At this summer’s National Association of Insurance Commissioners (NAIC) meeting, IUL illustrations were once again on the agenda.

Critics say that NAIC’s Actuarial Guideline (AG) 49-A, which was intended to help standardize Indexed Universal Life product illustrations, allows insurers to use illustrations that result in outsized performance expectations. As a result, the rule, which went into effect in December 2020, has been ripe for clarification since its passage.

Based on guidance from the NAIC and feedback from August’s meeting, the guidelines around IUL illustrations are likely to change soon, with potentially meaningful impacts to how clients perceive the value of their IUL policies.

The takeaway for advisors and clients? Watch the space. The potential for lower max crediting rates could result in less appealing illustrations, so advisors must be careful to position them correctly.

What is AG 49-A?

AG 49-A was initially designed to create more uniformity across carriers when running and presenting Indexed Universal Life (IUL) illustrations.

In 2015, NAIC created AG 49-A to standardize the representation of hypothetical returns of IUL products. The guideline requires that all Indexed Universal Life (IUL) products be illustrated “appropriately and consistently,” even if they have multipliers or other enhancements. Among other changes, AG 49-A also only allows for a single benchmark index account (BIA) per policy, where multiple were previously permitted.

In short, AG 49-A seeks to minimize the effect of multipliers and bonuses on IUL illustrations. This in effect “evens the playing field,” as companies that offer multipliers are unable to use them in an illustration showing the benefits (though they may be marketed using other means). The structure of the guidelines has provided some companies latitude to rework their illustrations to position IUL products more competitively, as the sample ledger below shows.

What are the proposed changes?

Recognizing the need for further guidelines, NAIC has proposed three options for updating AG 49-A:

• Equalize the illustrated options profits on all accounts relative to the BIA
• Reject the lookback provision and base the carriers’ maximum illustrative rate on its current fixed account crediting rate
• Reject the lookback and use a different formula altogether

Currently, the crediting rate being used in these IUL illustrations is based on a lookback provision. The most likely change would be a reversion to using the carriers’ fixed crediting rate.

Real-world effects

As we know, IUL is intended to be sold as an asset class with downside protection and index-linked upside potential. In a vacuum, these changes shouldn’t have too much of an impact on IUL sales if it were to pass.

In reality, this will have an impact on how consumers understand illustrations. Take, for example, a typical retirement income (LIRP) design. In this hypothetical, we would show a client two different illustrations: one with an income of $100,000, illustrated according to the current guidelines, and a second that provides $50,000 at a reduced crediting rate.

Clients may hesitate to purchase the IUL if they assume they would be locked into the lower rate for the duration of the policy. Advisors must make their clients aware that this is simply an illustrative limitation. It is not necessarily indicative of how the policy will perform long-term.

AG 49-A changes could cause downstream impacts

This one example illustrates that changes to AG 49-A could have a widespread impact, not only on how IUL products are illustrated, but also on how we present some of the underlying concepts that are used in conjunction with them.

For example, in a traditional premium financing scenario, it is common to use the policy cash value as a rollout strategy. If we are reduced to using the fixed account crediting rate, that rollout is likely going to be underwhelming, assuming the policy can even support it at all. We may then have to explore alternative rollout strategies with financing, such as utilizing a grantor-retained annuity trust (GRAT).

Depending on the guidelines implemented, we could be looking at a natural shift from IUL to other vehicles, like whole life insurance. The appeal of having guaranteed values (premium, cash value and death benefit) will only be magnified if we are comparing against an IUL at a relatively lower, restrictive rate. Conversely, if compared to a traditional current assumption UL product, the IUL should still win out. The fixed illustrative rates should be similar, but the IUL would have more upside potential.

The takeaway

Given that the period for comment on the proposal ends September 6th, we should expect to see more clarity on the proposal in the upcoming weeks and months. The result, however, will be clear: insurance professionals will need to evolve their plans and designs, which may in the end force advisors to get a bit more creative in their planning.