Expert: IUL illustrations nearing a crossroads as engineered indices grow

Indexed universal life is a good product that is not being marketed and packaged correctly, said a leading industry analyst during day two of NAILBA 43.

When properly marketed, IUL is a good "low-risk, low-return" financial product, said Bobby Samuelson, editor of the Life Product Review.
Unfortunately, the proliferation of engineered indices has given rise to wildly inflated illustrated returns.

When those returns fail to materialize, many IUL owners are unhappy enough to pursue litigation. Samuelson recently met a South Carolina lawyer who has been involved in 400 litigation cases against IUL.

"IUL is not going anywhere," he added. "We’re now grappling with a product that is fundamentally good, fundamentally serves clients, but we have to do it differently as an industry in order to make it sustainable for the long run."

Samuelson co-founded Life Innovators, an independent life insurance and annuity product development company, in 2018 and has been president and CEO since its inception.

Prior to that, Samuelson led product development teams for MetLife and Brighthouse Financial. He recalled the time 15 years ago when he heard an industry executive claim it was "irresponsible" to illustrate a particular IUL product at less than 10%.

"That was totally normal back then," he said.

No accounting for indexed life

But life insurance illustration regulations were crafted before IUL existed. After interest rates nosedived, IUL illustrations started to go sideways.

Instead of reopening the illustrations model regulation, regulators settled on Actuarial Guideline 49 in 2015 as the first check on IUL illustrations. Insurers quickly got around AG 49 by offering IUL products with multipliers and bonuses. That led to AG 49-A, adopted in late 2020, followed by AG 49-B in 2023.

"Every time we illustrate better, what do we do? Well, we increase the chance of failure," Samuelson said.

In time, insurers discovered they could engineer their own indices. Some have the traditional mix of bonds and equities. Others are a bit more creative. Few of them have any substantial history of returns to show clients.

There are now 207 indices by 51 insurers, Samuelson said.

"When you start using engineered indexed you are no longer purely in the equity world. You are now linking it to an index that has some equities in it, but has a lot of other things, too," Samuelson explained. "We are basically telling clients this is a low-risk index but you’re going to get insanely high returns. That does not exist."

While regulators try to get IUL illustrations down to the 5-7% range, the actual average index return from 2016 to 2023 was 3.23%.

“Is that low performance?" Samuelson asked. "No, I would argue that is exactly the right [performance] in a low-risk, low-return investment.”

One trend Samuelson observed in recent years is index innovations designed to solve last year's problems. In a comical result, he noted that indices showing gains in 2020 are indices created after 2020.

"Solving last year’s problem with this year’s index," Samuelson said. "That’s exactly the opposite of what you want to do.”

Growing concern

Most IUL insurers are boosting their financial position by selling IUL with a new portfolio backing, Samuelson explained. That structure works fine as long as interest rates remain stable or climbing.

But Samuelson has seen enough to know better.

"When I think about the sustainability of our industry one of the things that I am most concerned about is we are out there selling IUL on new portfolios today and [if] interest rates drop by 200 basis points over the next two years, these caps are going to fall faster than anything you have ever seen in your entire career with IUL," he warned.

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