Where Does IUL Go From Here?
Love it or hate it, not only is IUL is here to stay, it is currently buoying our industry. Don’t believe me? According to LIMRA, in Q2 2018, new annualized premiums from Indexed Life products increased 14% over Q2 2017. In contrast, during the same quarter, the total annualized premiums from new policies sold only increased 2%. IUL products now account for 64% of UL product premiums and without them, new annualized premiums in Q2 would have looked atrocious.
This news is welcomed for someone who thinks, “The consumer base is getting more comfortable with this product and I can call my clients and tell them about my favorite one”.
On the contrary, this news is terrifying for someone who thinks, “This product is incredibly complicated, agents have no idea what they’re selling, they’re selling it improperly, and clients have no idea what they’re buying”.
In my opinion, there is some merit to both sides. However, the curveballs that have been hurtling towards us since 2016 are starting to hit the catcher’s mitt. And that is the far bigger issue.
Principles Based Reserving (PBR) brings one of the most significant changes in the laws regarding how insurers are supposed to hold reserves for claims purposes. In addition to new reserve requirements, every product that adheres to PBR must use the most current Commissioners Standard Ordinary (CSO Mortality) tables. Every product is required to adhere to this standard by January 1st, 2020.
Without getting too into the weeds, this regulation should usher in decreases in premiums for most products with an increase in Secondary Guarantee premiums. However, the largest impact it will have is in driving down Cash Values.
A quick refresher on cash values. To determine whether a policy qualifies as Life Insurance and not a Modified Endowment Contract (MEC), the contract cannot accept more premiums in the first seven years than what would be required to have the policy paid-up over that time (7-Pay Test). This is over simplified, but it is enough for this conversation.
In many scenarios, PBR will allow carriers to carry lower reserves on products than they are currently required to (which would lead to a decrease in premiums) and the longer Life Expectancy on the new CSO tables means that mortality costs should also see a decrease.
So, with the expectation that premiums and mortality are decreasing, it stands to reason that less premiums would be required to pay up a policy in seven years.
This is what we have been expecting. It took carriers longer to put out PBR compliant products than we anticipated, but we are finally seeing them rear their faces as time ticks down. One carrier just updated their line of products and for a 55-year-old preferred client the Max Non MEC premium dropped by 21% and the IRR over 30 years dropped by .92% sitting in the same exact account.
This decrease in performance above is due to the forced premium reductions from lowered reserve requirements and mortality (Think 7-pay premium) while operational costs to the carriers did not decrease. This leaves a greater percentage of a reduced premium being consumed by charges than had been before so less funds are allocated to the investment account.
One positive about the carrier mentioned above is that their new PBR compliant IUL contract does seem to be more transparent than their current line. If this is a trend that other carriers follow, we consider this a positive consequence.
If you are like us, then you are likely asking yourself the question posed in the title. Where does IUL go from here?
Your guess is as good as our but here are some of the ideas we have come up with:
- Higher early internal charges could be withheld and utilized to boost performance in later years
- Greater emphasis on later year Cash Values through different bonus crediting or multiplier strategies
- Increased use of Term Riders
Whatever the future holds, it is very uncertain right now. If your clients are looking to dump as much premium as possible for cash value growth, there is no longer time to sit on the sidelines.
We would also be remiss to remind you that, we all have a rough idea of what IRRs are for most products and how they work. Most clients do not. While a product may not look as good to us, it might look great to them, especially in a level playing field where all products must adhere to the same standard.
Call our office to see what the difference could mean to your clients.