Index UL Facing A Big Year
January 7, 2010 by Sheryl J. Moore
The new year is going to be big for index universal life. Since the decline in the equities markets at the close of 2008, sales of indexed insurance products have been on the rise.
Index life insurance sales are up over third quarter 2008 and index annuity sales set record sales in 2009. But sales of equities products such as variable universal life are down dramatically.
Indicators suggest that Americans’ needs for safety of principal and upside potential will make IUL the beneficiary of this shift in cash value life insurance sales for the upcoming year.
Another big story for IUL in 2010 is legitimacy. Several big insurance companies are looking at IUL as a viable product for their cash value life insurance portfolios. Although unfamiliarity in the market could cause delays with product implementation, expect to see a number of new insurance companies delving into the IUL line before the close of 2010.
Currently, 33 companies are offering this once-niche product. If new, large, highly-rated companies also jump in, this will only increase the market’s legitimacy.
The next big story for the upcoming year will be a shake-up in sales rankings. One top insurance company has practically dominated the top spot in the IUL market since the turn of the century. However, recent commission reductions and terminated agent contracts have given way for other carriers to take over the top spot. Many are projecting that 2010 will be the year the top IUL carrier gets dethroned.
In addition, recent product development due to 2001 Commissioners Standard Ordinary changes has paved the way for lesser-producing IUL companies to move up in rankings.
Now, the not-so-good news. A big story that continues to get bigger in the IUL market is illustrated rates.
These fixed insurance products have no standardization for the methodologies used to illustrate current cash values. This translates to consumer misunderstanding, agent confusion, and a general lack of understanding about IUL as a whole.
Today, insurance companies use 8 different methods for calculating illustrated IUL rates. Furthermore, two insurers using the same methodology may use entirely different calculations for determining the illustrated rate. Ultimately, the aggressive, unsupportable illustrated rates in this market will force regulators to make mandates regarding ILU illustrated rates.
Today, there are IULs illustrating current cash values at rates as high as 10%. Compare this to risk-money products such as variable UL that are being illustrated at 8% and you are bound to get somebody’s attention.
The last big story in the IUL market for 2010 will be litigation. Lawyers are going to start crawling out of the woodwork, looking for the next “big opportunity.” The once-sleepy IUL market could likely become the next victim for bloodthirsty ambulance chasers.
Three major issues make IUL a target for class action litigation. First, many have not set realistic expectations for what consumers can expect to receive in terms of indexed interest on their IULs. In plain English, those illustrated rates are too high; consumers are going to get upset when they get zero instead of 10%.
Next, variable loan interest is compounding the unrealistic expectations. What is going to happen when the client gets 0% credited, but they owe 9% in loan interest? This is a far different story than the 10% interest and 6% loan rate the client was sold on the illustration. (“What? I’m not making money by taking max loans from my life insurance policy?”)
The last major issue is inappropriate sales concepts. For years, insurance agents have been taught how cash accumulation life insurance products such as IUL make a great vehicle for concepts such as hyper-funding and equity harvesting. However, these concepts are largely based on the sustainability of interest rates. When these rates don’t come to fruition, it results in unhappy clients.
Ultimately, the success of IUL will not be squashed by market conduct issues and a lack of regulation. However, now that the product line is becoming mature, regulators need to step up and ensure that consumers are protected. If not, this viable insurance product may eventually be damned with the same negative image as its sister product, the index annuity.
If 2010 is the year these issues get resolved, it could be that IUL sales will soon eclipse its variable counterparts.
Sheryl Moore is president and chief executive officer of AnnuitySpecs.com and LifeSpecs.com, an indexed product resource in Des Moines, Iowa. Her e-mail address is firstname.lastname@example.org.