out of favor. A slight variation came about with AG 37 and 38 in 2013 providing a pricing disparity compared to GUL, breathing a little bit of life into the VUL market in the form of no-lapse guaranteed VUL. However, the market had already left VUL for dead, especially for accumulation, and began to favor a product that offered downside protection. The industry decided to place the carrier’s balance sheet within the product while maintaining a market component, accessed through equity option contracts. This gave birth to indexed universal life (IUL) as the industry’s new darling providing the best of the protection and accumulation worlds. In the late 2010s, as a record market rally continued with persistently low interest rates, the industry decided to step up the IUL game to an entirely new level.
Agitated by recent AG 49 restrictions, the industry decided to apply leverage within the IUL contract through multipliers and various crediting mechanisms. Competitive desperation set in and a great illustration war raged, enticing many carriers to load on more and more risk to create ever more unlikely client outcomes. The past couple of years we have begun to see carriers adjust their cap rates downward, which will have a severely negative impact on leveraged IUL products that were sold in previous years. Through all this chaos, we have started to see some sanity return to the IUL market, but I fear a lot of the damage has already been done. The NAIC will fumble around and try to beef up AG 49, probably by the time this article is printed. That will hopefully be the end of the madness for this market and potentially a return to reasonable expectations. Where will the industry turn now to fuel its spreadsheeting and illustration addiction? For accumulation, I think the ball has bounced into the VUL court once again.
Don’t get me wrong. I like the concept of IUL, and the traditional products are very good client solutions. I think this because they have a good chance of delivering to the customer what they illustrate. Remember, we are in this industry to serve the clients first and selling them products that actually work should be a top priority above all else, right? Today, we are in a situation where the IUL products that illustrate the best are mathematically the least likely to work or deliver the results the client expects. And when our customer base, meaning the general public, gets disappointed on a large scale, it only hurts the industry’s credibility and attracts the attention of the regulators. It seems the industry carriers have already shifted to the next possible solution in anticipation of the changes to AG 49 and perhaps a FINRA/SEC storm to come. Why not deploy these strategies within a registered product sold by securities licensed agents? Quite frankly, securities registered agents are far more suited to understand and sell these strategies than fixed insurance agents. We’ve already seen several accumulation VUL products introduce indexed sub-account options over the past five years. We haven’t seen any multiplier or leveraged options yet, but I suspect they are right around the corner. The wonderful thing about putting an IUL inside of a VUL is that the client has an exit strategy. If the carrier adjusts the caps or gets cute with any of the other levers it can pull, the client can move out of that account and into a number of different equity or fixed alternatives. Overfunded, accumulation VUL is a very resilient product and has ample historical data for us to accurately apply illustration parameters. IUL has an extremely limited history, and even the options markets have limited data combined with these leveraged strategies, so it will take some time and probably some pain before we really understand what was sold and how it and the carriers behave. Remember, as things get tight, you can expect the carriers to pull those IUL levers to stay profitable.
The IUL market will be brought back to reality with an expected, enhanced AG 49, and I believe agents have begun to understand that things got out of control. IUL overstepped its bounds, big time. Simultaneously, the carriers are going to begin to shift their core accumulation message from IUL to VUL, where these securities-like indexed strategies have a proper home and fall under a more suitable regulatory environment. This isn’t a bad thing. The leading accumulation solution should reside in a VUL chassis; we’ve got the historical evidence to prove it. The main cultural barrier will be in getting insurance agents securities licensed.
Especially for clients who can achieve top underwriting classes, VUL remains the best tax-free wrapper for any asset class available. This time, perhaps instead of shifting from one product to the next, we can have a single product with multiple underlying options. Within the new accumulation VUL products, we have between 50 and 100 investment sub-accounts, a few indexed accounts with more to come, and at least one fixed account from which to choose. You know what’s funny? If you illustrate all the accumulation VUL products together under the same parameters— they all look almost exactly the same. Try doing that with the various IUL products available; you will see nothing of the kind. That is because they have drastically different bells, whistles, multipliers, caps, etc. The biggest variant between one VUL to another is the cost of the investment sub account portfolio or the asset manager charge. Those insurance carriers with strong variable annuity “VA” offerings and assets will have predominantly better priced VUL sub account options. That is just the nature of it. The client can build a great asset allocation model for their younger years and shift to an indexed or fixed option when their risk tolerance changes or they prepare to take income from the policy. I think we shall begin to see VUL come full circle and morph into an evolved, preferred accumulation vehicle of the 2020s.