Telling Time: A Historical Look at Accumulation IULs
by Kasey Gammons, LifeTrends Senior Analyst
Around the time Apple was revolutionizing the phone in 2007, life insurance saw a major change as well: indexed universal life (IUL). While this trend in life insurance has had a much more gradual buildup than Apple’s overnight success, IUL is currently at the forefront of innovation and effort within the industry. Because of its increased popularity, we wanted to look into how accumulation IULs have changed in the past few years.
One of the really awesome things about being in the data game is the ability to map out interesting historical trends. We’ve been looking at the life market for a good while now, and when we chart out some key values for indexed offerings over a five year period using a standard LifeTrends example client, we see some really fascinating and unexpected results emerge. The charts generally split up the consideration into two distinct parts: Market-wide Averages and our LifeTrends top 5 (which indicates our top five best income illustrating products at the time).
First, we looked at historical cap rates. Note that the market has remained fairly consistent, despite the significant impact of actuarial guideline 49 (AG49) near the end of 2015. Both averages have decreased overall, but still achieved some upward movement. One of the primary ways carriers have been keeping the caps in this lower interest rate environment is the introduction of high cap accounts in 2016. Essentially, insureds are given the choice to purchase a higher cap on an index for an optional charge. Today, eight products offer these higher capped allocations, helping maintain a fairly steady market average in a turbulent season.
Next, we turned our attention to maximum illustrated rates. When AG49 came into effect, it limited the highest interest that could be illustrated, based on a 25-year lookback method. As carriers made adjustments to come into compliance, the result was a sharp drop on the interest assumptions in 2016, and on average, the market lost a little over 80 basis points. There is a corresponding downward pull on maximum illustrated rates as caps have been losing some ground, though today we still see levels nearly on par with the initial regulation change.
We were really curious as to how this all translates to changes in illustrated distributions, and we definitely found some thought-provoking observations. As might be expected, with illustrated rates being pared down as AG49 came into effect, illustrated income took a substantial hit between 2015 and 2016, shooting downward about 15%. The overall market trend has seen a slow, upward rebound since the regulation took effect. Whenever we removed high-cap accounts from the consideration, it initially mimics some of the all-around market’s rebound, but moves off in a sharp directional split that has only formed in the last year.
We see perhaps the most interesting insights when we examine how the top performing products compare to the market average. What immediately jumps out is how the top five have leaped upward so radically just within the last year; specifically, they are now at a point that surpasses even pre-AG49 illustration levels. They do this with both lower cap rates and lower maximum illustratable interest rates. So, what is the secret to the performance boost? It is largely the result of policy bonuses, including newer allocations which provide performance enhancing multipliers, while also charging a substantial yearly account value charge. These multipliers act like an increase in the participation rate which can capitalize on returns in positive years. This comes with an extra cost, for those clients who are willing to opt in for the added risk/reward potential this can bring.
LifeTrends has been the exclusive benchmark provider for the past 8 years which allows us the unique position of observing the adaptation of illustrations and products over time. It is clear that indexed products have seen substantial shifting and adjusting as carriers have innovated in light of a consistently lower interest rate environment and industry regulation.1 This is just a sample of our observations, which we hope you enjoy.
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1 This is also true for protection products. For a detailed examination of trends in that market, please see my July 2018 POINTS
“Markets Down Memory Lane” for more information. We also released a POINTS on the ways to optimize distributions in the June 2019 “Step-Up Your Setup” piece.