The Evolution Of FIUL
2020 is sure to bring many changes and opportunities to our industry, but one thing that is likely to continue is the growth of fixed index universal life insurance (FIUL). Since Allianz Life Insurance Company of North America (Allianz Life®) decided to focus on growth in the FIUL market in 2011, FIUL has grown significantly to be the second leading product in the U.S. life insurance market and now comprises 25 percent of total life insurance sales.1
Why has FIUL been so popular? The innovative product design has been the main engine behind the evolution of FIUL, providing consumers with death benefit protection along with accumulation potential and flexibility for the future.
Flexibility is key, as clients are becoming increasingly challenged to find ways to protect their loved ones while also having the ability to address other financial issues. FIUL has helped in that regard, providing financial professionals with a useful financial vehicle that can help their clients meet their financial goals.
Yet, the evolution of FIUL hasn’t come without its challenges. One important issue facing the industry that will continue in 2020 is regulatory change.
Actuarial Guideline 49 (AG 49), has changed the landscape of the industry, especially when it comes to product design and illustration capabilities. Originally, AG 49 was introduced to try to level the playing field regarding how products are illustrated. However, some carriers have incorporated different features and enhancements, including bonuses, to allow the illustrated credited rate to be higher than what may have been intended by the regulators. Increased charges increase the option budget to pay for higher bonuses or higher caps.
This new trend of high bonus, high charge product designs is becoming commonplace in the industry. Although they are generally actuarially sound, these product designs may skew a client’s understanding of potential benefits if illustrations are not explained properly.
Products with higher bonuses may illustrate well assuming a flat interest rate, potentially illustrating higher cash values and higher loan amounts. Questions remain, however, as to how determining the risk profile has changed and what happens in the product knowing it is unlikely the policy would achieve the flat illustrated rate, or the external index experiences some volatility. With an external index, your client’s policy does not directly participate in, or receive dividend payments from any of them through the policy.
It’s important to remind clients that with all FIUL policies, nothing comes for free. If they are seeing a higher illustrated rate, they also need to understand that asset charges will also be higher—so more of the risk in the product has been shifted to them. And perhaps even more important, the higher the illustrated rate and associated charges, the lower the chance of success. If not communicated properly, this could set unrealistic expectations for product performance.
This goes to the topic of product design. Clients have the flexibility to choose how to allocate within their FIUL policy in a variety of ways, from low bonus/asset charge models to options with higher bonus/asset charges that offer the possibility for the highest possible loan solve. A product with a higher bonus/charge design may very well make sense for a particular client, but the bottom line is they need to understand the reality that their chances to achieve that level of success are lower than if they go with a more conservative bonus/charge structure. Unfortunately, when FIUL products are illustrated for prospective clients today, that is not always the case.
Hopefully, later this year when the next phase of AG 49 goes into effect, the issues associated with higher illustrated credited rates will be somewhat mitigated as carriers will need to illustrate at the same maximum illustrated rate, regardless of any bonus or multiplier. This will bring the focus back to product features and financial strength of the carrier—and will also prompt financial professionals to do a better job of telling the complete story of how FIUL products can be designed and what clients should expect from different scenarios.
Given these issues, there are a few things that can be done to help navigate the associated risks:
Understand volatility and sequence of returns—Market volatility has been a near constant for the past few years, and Americans are certainly aware of it. In fact, according to the most recent Quarterly Market Perceptions Study from Allianz Life, Americans are increasingly anxious about the effects of market volatility on their finances and 50 percent now say they are worried a major recession is coming.2 This volatility could create an issue if your clients start taking distributions from retirement accounts at the wrong time, which can create a problem with sequence of returns. Sequence of interest rates can also impact an FIUL policy. While a policy may still achieve six percent overall, the policy likely will get there by achieving varying interest rates. For example, over a four year period, the policy may return 12 percent, eight percent, zero percent and four percent averaging out to a six percent credited rate. The order of that sequence is what matters—especially in the zero percent years. Once your client starts taking loans3 from any available cash value accumulation through annual interest credits earned in the policy when the external index experiences positive index returns, an FIUL policy becomes much more vulnerable to sequence of interest rates. Understanding how variations in credited interest can affect their policy is important, as it can impact how much can be accessed from the policy and how long it will remain in force.
Determine risk profile—Figuring out how much risk your client is willing to take to accomplish their financial goals is a fundamental part of the financial planning process, and should be a key topic when discussing their FIUL policy. For example, if your client wants to have a death benefit of $500,000 with potential loan amounts of $50,000, how much are they relying on a certain illustrated rate to achieve the loan amount? Can they take the risk of higher charges and potentially outperform, or should they pick an option that could be a little more stable? This is a crucial conversation to have with your client in order to determine how they can most effectively use their FIUL policy to accomplish multiple financial goals.
Set expectations—Equally important to discussing risks with your client is setting their expectations about how their FIUL policy fits into their overall financial plan. Be sure to talk with your client about the full range of possibilities—what can go right, what can go wrong, and what different decisions regarding where to allocate their money truly mean. This includes talking about the various index allocation options and loan flexibility issues. It is important to review your client’s FIUL policy annually to make sure it is meeting their financial goals.
Run multiple illustrations—Provide your clients with multiple illustrations at different rates, also refer to the guaranteed rate scenario, so they can see the impact of potential underperformance—not just the best case scenario. Different illustrated rates will also show how the loan amounts can be impacted in different market environments and how the loan amount may need to be adjusted in the future to help the client reach their goals.
Utilize available tools—In addition to showing the impact of sequence of returns and various return levels, look to utilize other pre-approved tools that can help explain different outcomes. Examples include benchmarking tools that allow you to compare indexes and look at historical performance, or charge ledgers that can help compare product to product.
With the growing need for flexible solutions that can help Americans address a variety of common financial concerns, the future looks bright for FIUL. It’s dependent on our industry to help our clients understand the complete picture and make sure the FIUL story remains a positive one going forward. [JW]
- 3Q 2019 LIMRA’s U.S. Retail Individual Life Insurance Sales by Channel with All Splits.
2. Allianz Life Quarterly Market Perceptions Study, October 9, 2019.
3. Policy loans and withdrawals will reduce the available cash value and death benefit and may cause the policy to lapse, or affect guarantees against lapse. Withdrawals in excess of premiums paid will be subject to ordinary income tax. Additional premium payments may be required to keep the policy in force. In the event of a lapse, outstanding policy loans in excess of unrecovered cost basis will be subject to ordinary income tax. If a policy is a modified endowment contract (MEC), policy loans and withdrawals will be taxable as ordinary income to the extent there are earnings in the policy. If any of these features are exercised prior to age 59½ on a MEC, a 10% federal additional tax may be imposed. Tax laws are subject to change and you should consult a tax professional.
Life insurance policies require health and financial underwriting and have certain fees and charges associated with them that pay for the death benefit, underwriting expenses, and issuing and administering the policy. These policy charges would continue to be deducted, and loans will reduce the policy values and could cause the policy to lapse.
Bonus products may include higher surrender charges, longer surrender periods, lower caps, or other restrictions that are not included in similar products that don’t offer a bonus. The index allocations that offer the interest bonus will generally have lower caps and participation rates. There is no guarantee that a policy will be credited with an interest bonus every year as it is based on the growth of an index.
Product and feature availability may vary by state and broker/dealer.
Guarantees are backed solely by the financial strength and claims-paying ability of Allianz Life Insurance Company of North America.
Products are issued by Allianz Life Insurance Company of North America, 5701 Golden Hills Drive, Minneapolis, MN 55416-1297. 800.950.1962. www.allianzlife.com.