A long-running stock-market rally and low interest rates combined to create the perfect conditions for indexed universal-life policies. Sales of these policies rose from 4% of life-insurance sales in 2008, as measured by new annualized premiums, to 28% in the third quarter, according to industry-funded research firm Limra.
The millions of Americans who now own them saw those ideal conditions reversed in 2022, exposing the policies’ high fees and complexity. The insider joke about indexed universal-life policies is that it takes an actuary, an attorney and maybe even an engineer to understand how the product works.
The policies combine a tax-deferred savings component with a death benefit. They differ from an earlier generation of universal-life policies, which were pegged to bond rates. Indexed universal-life policies instead typically track the stock market, often the S&P 500, with caps on upside gains and protections against losses. Some insurers offer features such as multipliers to boost what they earn, for added cost.
Indexed universal-life sales were up 33% year-over-year in the first half of 2022, despite the market selloff. But in the third quarter, sales went up 2%, Limra said. Still, indexed universal life was the only product line to record positive growth in the quarter, as a pandemic spurt in life insurance sales ebbed and inflation hurt consumers’ budgets.
Limra’s researchers anticipate a minor decline in IUL sales in 2023, citing market volatility, inflation and a possible recession. The stakes are high for life insurers. Sales of indexed universal-life policies delivered $3.4 billion in new annualized premiums in 2021, Limra’s latest available figures show.
Policyholders did avoid stock-market losses this year, but the declines exposed them to high fees and charges, which are still deducted from their accounts. The absence of market gains makes the fees more evident, say some financial advisers and consultants.
“If I knew what I know now, I wouldn’t go for an IUL,” said
a 50-year-old hospital doctor in the Boston area who has bought three of the policies since 2012, totaling $5.5 million in death benefit. “Great, if the market crashes, my policy won’t crash. But the flip side is that the fees are high.”
He bought the policies primarily for their savings compounding, and is disappointed so far. As a result, he is working with an Orlando, Fla.-based firm, Rebel Rock Wealth, to figure out whether to cancel them and transfer his savings into something else.
Rebel Rock founder
said it worries her that consumers “are pitched market-like returns without the risk. It appears to them to be a win-win-win option,” when it isn’t because of the fees cutting into their return. She calculated that for one of Dr. Ntiforo’s IULs, from October 2021 to October 2022 his expenses tallied $5,980 of the $14,786 premium he paid during this period for the nine-year-old, $1 million policy.
Another concerning wrinkle to some critics: Insurers generally retain the contractual right to change the upside cap, subject to regulator-approved limits, and they can raise costs, per contractual terms.
IULs can work well for people with ample resources, and there are lower-cost versions with above-average crediting rates, some advisers say. Many affluent people load the savings to the maximum possible under federal tax law to take advantage of the tax-deferral.
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State regulators at a standards-setting organization are considering tighter rules on consumer materials for the policies, potentially weighing on sales next year. They are focused on a proliferation of “volatility-controlled” indexes that track a shifting mix of stocks, options, futures or other assets, rather than traditional indexes such as the S&P 500. Some regulators worry that hypothetical projections of savings growth using these indexes are overly rosy and can lead to unrealistic consumer expectations.
Under previous rule-tightening, projections tied to the S&P 500 can currently show up to 6.2% annual growth. Some insurers have been using 7.5% for volatility-controlled projections, according to insurance brokerage Valmark Financial Group. That number would fall to roughly 6% a year under a rule awaiting final approval at the standards group, the National Association of Insurance Commissioners.
Projected returns matter to many buyers because they count on the policy’s accrued savings to help pay rising death-benefit charges; those go up with a person’s age. If a projection proves faulty, a buyer could be stuck with an unaffordable insurance bill.
Valmark’s chief executive, hopes the lower volatility-controlled return projections, combined with rising interest rates, will end a common practice of borrowing money to buy IULs. Valmark prohibits such loans because of their risks. The idea is that the savings can be used to pay off the loan. Volatility-controlled IULs are the vehicle of choice for many agents, Mr. Rybka said.
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