Index universal life (IUL) products are attractive sources of strength for insurers. Overall total universal life new premiums increased 31% in the fourth quarter of 2019, primarily driven by IUL product sales.
But index universal life (IUL) products can be complicated. The features are nuanced and continually evolving. Naturally, explaining how IUL works can be equally tricky. Not only do carriers have to explain the way policies perform in a way that makes sense for clients, they also have to adhere to evolving Actuarial Guidelines from the National Association of Insurance Commissioners (NAIC) which recently approved AG 49-A — a revision to actuarial guideline 49 on illustrations.
Before 2015, the NAIC raised concerns that IUL illustrations were painting an unrealistic picture of potential returns for consumers. AG 49 were a set of guidelines meant to rein in these practices through uniform rules for illustrating the performance of policies tied to an external index. Some insurers added index-linked illustrations which allowed them to depict upside without properly portraying downside, or risk.
AG 49-A is a new guideline created by the National Association of Insurance Commissioners (NAIC) that requires producers to more clearly communicate the upside potential and downside risks of index universal life (IUL) products. AG 49-A standardizes the representation of potential returns of IUL products for consumers by requiring that all IUL products — even those designed with multipliers or other enhancements — should be illustrated in a manner that appropriately and consistently presents both upside opportunity and downside risk. AG 49-A also limits producers to a single benchmark index account (BIA) for all index strategies, and mandates that the hedge budget for the BIA may not exceed the company’s annual net investment earned rate (ANIER). AG 4A applies to all IUL policies sold on or after December 14, 2020.
Under AG 49-A guidelines, illustrations of potential IUL performance will be limited so bonus multipliers, cap buy-ups and other charge-supported indexed features will no longer unrealistically improve illustrations of product performance. Those features are still allowed as part of the IUL product offering, but insurers cannot use those features to manipulate illustrations in ways that enhance upside while downplaying downside risk.
The benchmark index account (BIA) was introduced under the original AG 49 to standardize the lookback calculation that determines maximum illustration rates — defined as S&P 500 annual point-to-point with a floor of 0% and a participation rate of 100%. When a carrier has an index strategy that fits this definition, the cap rate used in the lookback is the cap rate they offer. If a carrier does not have an index strategy fitting this definition, a hypothetical cap is chosen for the BIA using actuarial judgment.
The earlier AG 49 guidelines allowed a different BIA for each index strategy. The new AG 49-A guidelines stipulate that only one BIA cap may be used for all index strategies. And the cap for the BIA cannot exceed the cap that can be purchased with the company’s annual net investment earned rate (ANIER).
This means if an insurer offers a BIA, the max illustrated rates of all of its indices will be limited by its cap. For insurers who do not offer a BIA, the hypothetical cap will be limited by its ANIER.
These AG 49-A enhancements will affect IUL illustration across the industry, which should tighten up competitiveness as some insurers will have to revisit their approach to illustrating their IUL products. The impact for each product and insurer will depend on their current illustration designs and product features. Companies that never offered multipliers will see fewer changes. Companies with multipliers may choose to remove them because the multiplier no longer provides an illustratable benefit. Or the company may keep the multipliers and market the potential benefits outside of the illustration.
Yes. Marketing for IUL products from AIG companies has never included charge-supported bonus multipliers, buy-up accounts or any other charge-supported index-linked features in illustrations; so they will be less negatively impacted by the changes promulgated by AG 49-A. However, some changes in AG 49-A impact all IUL products, regardless of their specific features, including the reduction in the participating loan arbitrage limit and the changes to the BIA. Our transparent, low-cost products are already aimed at providing consumer value and straight-forward index returns regardless of market conditions.
In addition, AG 49-A will mean the maximum illustrated leverage on participating loans will be capped at 50 basis points, and a single BIA will be used to determine max illustrated rate. But as the AIG High Cap S&P 500 account is already a BIA, AIG will continue to consistently illustrate IUL products, their upside and their downside risk transparently and reliably — empowering financial professionals and consumers alike to confidently make decisions with appropriate support and information.
Policies issued by American General Life Insurance Company (AGL), Houston, TX except in New York, where issued by The United States Life Insurance Company in the City of New York (US Life). AGL Policy Form Numbers: ICC16-16760, 16760, 15442, ICC15-15442; AGL Rider Form Numbers: 15600, ICC15-15600, 13600-5, ICC18-18012, 18012, ICC16-16420, 16420, 15972, ICC13-13601, 13601, 07620, ICC14-14002, 14002, ICC15-15992, 15992, 15997, ICC18-18004, 18004, ICC15-15990, 15990. USL Policy Form Number: 15646N; USL Rider Form Numbers: 17600N, 13601N, 14012N, 16420N, 14002N, 07620N, 15996N, 15274N, 15272N. Issuing companies AGL and US Life are responsible for financial obligations of insurance products and are members of American International Group, Inc. (AIG). Guarantees are backed by the claims-paying ability of the issuing insurance company. Products may not be available in all states and product features may vary by state. Please refer to your policy.
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