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Modern Indexed UL products have upended the traditional Universal Life story. These days, Indexed UL products are more defined by their unique factors and formulas than by the basic shared mechanics of all Universal Life products. There is no longer such a thing as a “standard” Indexed UL product because almost all Indexed UL products are now heavily impacted by non-standard policy factors ranging from basic interest bonuses to highly complex, virtually undisclosed, formula-driven index return multipliers – and everything in between. If a basic Universal Life product requires 3 rd grade math, then the modern Indexed UL product requires multivariable calculus.

Actually, the situation is worse than that. Not only do modern Indexed UL products require multivariable calculus, but they’re masquerading as if they operate on 3 rd grade math. When you look at an illustration for a hyper-complex Indexed UL product, does it look any different than a basic Universal Life policy? Nope, it doesn’t. The simplest products look exactly the same on the illustration as the most complex products. This poses a real problem for producers who want to sell simple products but don’t have the time or expertise to sift through all of the material it takes to figure out the guts of a modern Indexed UL product. I get the same question from advisors all the time – how in the world am I supposed to figure out these products and feel good about what I’m selling?

That’s why I created the What-You-See-Is-What-You-Get (WYSIWYG, “wiz-e-wig”) Awards for Indexed UL products. These are IUL products that play by traditional rules of Universal Life and are free of extra product factors. They’re addition and subtraction products, not multivariable calculus products. What you see is what you get. It’s that simple. electricity explained They don’t have interest bonuses, index return multipliers, dynamic COI charges or any of the other funny business found in the typical modern Indexed UL product. I can’t promise that they’ll illustrate better than Indexed UL products not on this list – they probably won’t. This is not a competitive benchmark, it’s a simplicity benchmark. And in this crazy world full of Indexed UL products that few agents and virtually no clients can understand, simplicity is an attribute worth selling in itself.

• Interest Bonus > 0.25% – Inclusion of an interest bonus breaks the connection between the stated illustrated rate and the effective rate that drives illustrated performance. Furthermore, interest bonuses are contingent on assumptions about persistency, future interest rates, investment spreads and profitability targets that will change throughout the life of the policy and will impact decisions about how to set index participation and other non-guaranteed product elements in the future. Simply put, products with interest bonuses are not the same as products without them and every interest bonus is predicated on a different set of assumptions.

• Indexed Return Multiplier (IRM) > 5% – IRMs greater than 5% are excluded for several reasons. First, they are shown as a benefit in every year of a level rate illustration but will actually only provide a benefit in the event of positive index credits. Second, as with interest bonuses, IRMs break the connection between the stated illustrated rate and the effective rate that drives illustrated performance. electricity transmission loss Third, IRMs require an allocation from the option budget that changes with overall option prices, a tradeoff that will create some bizarre results in the future that are not captured in the illustration. Finally, many IRMs rely on the same assumptions as interest bonuses and will similarly impact future decisions about the carrier manages the product over the long-run.

• Illustrated indexed loan spread greater than >1% as a result of either an interest bonus or IRM – If a product qualifies under Criteria 1 or Criteria 2 but adds the additional illustrated interest from the Interest Bonus or IRM to the illustrated loan spread, then the policy is excluded from WYSIWYG because the illustrated distribution performance depends on the carrier’s particular interpretation of AG49. Illustrated income and distribution solves are only relevant and comparable for products that have identical interpretations of how to illustrate loan spreads under AG49.

• Dynamic Charges – A small but growing number of companies are using formula-driven charge schedules that can change with policy performance. In practical terms, this means that the charges underpinning the illustration shown to the client will absolutely not be the final charges deducted from the policy. With dynamic charges, what you see is formulaically not what you will get and these products are therefore excluded.

Much has changed since AG49 was finalized in 2015. Back then, just Nationwide had an index return multiplier in the same vein of what is prevalent in today’s market, but theirs was illustrated very conservatively. The multiplier didn’t even puncture the AG49 Maximum Illustrated Rate for the product. wd gaster x reader In retrospect, it seems kind of quaint when compared to the landscape of Index Return Multipliers (IRMs) that have come to define the modern Indexed UL market over the past 2 years. Virtually every new Indexed UL product has one and, usually, it’s the headline story for the product. These days, the industry is selling multipliers, not caps. It’s a brave new world.

Why are IRMs so popular, powerful and provocative? First, they break the connection between the AG49 Maximum Illustrated Rate and the effective illustrated rate shown in the illustration. A 6% AG49 Rate on a product with an IRM can generate effective illustrated rates of anywhere from 6.6% to 9%, depending on the particular design and pricing. Second, an increasing number of insurers interpret AG49 to mean that any interest from the IRM can be added to the 1% maximum illustrated loan arbitrage restriction outlined in AG49. In other words, those products illustrated at 6% show loan arbitrage ranging from 1.6% to 4% after including illustrated interest from the IRM. Little wonder that illustrated rates have dropped in the wake of AG49 but, according to a study done by one life insurer, illustrated income has continued to climb.

