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The World of Indexed Universal Life: A Conversation with Bobby Samuelson and Marc Schwartz

  It's always great catching up with industry technical guru and thought leader, Bobby Samuelson.  Bobby's Life Product Review is the only source for independent, objective and technical life insurance product intelligence and an outstanding resource for all of us in this industry. We asked Bobby if he would like to join Windsor's Marc Schwartz in a conversation about the latest developments in Index Universal Life products, and Bobby graciously accepted.

Marc Schwartz, Windsor Insurance: Bobby, we really appreciate you taking the time to educate us on what's happening in the world of Indexed Universal Life (IUL).  No question that IUL is our industry's "hot" life insurance product and the basic concept of participating in the upside of the market while minimizing the downside has proven to be compelling to consumers. Of course, the terms "compelling" and "life insurance" don't usually appear together so it must be a good thing, right?

Bobby Samuelson: Obviously!   But in all seriousness, it seems like every generation has its angle to make life insurance look attractive on the basis of performance rather than protection.  Tontine Whole Life in the late 1800s, vanishing premium Whole Life, UL in the 1980s, VUL in the 1990s, premium financing and STOLI in the early 2000s and now Indexed UL.  As Mark Twain once said, history doesn't repeat itself, but it often rhymes.  We've got quite a limerick running in life insurance.

As Mark Twain said, history doesn't repeat itself but it often rhymes.  We've got quite a limerick running in life insurance.

Marc Having seen an illustration or two during my career, I know this is the primary way producers set expectations with clients.  And of course, AG49 is the regulatory effort to bring some discipline to setting reasonable or appropriate expectations as it relates to IUL.  Is AG49 doing what it is intended to do?

Bobby:  Yes and no.  One of the primary goals was to fix the basic problem of products with identical caps and floors illustrating at different crediting rates because carriers were calculating their hypothetical historical lookbacks differently.  AG49 did fix that problem.  But, beyond that, the intent of AG49 to both standardize industry practices and limit illustration warfare has been systematically undermined by new product features.  On those counts, things are worse than before AG49.

Marc In terms of IUL design, carriers seem to moving to either "simple" or "complex" with both sides being ardent believers that their design will ultimately create superior consumer value.  First of all, are you seeing this same dichotomy?  And secondly, what side are you on?

Bobby:  Yes, definitely.  Carriers are picking sides, but I'm not so convinced that the issue actually revolves around "consumer value."  That's a really hard term to define and there are no objective measures of it. In my mind, the issue is how we – life insurers, distributors and agents – see our value proposition to our customers.  Are we selling protection or performance?  If it's protection, and in this case, the downside protection and upside potential in Indexed UL, then a simpler, low-cost design is a good fit.  If you think you're selling performance, then you want whatever illustrates best and has the potential for the most upside, even if the downside risk and volatility are greater.

What side am I on?  I think every time the life insurance industry has sold its products on the basis of performance, we've ended up with a black eye.  So that's an easy call.

I think every time the life insurance industry has sold its products on the basis of performance we've ended up with a black eye.  The issue is how we see our value proposition to our customers.

Marc:  And with IUL often being sold as an accumulation vehicle, it can be illustrated to look like an attractive and efficient way to fund supplemental retirement income.  What are some of the contributing factors that would impact actual distributions versus what was originally illustrated?  Which of these factors are "governed" by AG49?

Bobby:  Given that there is a 0% chance that real life will match the illustration, then the only reason I can figure for why people are benchmarking IUL products based on projected distributions is because they're making the assumption that the real-world will play out identically for each product, so the product with the higher distributions is the better product.  That's a really, really bad assumption.  There are so many factors at work, even without considering all of the new product designs that increase risk and return in ways that aren't reflected on the base illustration.  On top of that, carriers interpret the illustrated loan spread requirement in AG49 differently, so even the base illustrations aren't comparable.  Honestly, I'm kind of amazed that anyone is even benchmarking on income.  That is the most easily manipulated metric of all.  Benchmark cash values and maybe the standard loan option.  Looking at distributions with indexed loans is about as useful as having a map of London when you're driving in New York.

Looking at distributions with indexed loans is about as useful as having a map of London when you're driving in New York.

MarcAs you well know, Lincoln has generated a great deal of buzz with the recent launch of their WealthAccumulate IUL (WA IUL) product.  Since it's the "new kid on the block", I encourage all producers to dig into your excellent five part review of the new Lincoln product.  Not only is your analysis independent and objective, it does a great job of articulating the technical components and features of this product.  And beyond the WA IUL product, it provides fantastic education on IUL products in general, including the many and continually evolving moving parts.  The links to the five part review can be found below.  Specific to WA IUL, what do you consider the product's core strengths?

