Looking Through the 70% Window
By Ami Amega, LifeTrends Product Analyst
In the land of Indexed Universal Life (IUL), the selected illustrated rate (IR) is one of the most debated factors considered when comparing product performance. Comparing products at their regulatory maximum IR can be overly optimistic, while a lower fixed return rate (such as 5% or 6%) doesn’t take differences like caps into consideration. While there are many other homegrown methodologies, we wanted to find a standard that would give a nice estimate to view the range of possibilities rather than a single scenario. Our solution was to develop a concept called the 70% window. We start with your basic window. At the top of the window, we have the optimistic max illustrated rate, and at the bottom of the window (or the window sill) we have 70% of the max illustrated rate. This builds a practical range where market highs and lows would affect each product according to their cap assumptions. Instead of trying to nail down and focus on one specific scenario for an illustration that has hardly any chance of coming to fruition, we’re proposing getting comfortable with a range of values that should encompass the actual result. Through this window, we can view a more wholistic picture of a practical range where performance may lie.
Why look at this 70% window?
The bottom sill allows for many interpretations, but setting this lower limit of 70% assumes that dwindling market conditions would affect products in equal proportion. With the constant influx of creative bonuses and multipliers, it has been difficult to find a level playing field on which to compare these products. The 70% window is a simple calculation, and it accounts for differences in caps and floors, while equally affecting the bonuses. For perspective, if a product’s max IR is 7%, the bottom range of the 70% window would illustrate at 4.9%.
Using this analysis, what conclusions can we draw? We wanted to keep an eye out for those accumulation products that completely fell off the map; products that have windows so large that in the event of an unsightly storm, their performance completely loses ground. Larger windows tend to imply that products may have more sensitive responses to interest rate changes. We looked at over 30 accumulation focused indexed universal life products, illustrating them at 70% of their max rate in their regular and high cap accounts. The study focused on the percentage drop in distributions that occurs between the max rate and 70% rate (the size of the window). Looking at Preferred Best and Standard males ages 45 and 55, we observed which products could block the rain through unfavorable circumstances. The results showed to be quite interesting, but not as dramatic as one might reckon with about two-thirds of the products showing average drops in projected distribution between 40% and 50%. Overall, most products fit within a range of 25% and 60%. Give or take a couple of outliers, the overall trend is products that are the most competitive at their maximum IR comparisons tend to stay relatively competitive at the bottom sill.
What’s the view from this window?
The best products were those that saw less than 40% drops in their income distribution. One of the strongest contenders was Global Atlantic’s Lifetime Builder Elite. With an average drop below 40%, it has one of the smallest windows while also showing some of the strongest distributions at both the top and bottom of its sill. Nationwide’s YourLife IUL Accumulator is another good product to note. Coming in with an average drop of 26%, it has the smallest window rendering it relatively less sensitive to falling interest rates. Though its distributions started off nowhere near the top at its max IR, Nationwide makes a steep climb in rank to being one of the top five at the respective 70% rate.
On the flip side, the largest windows were comprised of products that had distribution drops greater than 50%. John Hancock’s Accumulation IUL 18 and Pacific Life’s Pacific Discovery Xelerator IUL had incredibly strong distributions at their max rate, but faded into the middle at their 70% rate. Their distributions saw some of the highest drops at around 49% to 55%, leaving their bottom sill lower than other products who have smaller windows with less optimistic maximum returns. Interestingly, despite these examples, the general trend showed that products with the largest gaps are typically those who had the least competitive distributions to begin with. Transamerica’s Financial Foundation IUL is a good example. It is ranked near the bottom, but still has a staggering average distribution drop of roughly 70%.
We also thought it would be interesting to compare the performance of high cap accounts to regular S&P 500 accounts. The result was high cap accounts showed larger windows than their core cap counterparts. The differences in percentage drops between the two range from nearly 1% to 18%. Given the fact that high cap accounts are designed to be more optimistic, it’s no surprise that they would be more sensitive to interest rate changes. However, even with these larger windows, on average high cap accounts still perform better than core cap accounts at their respective 70% max IR rates. The mere fact that one can illustrate a product in an account that is more sensitive to falling interest rates, yet still see better performance, shows the power and the importance of exploring options that are on a spectrum.
Not to our surprise, the biggest thing we took away from this analysis is how it is of the utmost importance to maintain vigilance. Though it is safe to say that the whole industry suffers in a low interest rate environment, because of the many assumptions, accounts, and the general risky nature of Indexed Universal Life, it is incredibly difficult to foresee the end result of products without exploring their outcomes within a range of scenarios. Whether it be through the looking glass of the 70% window or by some other means, considering product performance within a range of values is the most practical way to hedge against illustration inaccuracy, inconsistency, and uncertainty.