Jason Wellmann

Building a Better Future for FIUL
2015 was another important year for fixed index universal life insurance (FIUL) as financial professionals continued to learn more about how FIUL can help their clients achieve the primary need for death benefit protection while also offering the opportunity to build cash value accumulation. 

According to the most recent report from Wink*, indexed life sales for the third quarter of 2015 were $478 million, up 4 percent over the previous quarter and up 28 percent from $372 million in sales for the third quarter of 2014. In fact, index life insurance sales were greater in the third quarter of 2015 than in any other third quarter in the history of the product line. 

Perhaps more significant than the 2015 sales results, however, is the evolution in the way FIUL products are now sold. On September 1, 2015, the first phase of Actuarial Guideline XLIX (AG 49) became effective for all FIUL insurance policy illustrations. This was a significant milestone because the new guideline helped bring more consistency and clarity to the illustrations that financial professionals use when discussing FIUL products with their clients. 

AG 49 was originally proposed by insurance companies who sell FIUL policies-including Allianz Life Insurance Company of North America (Allianz Life®)-who wanted to develop a consistent methodology for determining maximum illustrated rates. In its initial stages, the proposed methodology was simple and straightforward, and could easily be understood by consumers. But as certain non-FIUL companies questioned the proposal and proposed alternatives, the conversation became more actuarial in nature. At that point, we relied heavily on our illustration actuaries to demonstrate the strong value that FIUL provides to consumers and help shape a compromise that we could support.

Role of the Illustration Actuary
A key role of an illustration actuary is to perform a series of tests to ensure that the illustrated scale used in a life insurance policy illustration is compliant with insurance regulations and guidelines. Many financial professionals know that illustrated values cannot exceed the current rates and charges in effect at the time of the illustration (called the “currently payable scale”), but some may not know there is a secondary limit placed on illustrated values (called the “disciplined current scale”). The purpose of the disciplined current scale is to prevent a company from showing an illustration of a product that they cannot afford. The illustration actuary must determine the disciplined current scale for each policy their company illustrates, and then set the maximum illustrated scale. 

In order to demonstrate that a policy can be afforded at a certain scale, a company must be able to show that the accumulated cash flows equal or exceed the policy’s cash value at certain durations. Accumulated cash flows are a company’s “cash in” minus “cash out”, and reflect premiums paid by the policy owners, investment income earned by the company, expected death benefit claims, living advantages such as withdrawals or loans, management expenses, commissions paid to the agents, and taxes incurred. The illustration actuary must use a number of assumptions for these calculations, including mortality assumptions, policyholder behavior assumptions, and interest rate assumptions.

Prior to AG 49, illustration actuaries looked to the Life Insurance Model Regulation and ASOP 24 for guidance on FIUL. For traditional UL policies, companies credit a set rate of interest directly to the policy, so the guidance was straightforward: the maximum illustrated rate is the credited rate on the policy, so long as the illustrated scale can be afforded (i.e. it passes disciplined current scale testing). But for FIUL policies, instead of crediting a set rate of interest directly to a policy, companies typically invest that rate in derivatives and then apply their payoffs to the policy in the form of indexed interest. So two grey areas existed for FIUL: 1) “What is an appropriate derivative payoff assumption for disciplined current scale testing?”; and 2) “What is an appropriate credited rate for the policyholder illustration?”

Important changes under AG 49
Section 4 of AG 49 addresses the illustrated crediting rate question directly, by prescribing a process to determine the maximum illustrated rate for each policy. There is still some actuarial judgment in the determination of the illustrated rates for each individual index allocation within a policy, so financial professionals may see some differences between companies in their approach. However, the overall maximum illustrated rate in place for each illustration should be fairly consistent between companies, assuming they have similar index allocations and caps. 

Section 5 of AG 49 limits the investment income earnings assumption used in the disciplined current scale testing. This change impacts the testing process for the illustration actuary, and may indirectly impact the maximum illustrated scale, but shouldn’t be a prominent component for non-actuaries. 

Most illustrated rates for FIUL illustrations will be lower than before, which opens the door for increased product education. Before AG 49, the industry often focused on the numbers shown in illustrations, but now there will be more focus on product features such as index allocation options and riders. There will also be more emphasis on training and education, both for financial professionals and consumers. Allianz Life heavily invests in education—last year we had over 1,000 financial professionals come to our home office for product and hedging training. And I think there will be more focus on the insurance companies themselves, both in terms of company strength and rate setting history.

Achieving a level playing field
Allianz Life is focused on the smooth implementation of AG 49 and hopes that the rest of the industry also follows the spirit and intent of the guideline so we can achieve a level playing field. But realistically, we know that when there is room for interpretation, a few companies may push the limits. We’ve already seen certain companies do this with illustrated bonuses that are not guaranteed, and we’ve also seen some companies change their product floors and account charges to obtain a higher illustrated rate. This is exactly why product education and transparency are important—so financial professionals can compare products holistically, by considering all features and benefits, and avoid being misled by isolated benefits. 

Phase 2 of AG 49 goes into effect on March 1, 2016, so we’ll be implementing the new alternate scale, historical index performance table and loan limitations in the upcoming months. Allianz Life has been requiring a version of the alternate scale since 2008 and has offered an optional historical table since 2006, so these are both changes we believe are good for the industry. The loan leverage limitations are good for tempering expectations but could be difficult to explain, so we’re going to be helping financial professionals with talking points on why the illustrations operate differently than the provisions of the actual policy. 

