Vol 10 No 7		August 2008

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Indexed ULs - Deja Vu

"We seem to have returned to the illustration wars of the 1980s and early 1990s. Creative techniques were used to win sales by showing exaggerated policy performances, usually as a vanishing premium competition. Illustration regulations were promulgated, but the clever always have the advantage over the earnest when the details are so complex"

My March 2007 Perspectives dealt with what appeared to be a return of liar's poker illustration games in the form of equity index universal life (EIUL). Equity index refers to illustrated crediting rates determined by stock index performance, capped, at say 13% with a guarantee of around 3%. I am now convinced that EIUL has become a major seller in the permanent policy marketplace. It may even overtake no lapse UL. Two of the biggest EIUL sellers - lets refer to them as Premier Financial (PF) and Acme Life (AL) - have shown up with considerable regularity in my cases the past year.

A recent review of a PF illustration for a client shows a crediting rate of 9.61%, which means PF needs to earn around 10.11% to 10.61% on their portfolio. The big question is whether such crediting will actually be realized. I obtained financial operating results for PF. Their figures aren't encouraging with respect to realizing high crediting rates. 92% of their investments are in fixed income assets, with only 8% in equities. SP's five year average NAIC net yield is 5.7%, and the net yield excluding policy loans while including capital gains is 5.9%. This client bought this policy for retirement income. Based on the SP illustration using the 9.61% crediting rate, the IRRs for premiums-to-cash-values are: 6.7% at 60; 7.1% at 65; and 7.3% at 70. However, if I substitute 5.5% crediting the yields are: 3.3% at 60; 3.3% at 65; and 3.8% at 70. How would you bet on this outcome?

For another client I reviewed an AL illustration having a crediting rate of 8.2% with bonus crediting embedded into the illustrated figures of 1.25% after 10 years, for a yield of 9.45%. AL's financial operating results show that 99% of investments are fixed income with less than 1% in stocks. The five year average NAIC net yield is 6.7%, and when loans are excluded while capital gains are included, the average is also 6.7%. AL's illustration had target premiums of $4,000 needed for the policy to provide coverage for the client's lifetime. When I substituted crediting of 5.5%, the target premiums were a whopping $40,000.

We seem to have returned to the illustration wars of the 1980s and early 1990s. Creative techniques were used to win sales by showing exaggerated policy performances, usually as a vanishing premium competition. Illustration regulations were promulgated, but the clever always have the advantage over the earnest when the details are so complex.

Not only are buyers having their expectations stretched but conscientious agents not using EIULs are losing business. I recommend advisors assist clients with some basic research to determine whether illustrated crediting rates have any reality before jumping into the EIUL pool.