Finally, life insurers have figured out that deducting a specific charge to fund larger IRM is an exceptionally good trade on the illustration. In the strange math of Indexed UL, \$100 charged at the beginning of the year to fund an IRM shows back up at the end of the year as high as a \$150 credit, which is restricted by the 50% illustrated option profit assumption in AG49. IRMs funded by policy charges can dramatically increase the risk and leverage of the policy, but the bet only draws a winning hand on the illustration. Life insurers who have employed this strategy have also realized that bigger bets always illustrate bigger returns and therefore generate more sales, even though they also mean more risk and leverage for policyholders. As I wrote in a previous post on Voya’s ICAR, this natural incentive to escalate the size of the charges and bonuses is part of what is fueling the IUL illustration war. It’s not stopping anytime soon. Companies are already upping the ante in their filings for next year.

It is hard to imagine that IRMs won’t be the chief subject of the regulators’ inquiry into AG49. Not only do IRMs completely define the IUL market, but they also almost entirely came into being after AG49 was codified. They’re the only new piece of information. Furthermore, the three reasons that IRMs are so popular run up right up against some of the key tenants of AG49 – limiting maximum illustrated rates, restricting illustrated loan arbitrage and defining the maximum allowable option profit assumption for actuarial testing. Even though IRMs don’t run afoul of the letter of AG49, the question for regulators will likely be whether or not they are in accordance with the spirit of the guideline.

AG49 is not an abstract, actuarial concept. As is readily apparent by now, the Indexed UL market revolves entirely around illustrated performance. Sales have followed the products with the best illustrations like a cat chases a laser pointer. gas utility bill This is a symptom of a much larger issue for our industry. Illustrations are not and were never intended by regulators to be performance projections. And yet, that’s exactly how many agents, distributors and even life insurers use them. Howe else can you explain the mad, crazed rush that life insurers have made to build IRMs in their products in order to maintain their competitive positioning on the illustration and in benchmarks? It’s almost as if people in our industry general think that the product that illustrates better will actually perform better, despite decades of proof that as-issued illustrations are almost entirely unrelated to actual policy performance. Illustrations are simply products of the rules that govern them – rules like AG49. Rules that can, do and will change.

Last week, Pacific Life released a statement declaring that the very first PDX Performance Factors had been announced – 2.46 for one policy and 4.18 for another. As the Pacific Life representative quoted in the statement says, those Performance Factors have the potential to deliver total credits for policyholders of 24.6% and 41.8%, respectively. These are gargantuan numbers and Pacific Life is taking this opportunity to crow about the potential upside for its policyholders. It seems like a great press release and something to celebrate, but it’s not. Not even close. In fact, it’s proof positive of PDX’s weaknesses and just how misunderstood the product really is.

First and foremost, let’s talk about disclosure. The Performance Factor is apparently so important that Pacific Life felt the need to do a press release celebrating its debut figures, yet they’ve done virtually no disclosure in product filings or illustrations about how it works or its key pricing inputs. The press release shows you just how little we know. It says the first factors are 2.46 and 4.18. So, how are we supposed to know if those are “fair” Performance Factors? Did they change from what was originally illustrated? Are they based on the same pricing inputs? How in the world are the advisors supposed to manage these policies without any way to interpret those numbers? Can you imagine having a conversation with a client about why they got what? The core problem with the Performance Factor is that it has certain charges but uncertain benefits. z gas el salvador precios This press release doesn’t fix that problem – it highlights it.

As the PacLife representative in the press release states, policy charges “support” the Performance Factor. Early in the contract, before PacLife introduces a bunch of funny business into the formula, the math to determine the Performance Factor is fairly straightforward. A Performance Factor of 2 means that the policy charges used to support the PF equal 4.1%, which is the product option budget (at least, that’s what it was at issue). The charges double the option budget and therefore the returns are also doubled (PF = 2). Makes sense. wd gaster cosplay Using that math, you can translate the Performance Factors in the press release to the policy charges that they imply – 2.46 equates to charges of 6% of Account Value and 4.18 equates to charges of 13% of Account Value. The Performance Factors are gargantuan because the policy charges used to support them are also gargantuan.

These policyholders are gambling 6% and 13% of their account values, respectively, for a shot at more upside. This is an immense amount of risk and leverage for a product that is supposed to be about protection from downside risk and is not a security. It is a clear example of just how far we’ve strayed, as an industry, from our moorings. We used to sell Indexed UL as “zero is your hero.” What this press release shows is that a better slogan might be “come and gamble a significant chunk of your account value on our proprietary, undisclosed, non-transparent, options-based roulette wheel.” I know, I know. It just doesn’t have the same ring to it, does it? I’ll work on it.

A lot of people have asked me if this press release changes my opinion of the product. Given that my opinion of PDX has always been that it is complex, inadequately disclosed and highly leveraged, the answer is that this press release only serves to cement my opinion. And I’m genuinely disappointed about that. PacLife has historically done better. The press release that Pacific Life should have released was that it was disclosing the formula and pricing inputs for the Performance Factor on each client’s annual statement so that they could clearly see where they were taking risk and how they might be rewarded for it, which would facilitate productive conversations with their agents and advisors about how best to manage their policy for the long haul. Now that would change my opinion of PDX. But judging by the self-congratulatory and short-sighted nature of this press release, it looks like things aren’t shifting any time soon.