Deal Reached On Proposed IUL Illustrations - INN

[DHK]

Deal Reached On Proposed IUL Illustrations

The coalition of insurers led by MetLife also includes Northwestern Mutual and New York Life.

It is expected that the current proposal would result in crediting rates in the 6 to 7 percent range and put limits on loan leveraging.

[...]

Under the proposed phase-in, provisions dealing with currently payable scale methodology, as well as the so-called “guardrail” that limits the expected yield that can be offered investors in IUL, will go into effect Sept. 15. Provisions detailing information on policy loans and establishing additional standards will go into effect for all new business and in-force life insurance illustrations on policies sold on or after March 1, 2016.

[...]

“This is a critical component of the proposal as it represents the main control over the maximum illustrated rate,” the actuary said. More specifically, he said, the Life Insurance Illustrations Model Regulation stipulates that the illustrated scale must be the lesser of the currently payable scale and the disciplined current scale.

The actuary explained that, for the currently payable scale (DCS), the LATF proposal uses a historical look-back approach that generally results in rates in the high 6's (6.83 percent for a 0 percent floor/12 percent cap product).

“While this rate is much higher than I would like, we believe that most companies' illustrated rates will be capped at the disciplined current scale,” the actuary said.

He said that for the DCS provision, the LATF proposal caps the investment return on options at 45 percent.

“While this 45% is clearly much higher than I would like, there are some clear positives here,” he said, “because this guardrail, even when using a 45 percent maximum return, will provide a limit on illustrations.”

The solution is clear: Don't sell IUL based on illustrations.

 

[RyanCO]

This should be interesting to watch.

Run most IUL illustrations and you'll have an option - provided by the company itself - to use 8.00% and higher.

If this were to be seriously enforced, illustration software would have to be changed to not allow for that.

 

[Larry Tew]

I don't sell IUL partly because of the illustration gymnastics that are allowed in marketing these plans. This sounds like a step in the right direction.

My main reason for not using IUL is that it is easily the most over-hyped product of all time. Any time someone puts out an article or self-published book calling ANY product the "miracle this" or "magic that" - run the other way.

 

[DHK]

I agree. IUL really is about capturing upside potential without the downside. It's about volatility, not magical returns.

I know that it is being over-hyped and amateur agents over-rely and over-sell based on the illustration's "straight-line" illustrated returns - even if they are "only 7%" - to show the power of the product.

No investment or insurance product anywhere will ever get 7% per year, EVERY year.

But I DO wish that it would show returns up to the current caps, and alternating 2-3 years of maximizing the cap, and then 2 years of 0% returns... just to give a more realistic (somewhat) idea of what the product can do while maximizing the volatility.

But I doubt we'll ever get that ability.

 

[Norwayguy]

Will the new model regulation make the illustrations any longer, remain the same length or shorter (yeah right).

 

[DHK]

I wouldn't know. I think it primarily has to do with underlying assumptions being projected to help avoid misrepresenting the product's abilities.

 

[Norwayguy]

I wouldn't know. I think it primarily has to do with underlying assumptions being projected to help avoid misrepresenting the product's abilities.

Anyone wanna bet on added disclosures?

 

[DHK]

I won't bet against it.

 

[scagnt83]

As someone who runs illustrations at the proposed rates (6%-7%), I actually have mixed feelings about this. Mostly because it has been spearheaded by carriers who do not sell IUL and see it as competition.

But more than that, I feel that as an agent it is important to be able to see what the product does at different rates.

Also, most carriers set the default rate to the 20 year or 30 year historical lookback.... which happens to be what the NAIC recommended around 2010(ish)...

Why not make the default 1% less than the 10 year moving average? That seems like a very reasonable and conservative assumption. Instead they putting caps on the assumptions for Options Returns related to the non-guaranteed investments.

I agree that something needed to be done to prevent misrepresentations. I just hope that this is a reasonable way of doing it. It is really hard for anyone but an actuary to know they way it is set up. IMO, the more transparent the better.... this is anything but transparent.

----------

But I DO wish that it would show returns up to the current caps, and alternating 2-3 years of maximizing the cap, and then 2 years of 0% returns... just to give a more realistic (somewhat) idea of what the product can do while maximizing the volatility.

But I doubt we'll ever get that ability.

You already have that ability with many IUL carriers. Midland/NA and LFG are two that come to mind immediately. I think Penn is another one. It must be manually entered, but it is 100% possible.

Some carriers also will show year by year historical lookbacks on rates, which you could then use for your variable rate input.

Break away from Anico and use a better product/carrier/illustration system!

But it would be nice if the default ran as the actual year to year return over the past 30 years and not a flat annualized return. I wouldnt be surprised if it happens some day, or if a carrier doesnt let you click that option on an illustration software.

 

[DHK]

You missed what I meant. I wanted to show maximum returns up to the current caps (about 14%) for 3 years, then 0% for 2 years... and alternate that throughout the life of the policy.

As far as I know, NO IUL carrier illustration system allows their illustrations to show anything above an 8-9% return in any given year.

I know Midland and NA will allow the alternating returns... but still up to a certain limit on that rate of return.


If IUL was properly sold and positioned by the majority of agents, I doubt this would be a problem. However, with all the misrepresentations on what the product is and does... it won't ever happen.