Indexed universal life (IUL) insurance policies are playing a leading role in the marketplace these days as producers strive to meet clients' need for death benefits and cash accumulation potential in the midst of continuing economic uncertainty and low interest rates.
In fact, LIMRA reported in June that new IUL premium grew about 50% in the first quarter of 2010 compared to the prior year. This popularity isn't surprising. Recent stock market turmoil has shaken client confidence in equities and, as a consequence, the variable universal life (VUL) insurance policies that use investment options to pursue cash value growth. Yet standard universal life (UL) policies may not provide clients with an attractive enough alternative due to the current low crediting rates.
From the client's perspective, IULs appear to strike a balance between VULs and standard ULs, with downside protection -- a floor of, say, a 1% interest credit -- plus the potential to benefit, in part, from the upside performance of a prominent stock index. But appearances, as top producers know, rarely tell the whole story.
The effectiveness of IULs is impacted by three key factors, which producers must sort through as they strive to meet client needs:
o Single-index, U.S. bias -- Virtually all of the IULs sold in the U.S. have crediting rates tied to the well-known Standard & Poor's 500 index. On the surface, the performance of 500 publicly traded companies seems to provide excellent diversification for the client. But, after all, these are all large U.S. companies -- which means this index represents just a narrow slice of all the equity options around the world (note that less than 50% of all assets reside in the U.S.). Thus IULs tied to the S&P 500 index may not provide significant diversification, which may limit clients' upside potential over time.
o Varying crediting illustrations -- With one index playing the dominant role in IUL illustrations, you would think that clients would all see clear, comparable crediting projections among various products. But the reality is that companies can present historical data in widely divergent ways, based on the particular historical timeframes and beginning-and-ending dates they choose. Thus various IULs -- technically using the same S&P 500 data -- might project potential crediting rates ranging from 6.5% to 9.5%. These widely varying projections may create confusion for clients and producers alike.
o Emerging income needs -- There was a time when illustrations of potential supplemental retirement income in UL products could be more of a formality. After all, the generation currently in retirement generally comprises large numbers of savers who also may be benefitting from traditional pension plans. Their UL policies may not need to generate supplemental retirement income. The next generation moving toward retirement, however, generally grew up as spenders with varying degrees of success in assuming their planning and investing responsibilities in the defined-contribution era. As a result, in a few decades, IUL policyholders may indeed need to rely on their cash value for supplemental retirement income1,2. Thus the growth drivers in their policy, such as the index, can make a huge difference.
Producers who analyze these factors -- index choice, crediting scenarios and client supplemental retirement income needs -- will be in a much better position to provide the life insurance product that delivers the prospect for long-term cash value accumulation.
Multi-index option, global strategy
With the market bias toward single-index IULs using the S&P 500 index, there have been few alternative strategies available to producers. However, new options are emerging that allow producers to offer to clients potentially greater risk diversification and opportunities for cash value growth within an IUL product along with valuable death benefit protection.
One example is the IUL global product from one of the ING life insurance companies. Rather than using a single index, it calculates index interest credits using three different indexes: the EURO STOXX 50 Index, Hang Seng Index, and the S&P 500. These indexes may provide greater diversification, and each index has a distinctly different set of historical performance characteristics (see chart below).
In addition, the product uses a five-year, point-to-point look-back period and calculates the index credit using a portion of the better performing two out of three indexes. In essence, at the end of each five-year period, a portion of the top two indexes are used in the calculation and the index with the lowest change rate is not used.
Taken together, these features may provide clients with the potential for higher interest crediting rates than a single-index methodology might provide while also potentially reducing volatility associated with year-to-year index changes.
Client opportunities
A product of this type is designed for potential longer-term cash value growth and thus may be attractive to a range of clients:
o Employees who are mid-career and already taking full advantage of company matches in their 401(k) plans, and who want to accumulate additional cash with an eye toward potential supplemental retirement income.
o Employers who want to attract or retain executive talent by providing (paying the premiums on) a highly attractive benefit that the executive owns and that may potentially deliver supplemental retirement income while providing valuable death benefit protection.
o Small business owners who may use this as a supplement to their existing retirement savings strategies.
o Large estates that may find these as attractive purchases using a premium financing approach because of the potential to produce higher interest crediting rates.
Innovations like the multi-index IULs are likely to continue to provide a bounce to the rebounding of life insurance sales in the near term. This is because they have broad appeal -- from the affluent, to middle-market clients, to business owners -- as well as a formula that potentially provides diversified avenues for cash value growth without the extreme volatility of VULs.
Index snapshots
EURO STOXX 50(R) Index: An index of blue-chip stocks that are represented by 50 stocks covering the largest sector leaders in the EURO STOXX 50(R) Index.
Hang Seng Index: An index of the largest and most liquid stocks listed on the Stock Exchange of Hong Kong.
S&P 500(R): An index of stock performance of 500 publicly traded companies.
Three indexes, divergent results
The chart illustrates the potential value of multi-index IUL strategies by comparing the finishing positions of the S&P 500(R), EURO STOXX 50(R), and Hang Seng Indexes from Jan. 28, 1992 to Sept. 28, 2009.
During that period, The Hang Seng Index had the highest ranking 67% of the time. The S&P 500 had the highest ranking when compared to the other two indexes only 9% of the time; it least often ranked third when compared to the other two indexes, but was also ranked first the least often. The EURO STOXX 50 ranked higher than the S&P 500 nearly three to one when compared to the other two indexes.
These unmanaged indexes are not intended to represent specific investments. Investors cannot invest directly in an index. Past index performance does not represent future performance of these indexes. The finishing positions for each index were determined based on the changes in the value of each index between the 28th day of each month during the period shown and the same date five years earlier. The percentages shown reflect the number of times that each index had the highest (1st place), second highest (2nd place), and lowest (3rd place) 5-year index change rate on the 28th day of each month during the period. The data provided provides only a comparison of the indexes to each other and provides no information relative to the performance of the indexes during the period shown.
Dan Mulheran is president of U.S. Retail Life Distribution for ING, a global diversified financial services company with over 85 million clients in more than 40 countries.
John McSwaney, CLU, ChFC, AEP, is president of McSwaney & Associates Consulting Inc. in Bismarck, N.D., and past president of AALU and the International Forum.
Footnotes:
1. Income tax-free distributions are achieved by withdrawing to the cost basis (premiums paid) then using policy loans. Loans and withdrawals may generate an income tax liability, reduce available cash value and reduce the death benefit or cause the policy to lapse. This assumes the policy qualifies as life insurance and is not a modified endowment contract.
2. All withdrawals reduce the death benefit and may reduce the value of any optional benefits. Early withdrawals and other distributions of taxable amounts may be subject to ordinary income tax, a surrender charge, and if taken prior to age 59 1/2 , an IRS 10% premature distribution penalty tax may apply.
For agent use only. Not for public distribution.
ING Indexed Universal Life-Global, policy form series #1180-12/09 with an equity indexed feature, varies by state and may not be available in every state. It is issued by Security Life of Denver Insurance Company, a member of the ING family of companies.
Neither ING nor its affiliated companies and representatives offer legal or tax advice. You should consult tax and legal advisors regarding your individual situation.
All guarantees are based on the financial strength and claims paying ability of Security Life of Denver Insurance Company which is solely responsible for the obligations under its own policies.
