The Indexed Universal Life insurance policy is one of the latest life insurance products in the market that offers opportunities for policyholders to earn some interest from their regular monthly premium payments. Of course, the policy guarantees the death benefit and all the other benefits associated with a typical life insurance policy.
There are many IUL policies offered by different life insurance companies, and prospective clients may sometimes find it difficult to determine the best IUL policy. Because of this, life insurance experts and IUL agents use illustrations to demonstrate why clients should consider their IUL policies, as compared to their competitors’.
Even though many life insurance agents use illustrations to sell IUL policies to prospective clients, industry analysts argue that they have led to deep divisions in the life insurance industry. This division is caused by the tendency of the illustrations to draw potentially divisive differences between insurance companies.
To stop the ever-growing divisions, the National Association of Insurance Commissioners (NAIC) is in the process of coming up with measures to regulate IUL illustration. The agency has already come up with actuarial guidelines in an attempt to address the ever-growing differences. According to NAIC, all IUL illustration will be governed by the proposed actuarial guidelines.
How IUL works
For IUL agents, the “best” IUL policy is one that has the highest cash value returns at the end of the year. While it is true that IUL policies guarantee policyholders some return on their investment regardless of how the market performs, it is important to point out that the insurance company sets the interest cap and limits the amount of return you can get from your investment. Due to this, your returns will still be more limited than investing in stocks, even when the market performs positively!
The Major Components of an IUL Illustration
An IUL illustration must include some critical components to prove to a prospective client that it is the best in the market. Before investing in any IUL, it is important to know the most important aspects of an IUL illustration:
- Guaranteed Returns: It is important for an IUL agent to demonstrate that the policy has some guaranteed returns. In fact, the guarantees are the reasons why people invest in IUL policies. This component indicates the minimum return that a client should expect from the IUL company.
- Possible Returns: It is also important for the agent to illustrate to you the possible returns at different crediting rates. This component helps prospective clients to know the estimated amounts of money they are likely to receive at different rates.
- Crediting Rate and Insurance Cost: It is important for prospective clients to know their insurance cost to determine whether the policy is viable or not. Most IUL companies can change insurance costs at will, and this might have an impact on returns. This should be a key part of the illustration.
Why There is a Need for Major Changes in IUL Illustration
There have always been issues when it comes to the question of the right crediting rate for IUL policies. In fact, most IUL agents cannot provide a conclusive answer on what, in fact, the proper rate even is. However, the question is also important to other stakeholders such as financial planners, accountants, and attorneys, as they also engage with clients on other issues related to IUL policies. Although it is usually the IUL agents that market the policies, but non-insurance advisors also determine the sufficiency of an IUL policy.
According to the National Association of Insurance Commissioners (NAIC), the perception that crediting rates of between 6.5% and 8.25% can support an IUL policy is an illusion that has been created by constant rate illustration projections. The NAIC’s Life Actuarial Task Force revealed in its 2015 review that there is a need to limit illustratable crediting rates to bring some clarity in IUL illustrations. However, opinion is still divided on the extent to with the proposed limitations should apply.
The American Council of Life Insurers (ACLI) has also been contributing to the ever-growing debate about IUL illustrations. ACLI agrees with the proposal to regulate IUL illustrations and insists that all IUL illustrations must conform to the actuarial guidelines, but at the same time meet the specified goals. For instance, similar IUL products should not show major differences when it comes to determining their illustrated rates.
There is an increasing need for consistency to restore trust in IUL illustrations. The new actuarial guidelines were introduced in 2015, leading to a drop in maximum illustrated rates for IUL policies. According to a survey that was conducted by Susan J. Saip and Carl A. Friedrich, the average illustrated rate was 6.69 percent in the first nine months after the new guidelines were introduced.
Insurers and IUL agents apply a wide range of practices when illustrating in-force policies. Some of the methods include; increasing spreads, adjusting caps, creating new illustration scales, support of in-force block with a surplus, illustrating guarantees, discontinuation of other product illustrations.
In conclusion, there is a need for uniform illustration standards to avoid the inconsistencies that are normally seen when illustrating similar IUL products. National Association of Insurance Commissioners (NAIC) introduced new actuarial guidelines for illustration of IUL products in 2015 that have been well received by the American Council of Life Insurers (ACLI). Apart from bringing to an end the deep divisions caused by IUL illustrations, the new guidelines have enhanced professionalism in the life insurance industry.