Bobby:  The obvious one is that the product illustrates ridiculously well.  For me, that's a statement of fact, not a statement of value.  Lincoln wanted this WA IUL to blow the doors off of every other IUL on the market and they achieved that goal.  But as we've already discussed, illustrated performance has little to do with the real-world.  What I think Lincoln did well was create a fairly transparent menu of choices of account options that apply different levels (and mixtures) of leverage and illustrated performance.  WA IUL also introduces a new type of bonus, which Lincoln calls the Positive Performance Credit, that boosts illustrated performance but also tells an interesting real-world performance story.

Marc And the vulnerabilities?

Bobby:  WA IUL has highly leveraged accounts.  What leverage gives in illustrated performance at the maximum AG49 rate, it takes away when the illustrated rate decreases.  That's the challenge with any leveraged IUL and WA IUL is no different, it's just more leveraged than almost any other product on the market.  Illustrate accordingly – which is to say, illustrate conservatively, as I've always advocated for any Indexed UL product.  When you look at WA IUL through a more conservative lens, the "value" of the asset charge funded multipliers diminishes significantly.  Whether or not they'll end up being a net positive to clients given the additional risk is very much an open question.  But, again, any leveraged IUL has the same issue. Specific to WA IUL, I think Lincoln could have done a better job on disclosure for the Positive Performance Credit.  It's barely referenced in the illustration or the contract, but it forms a substantial part of the story for the product and, more importantly, for illustrated performance.

Illustrate conservatively, as I've always advocated for any Indexed UL product.

Marc Earlier in our conversation, we talked about how illustrations set client expectations.  Even with regulatory "controls" like AG49, there are moving parts that producers need to understand.  And as it relates to the sophistication and risk tolerance of the client, proper expectations need to be established as this ultimately will determine perceived value.  Let's talk about illustration best practices for what we might characterize as "simple" and "complex" flavors of IUL products.  What do we need to consider for "simple" products and the emerging array of "complex" products?

Bobby:  I actually think the rules of thumb are pretty similar, but the benchmarking is very different.  AG49 requires insurers to illustrate an alternate rate that is usually pretty close to the option budget alongside the base illustration.  I recommend showing both ledgers to the client with equal weight.  If you start saying that the product is more likely to look like one than the other, then you're giving investment advice about a security.  Probably not a great idea.  If you follow that rule of thumb, most of the leverage components for complex products will kind of become obvious and you'll be able to clearly see the concept of taking more risk to get a shot at more upside.

When it comes to benchmarking, simple products can be benchmarked against each other, complex products cannot.  Simple products share similar mechanics.  They are all Indexed UL products in the classic sense.  With complex products, each has its own little cocktail of interest bonuses, multipliers, proprietary indices, asset-charges, persistency credits, dynamic COI rates, you name it.  They do not share similar mechanics and really shouldn't be illustrated against one another.  If you want to sell one of those, you need to understand – really, truly understand – how it works.  Otherwise, you're going to be easily misled.  And, unfortunately, most products on the market are complex and producers everywhere are using old-school benchmarking techniques to compare highly sophisticated products.  It's a bad combination.

I know this sounds extreme, but we really should stop using illustrations.  They do more harm than good. 

MarcIt seems that as long as we have sales illustrations, we're giving the client a measure to gauge one product's "performance" against another.  In addition to producers being prudent, informed and forthcoming regarding what makes up an illustration, what should we be doing as an industry?

Bobby:  I know this sounds extreme, but we really should stop using illustrations.  They do more harm than good.  Clients and even producers think that the product is the illustration – it's not.  The product is a framework and schedule of charges and credits.  The illustration represents a single outcome out of an infinite number of possible outcomes.  If you need it to explain the value of life insurance, then you're not explaining the product correctly.  And yet, most producers skip the product explanation and go right to the illustrated performance.  It's the path of least resistance in the short run but it creates baffled and disillusioned clients in the long run.  We'd be better off with an illustration only showing the schedule of charges and credits – in other words, we'd be better off doing what everyone else in the financial services industry already does.

Marc: As always, your insight and analysis is much appreciated by Windsor and the industry.  Keep up the great work!   And in addition to Bobby's five-part review of the new Lincoln WealthAccumulate IUL product (links below), please check out Bobby's treasure chest of independent, objective and technical analysis at The Life Product Review.

Bobby: You bet, thanks!


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