Additionally, regulators are closely watching how companies implement AG 49, including their use of illustrated bonuses, account charges and floors, and we have people at Allianz Life who are actively a part of those conversations. As FIUL continues to be a popular choice for consumers seeking death benefit protection and the opportunity to build cash value accumulation, we support guidelines that increase education, sustainability and transparency throughout the industry. Allianz Life is committed to doing what’s right, and we believe AG 49 goes a long way toward that goal. [JW]

Guarantees are backed by the financial strength and claims-paying ability of the issuing company. 

Footnote:

*Wink’s Sales & Market Report, 3rd Quarter 2015

Life is full of uncertainty.

 While we can’t predict what will happen tomorrow, financial professionals can help their clients prepare for the future by offering product solutions for their client’s overall financial strategy. One product category gaining momentum is fixed index universal life (FIUL) insurance. According to LIMRA, from 2012 to 2013 the annualized premium for FIUL products went up 9 percent with annual premium in 2013 hitting more than $1.7 billion in sales (2013 LIMRA U.S. Individual Life Insurance Sales report). With the availability of FIUL products increasing, FIUL can play an important role in helping clients of all ages, including retirees, build more protection into their financial future.

Life insurance provides an income tax-free death benefit to beneficiaries, which can address immediate needs that may include income replacement, a college funding strategy, paying down a mortgage or other debts, estate tax coverage, final expenses and business succession. But today’s FIUL policies can also provide additional features beyond the death benefit. Some of these options include the ability to help address future expenses, including the rising costs associated with a chronic illness and long term care, as well as inflation. These features may generally be available through optional riders that come at an additional cost.

Financial professionals who understand these additional advantages can help address clients’ needs and demonstrate that they are focused on helping their clients with their financial future.

Protection and More

FIUL differs from traditional universal life insurance by providing the opportunity for the policy to build cash value accumulation from indexed interest. FIUL can provide an opportunity for the policy’s cash value to increase based on positive changes to an external market index, but the policy’s cash value will never decrease when the external market index is negative (although fees and expenses will apply, which will reduce cash value). Although an external index may affect the interest credited, the policy does not directly participate in any equity or fixed income investments—clients are not buying shares in an index. Along with death benefit protection, we believe the potential for an increase to the policy’s cash value has helped make FIUL one of the fastest growing segments in the life insurance industry.

In addition to the death benefit protection, there are additional benefits that can make FIUL products a fit for many consumers, including retirees. For example, some FIUL products include chronic illness and long term care riders (which may be subject to underwriting requirements). According to the Allianz Life 2013 Life Insurance Perspec­tives Study,* when respondents (ages 25 to 75) were presented with examples of additional benefits available through some life insurance policies, “access to money if I become chronically ill” was the most popular option with 62 percent of respondents noting it as the most valuable benefit. When we look specifically at the response from older respondents, the majority (57 percent) of respondents ages 55 to 75 said access to money if they become chronically ill was the most valuable benefit. Policies that offer riders that specifically address chronic illness and long term care allow clients to access a portion of the death benefit or accelerate death benefit payments to help pay for other health care expenses or emergencies (subject to certain qualifications).

Focus on Innovation

A compelling aspect of the FIUL market is that it is constantly innovating as carriers listen to consumer demand. Understanding customer needs opens the door to finding new ways of making the products stronger and more flexible. Recent innovations within FIUL demonstrate that a focus on delivering these results for the customer is a key factor in the growth of the category.

One of the most recent innovations that carriers are adding is more choice in index allocation options. These allocation options provide clients with new opportunities for cash value accumulation. In addition to the death benefit that can help clients protect their family or estate  in the case of premature death, these index allocation options are designed to help accumulate cash value for various purposes such as supplementing retirement income through policy loans. These index allocation options can also provide opportunity to build cash value to help address concerns such as health care and inflation.

In addition to current crediting methods that help build the cash value of the life insurance policy, new crediting methods can also offer the potential for indexed interest that is credited if the index performance is flat or experiences any increase from one policy anniversary to the next (including when the indexed interest exceeds that set amount). This index allocation option provides a more straightforward method with a shorter time horizon to build cash value for possible use on future expenses. This is also an attractive feature because it can be effective even in a low interest rate environment when small index changes can mean indexed interest could still be credited to the policy.

Financial professionals should be aware of other optional riders (available at an additional cost) that may be available on FIUL products. Some FIUL policies may offer riders that can help protect the purchasing power of the loan amounts and can also address concerns about future tax increases. Remember that taking policy loans and withdrawals against a life insurance policy will decrease any available cash value and death benefit and could cause the policy to lapse. In the event of a lapse, outstanding policy loans in excess of unrecovered cost basis will be subject to ordinary income tax. Tax laws are subject to change, and your clients should consult their tax professionals. All guarantees in the policies are backed by the financial strength and claims-paying ability of the issuing company.

There are many options available to financial professionals as they help their clients create the financial future they desire. Those who are open to the possibilities will see that FIUL can provide clients, including retirees, with many of the benefits they seek. Today’s innovative and flexible FIUL products offer death benefit protection, options to help address certain concerns such as chronic illness and long term care needs, and innovative index allocation options for cash value accumulation potential. By educating these clients about what makes FIUL unique, financial professionals can offer clients reassurance for their financial future amidst a life full of uncertainty.

 *The Allianz Life 2013 Life Insurance Perspectives Study was conducted by Ipsos via their online iSay/Partner Vendor Sample from Sept. 6-18, 2013 with 2,034 panel respondents age 25 to 75 with $75,000-plus in household income, and was commissioned by Allianz Life Insurance Company of North America.