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The El Camino of Life Insurance

Thursday, August 21, 2014

Never have we heard a better description of Indexed Universal Life (IUL) then in the comment section of an article describing IUL looking like the El Camino (part sedan, part truck but it does neither particularly well) of life insurance. IUL has often been described as part downside protection and part upside potential but like the El Camino neither one works really well.  Which is all the more surprising when in 2012, Fox Business had this to say about IUL: “An emerging and fast-growing contract design — the indexed universal life (IUL) policy — may come very close to being the ideal contract for most consumers in today’s interest and overall market environment.” 

The newest type of life insurance product, introduced in 1997, the market share for this product type has grown steadily since 2004 and is the fastest growing of all permanent life insurance products.  Indexed universal life (indexed UL) improved 1 percent in the fourth quarter, ending 2013 up 13 percent and recording the greatest increase in absolute dollars compared to other product lines. In 2013, indexed UL represented a record 35 percent of UL premium and 13 percent of total life insurance premium. (Source: LIMRA).  Does this takeover of market share from other products, such as Whole Life and Current Assumption Universal Life (Current Assumption UL), imply that Indexed UL is inherently a “better” product?  Is it really the ideal contract?

Unfortunately, probably not.  When a new product is introduced, it has no history, no track record, so the illustrations used in the sales process have few if any restrictions.  This can be seen in the 1980s when Current Assumption UL was illustrated at 12%.  As many consumers have come to realize, the crediting rates on those policies have declined to an average of 4% - 5% and many are underfunded and in danger of lapsing without value if they do not pay considerably higher premiums than originally illustrated.

When it was first introduced, Indexed UL was also commonly illustrated at higher rates of return, as high as 12% in some cases.  Over time regulators have now introduced formulas that must be used that restrict the rate of return for the illustrations to something that is more reasonable, but is it really realistic to be illustrating Indexed UL at 7% and Current  Assumption UL at 4%?  Are the products really that different and can Indexed UL produce returns 300 basis points higher than Current Assumption UL?

Indexed UL is said to deliver higher returns than Current Assumption UL with equity-linked participation rates.  The insurance company uses their general account yield to purchase equity exposure from a third party, whereas the Current Assumption UL crediting rate is based solely on that general account yield.  In addition, both products also have expenses that the insurance company deducts from cash values.  Indexed UL therefore, is not that much different from Current Assumption UL.  Both products produce returns that are linked to the insurance company’s general account. Both products are subject to expenses deducted by the insurance company.

How can you fairly determine the better product for you or your client? A Veralytic Report is a good place to start.   Veralytic is the only patented, objective and rules-based research tool that goes beyond the overly-simplistic comparisons of illustrations of hypothetical policy values that can be considered “misleading” and “inappropriate” by both financial and insurance industry authorities. Veralytic’s independent research reports provide a facts-based solution that is both compliant with industry regulations and established case law.

Veralytic is simply the fastest, easiest, and most comprehensive and cost-effective way to independently verify to clients and their advisors whether or not the pricing and performance of existing or proposed life insurance is in their best interest. Only Veralytic is accepted for independent client representation, endorsed by the New York Bankers Association (NYBA) and compliant with industry regulations and established case law.

Use the Veralytic Reports to determine the appropriateness of pricing, the reasonableness of performance expectations for invested assets underlying policy cash values, and overall suitability for your (client’s) policies based on the 5 factors of suitability. Click here and get up to 3 Veralytic research reports under our NO-Risk trial subscription.

re: The El Camino of Life Insurance

Friday, August 22, 2014 T Mark Pace- Objectiview
Great article! An IUL is still technically a fixed UL product as you have stated with the same expense and cost of insurance issues. The real problem is the lack of understanding of the "order of return penalty" and how it effects actual performance over time for any product that has variable returns credited to the product when compared to an illustration that has constant returns credite and projected over time. In other words, the actual cash values using the variable returns will always be less than the constant returns projected cash values even when the same average returns are achieved. This is due to the fact that the withdrawals of expenses and COI over time will more adversely effect the variable returns due to the " order of returns" penalty.

re: The El Camino of Life Insurance

Thursday, August 21, 2014 Carol Robinson

Barry, I wish I had had this article when I was still working at Northern.  This was an ongoing battle that I had with some of the agents who should have known better than to sell this junk.  I was able to stop some of these sales but as your article says, it still continues…sold by those who have NO Series 6 or 7 license.

Enjoying my one-year's retirement!

Carol Robinson


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