Are indexed universal life policies ticking timebombs?

by Leo Almazora07 Jan 2020

Indexed universal life (IUL) has proven to be one of the insurance industry’s hottest products in the U.S., but regulators are concerned that buyers are unprepared for the fallout of a possible crash.

“The product’s appeal is that it promises annual interest based on formulas tied to stock indexes like the S&P 500 as well as protection against losses,” reported the Wall Street Journal. “Some policies offer newer features known as ‘multipliers’ that promise even higher annual interest, for higher prices.”

Research firm LIMRA reports that for the first nine months of 2019, IUL accounted for a quarter of all individual life sales as measured by premium, according to the Journal. That figure was just 20% in 2014, and 4% in 2008 prior to the decade-long U.S. stock market boom.

The historic stock-market run has provided a lift to the policies, but if it sputters or reverses, it may leave some buyers with an unaffordable insurance bill.

Designed to stay in force until death, IUL policies include both a death benefit and an interest-earning savings account that can help pay future policy costs. Premiums paid by policy holders are placed in the savings compartment, the cash-value account, from which the insurer deducts fees typically on a monthly basis.

Money in the cash-value account grows because of premium payments and interest, which the insurer credits based on formulas tied to stock indexes. However, the insurer also deducts fees, which typically increase over time to reflect the policy holder’s advanced age. If the stock market goes sideways, the interest earned could lag expectations even as fees continue; should the cash-value account get depleted, additional money would have to be paid to keep the policy in force.

“[IUL policies are] often postured as an investment vehicle where you can’t lose,” life-insurance consultant Bill Boersma told the Journal. The obviously impossible promise has persisted, he said, because the policies “have largely been in force only during a historic bull market.”

The problem of pie-in-the-sky projections has come to the attention of U.S. regulators, including the National Association of Insurance Commissioners (NAIC), a standards-setting organization for state insurance departments. By mid-2020, it reportedly plans to put rules in place to prohibit insurers from showing better illustrated results for new products with the features than those without.

Fred Andersen, an actuary with the Minnesota Department of Insurance and a leader in the effort at the NAIC, warned that existing consumer materials “can lead to unrealistic expectations.” Paul Graham, chief actuary with trade group American Council of Life Insurers, took a softer stance: asserting that the industry supports the development of materials and disclosures for consumers to “make the right decisions,” he acknowledged that companies “have different views” on how to do that “on rather complex IUL products.”

The potential threat to consumers has surged for consumers, among whom demand for IUL skyrocketed over recent years as low interest rates made conventional bond-based policies less appealing. For the new products, some insurers credit interest based on a “participation rate” that pays out a designated portion of a stock market index’s gain. Others specify a maximum interest rate, with 10.77% being the current average, according to market research firm Wink, Inc.

“Insurers generally retain the contractual right to change these percentages, subject to regulator-approved limits,” the Journal said. “They also typically can raise the cost of the death benefit, per contractual provisions.”