The Coming of Age of Index Universal Life
January 9, 2010 by Frank Howell
- By Frank Howell
This year, index universal life (IUL) celebrates its 10th year on the market. First introduced in 1997, this product has become more and more common, with more than 20 companies offering it, and advisors and the public are increasingly taking notice.
What is IUL?
IUL is universal life insurance with death benefit protection and cash value accumulation. It offers an index account option that credits interest that is based, in part, on the performance of a market index.
According to Advantage Group Associates Inc., a firm specializing in the analysis and monitoring of index life and annuity products, between 2003 and 2006 IUL sales increased more than 360 percent, closing with $338.2 million in annual premium.
Industry sales data through June 2007 indicate that this trend is continuing with $214 million in premium. With such positive sales growth, one might question why so many people are showing interest in this relatively new type of policy, particularly with so many companies adding enhancements to more traditional product designs.
One answer may be product positioning. IUL provides guarantees that can be found in traditional universal life products, but it also has greater interest rate opportunities because of different crediting methodologies. These crediting methodologies use market indices such as the S&P 500* to credit the amount of interest that the policy owners earn. While there is greater upside potential because of these methodologies, there is also typically a minimum rate, or “floor,” that is contractually guaranteed by the issuing company. All guarantees are based upon the claims-paying ability of the issuer.
These guarantees are backed by the insuring company’s general accounts, just like other traditional life contracts, and are, therefore, a key selling point to the target market.
Is IUL right for your clients?
Typically, the ideal IUL client is someone who appreciates the upside opportunities of the product but is motivated by the strong downside protection. This should be the key factor that differentiates the typical index purchaser from the variable customer. Consumers who prefer IULs are typically between the ages of 30 and 55 and have enough disposable income to fund the policy and pay the premiums so they may take advantage of the accumulation benefits.
Take a look at the following hypothetical example, where one can see the power of these protective guarantees. This example represents a 2 percent guarantee floor rate and a 14 percent cap with 100 percent index participation, excluding dividends.
Sheryl Moore, president and CEO of Advantage Group Associates Inc., said that while the upside potential is a key benefit of index products, many of her insurance company clients also leverage the downside protection. Carriers that offer strong downside guarantees in the 2 to 3 percent range can be very attractive to both producers and clients, particularly if the guarantee is applied on an annual basis rather than over a period of time.
Then, look at the actual returns of the popular S&P 500 index without dividends and overlay the same cap and floor. You can see that over the last 20 years, the actual average annual return would be 8.93 percent historically.
Why you need to know more about IULs
While this product introduces new terminology and additional moving parts to financial planning, it is nonetheless becoming more commonplace, particularly with the popularity that fixed index annuities (FIAs) garnered in the past. This leads us to another reason for the increased sales of IULs: Producers and clients are more comfortable with this policy structure because of the success of FIAs.
While the industry has been dealing with controversial issues centered on IULs, such as lengthy deferred sales charges, aggressive agent commissions, and client suitability, IUL contract structures are consistent with traditional policy structures, and agent commissions are consistent with other permanent life products, as are the deferred sales charges. Bearing in mind that no one can accurately predict future concerns from regulatory agencies or state insurance departments, IUL appears to be in good stead.
In addition to product structure challenges, insurance companies and producers have learned to position this product as an extension of traditional life offerings and not present it in any way as a variable policy. IUL policies are not securities, and the indices are simply used to establish interest-crediting rates.
With the continued development of competitive products, financial advisors have never been in a better position to serve their clients. While advisors will have to invest time in familiarizing themselves with the product structure and sometimes unfamiliar terminology of IUL, they will not be wasting time doing so — their clients will most certainly benefit from their expertise, helping to further drive IUL sales.
Frank Howell is senior vice president of Penn Mutual’s sales support operation. He can be reached at email@example.com.