By Kasey Gammons, LifeTrends Sr. Analyst
Looking around at the Indexed UL landscape can be a little intimidating in a post-AG49 world. Seeking to distinguish themselves, nearly every carrier employs at least one, and likely more than one, method to improve illustrative performance. Surveying IUL policy options can feel a bit like shopping for a new car: each one has its own particular features, performs and costs a little differently, and has different bells and whistles accompanying each vehicle.
Probably the most common feature accompanying any given IUL policy in the market is the incorporation of some form of interest bonus. Since it is such a prominent fixture, we wanted to take some time to focus in on this widespread and consistent trend. Our modest aim in this piece is to briefly lay out the nature of interest bonuses, discuss the current market trends surrounding them, and highlight some of the more unique offerings (don’t worry, we won’t try and sell you a car or an interest bonus).
Interest Bonuses and Categories
A simple working definition we can use for an interest bonus is: any boost provided on the interest credited to a policy. Interest bonuses help restore some optimism on index returns without violating the regulation set out in AG49. They frequently have different names associated with them such as persistency bonus or account value enhancement. Interest bonuses vary primarily by type, amount, guarantee of the bonus, and start year.
Bonuses can be set into two primary categories: Additional Credits and Multipliers.
Definition and Trends. Additional credits function pretty much exactly as the name sounds: they add bonus interest directly to the policy. One of the advantages to the additional credit method (as opposed to multipliers) is they can function largely as a floor on index returns since bonus interest isn’t dependent on returns. Bonuses in this category range from .25% to 1% of additional credit to the policy, but it is hard to pin down a clear trend on the amount of bonus; two relatively common options are .25% and .75%. If an illustration’s illustrated rate is set to 6% with a .5% interest bonus beginning in year 11, then the ledger would show values returning a 6.5% interest credit after the bonus activates.
By far the most common year for an additional credit bonus to start is year 11, though years 10 and 6 have a few instances as well. Approximately half of products using this bonus form are guaranteed, showing an almost even split between guaranteed and non-guaranteed offerings.
Noteworthy Exceptions. While most products follow a fairly straightforward approach, there are three products that provide a unique spin on the additional credit model.
- AXA’s IUL Protect adds a unique index credit based on the current crediting on their general, fixed account. If AXA declares current rates above a threshold 3.5% on their fixed account, then their indexed options get a bonus of the difference above the 3.5%. So, using their current declared fixed account rate of 3.75%, then .25% bonus is added to the interest on the indexed crediting (for a 6% indexed market return, a policy would receive a 6.25% indexed credit with bonus included).
- Securian Financial’s Orion IUL provides their non-guaranteed Annual Policy Credit, a variable credit that is tied to several factors including S&P index performance, overfunding levels on the policy, and whether their spread death benefit option is elected (more APC if elected).
- Pacific Life’s Pacific Indexed Performer LT 2 is a non-guaranteed, variable duration, and variable bonus tied to their fixed account bonus (bonus maxes at 1%).
Definition and Trends. Multipliers, in contrast, multiply indexed interest returns by some factor. For example, if a policy has a 15% multiplier and the index returns a 6% interest credit, the total interest with bonus credited will be 1.15 x 6% = 6.9%. Multipliers can take two distinct forms: as an inherent part of a specific index allocation or as a persistency bonus. Generally, if the multiplier is tied to an allocation, the name of the index will have the words “multiplier account” as part of the naming convention, such as S&P 500 Multiplier Account.
Many multipliers in the market are guaranteed at 15%. If the multiplier is tied to the allocation, it begins when the policy does, and if it is a persistency bonus, the strong trend is to begin in year 11. The only non-guaranteed multipliers are Pacific Life’s two Discovery IULs. The clear advantage to the multiplier method over additional crediting is that when index returns are high, the multiplier can provide significantly more bonus interest than its counterpart. However, the downside to multipliers occurs in 0% interest return years since multipliers will provide no bonus.
Noteworthy Exceptions. As with added credit, most products use multipliers in a standard manner, but there are two companies that provide interesting twists in the multiplier model.
- Pacific Life’s Pacific Discovery Protector/Xelerator IUL caused quite a stir when it was first introduced as the first factor-based, formula-driven, non-guaranteed, and complex multiplicative interest bonus. At the end of each year beginning in year 3 (PDX) or year 11 (PDP), a multiplying factor is calculated based on a plethora of variables such as “issue age, duration, gender, risk class, death benefit option, face amount, accumulated value, and which Indexed Account the segment is allocated to.” Though charges are higher on this product, interest crediting in some accumulation scenarios can see returns upwards of 50% or more in later years.
- Prudential’s PruLife® Index Advantage UL (2018) can potentially utilize two distinct multipliers, for a multiplier on top of a multiplier effect, granting a staggering potential for bonus interest. There is a persistency-type multiplier that provides a 20%, guaranteed, 30-year duration bonus beginning in year 11 that activates if premiums are moderate to overfunded. Additionally, it contains an Indexed Account with Multiplier account, offering a 15% guaranteed interest bonus for the life of the policy.
No Bonus and Dual Bonus
While the overwhelming majority of the Indexed UL market employs some form of interest bonus, there are exceptions. In the accumulation sphere, only three distinct products tout a lack of need for any form of interest bonus (Mutual of Omaha’s Income Advantage, Transamerica’s Financial Foundation IUL, and Voya’s IUL-Global Choice). It is slightly more common for products to opt for no bonus in the protection sphere, but still relatively rare.
On the other hand, six products potentially offer two bonuses, instead of the customary single bonus: AXA’s IUL Protect, Prudential’s PruLife® Index Advantage UL (2018), Securian Financial’s Orion IUL (these
three are mentioned in the above sections), John Hancock’s Protection IUL 15, North American’s Builder Plus IUL, and Penn Mutual’s Accumulation Builder Select IUL. With the exception of Prudential’s dual multiplier, all of these employ some form of a multiplier in addition to an added credit.
A brief survey of interest bonuses reveals much of what was said in the beginning: there are many different features and bells and whistles attached to them. Despite the colorful exterior and fancy gadgetry, there are really only two engines under the hood of the interest bonus vehicle: either an additional credit or a multiplier. While it is certainly important to understand the more complicated mechanics surrounding interest bonuses, there are some clear trends (with some unique outliers, of course) and ways to get a handle on this very important IUL feature.