IULs Fill Growing Gap in Retirement Plans

By Cyril Tuohy InsuranceNewsNet

Suddenly, there’s a lot of action surrounding indexed universal life insurance products.

Sales are brisk, and a task force by the National Association of Insurance Commissioners is debating what illustrations that agents and carriers can use in marketing the products. Meanwhile, a New York financial watchdog has launched a probe into sales practices associated with the policies.

What’s going on?

Jason Konopik, chief financial officer of AMZ Financial Insurance Services LLC in Urbandale, Iowa, said IULs are on more people’s radar screens for two reasons: IULs remove many of the highs and lows of stock market volatility, and they offer the perfect hedge against tax uncertainty.

IULs “hit the sweet spot of what clients are concerned about today,” Konopik said in an interview with InsuranceNewsNet.

Konopik, an expert on IULs, said the products are ideal for people around age 55 who still have a 10-year window before they start drawing down on their retirement income.

Unlike 401(k) products that some call a “time bomb” with regard to tax rates when the time comes to draw down on the assets, IULs offer the ability to take loans and withdrawals against the policy. Come time to retire, IULs produce steady cash flow. As nearly everybody knows by now, millions of Americans are going to be desperate for those cash flows in a few years.

The policies pay interest according to a formula pegged to a stock market index and offer protection from market downturns. As much as 12 percent of the cash in the policy is allocated to the index crediting, and there’s a death benefit to be enjoyed by heirs. IULs contain specific features that reduce the cost of insurance charges over time, allowing the cash to grow.

Market demand for the product, which has been around since 2000, speaks for itself. IUL premium improved 14 percent in the second quarter, resulting in a 13 percent increase in the first half of 2014, according to the insurance research organization LIMRA. Nearly three-quarters of IUL carriers reported higher sales in the first half of this year, compared with the first half of 2013.

In addition, IULs represented 42 percent of total universal life premium in the second quarter, and 17 percent of overall individual life premium in the second quarter, LIMRA reported.

“Financial advisors should be excited about this product and they are,” Konopik said. Advertising and “client-type activity” around IULs have soared. “Expectations industrywide are that we will be on this growth path for a while,” he said.

And that growth is exactly what has attracted New York Financial Services Superintendent Benjamin Lawsky to take a closer look at IUL sales practices. In September, Lawsky announced that his office had launched an investigation into IUL sales practices out of concern that some advisors and carriers were painting a misleading and inaccurate picture of the potential gains associated with IULs.

Konopik estimated that more than 50 carriers in the United States are marketing the selling of IUL policies. “Insurance companies that said they’d never do it 10 years ago are now selling it,” he said.

In the latest example of a carrier tweaking its IUL offering, Fidelity & Guaranty Life Insurance Co. last month injected more flexibility into its fixed index universal life product by offering another interest crediting option that guarantees an interest rate of at least 3 percent, the company said.

Are advisors overselling IULs? Chris Conklin, former principal and actuary with Insurance Insight Group, wrote in a 2009 blog post that anyone buying an IUL should do so as a long-term commitment because surrender charges often last 10 years or more, and because cash values are well below the premiums paid for many years after the policy is issued.

Carriers also reserve the right to change elements of the interest crediting formulas and of the mortality charges, often “beyond the increases shown in the illustration” that an agent provides to a client, wrote Conklin, now a senior vice president for product design with Genworth Financial in Richmond, Va.

“There’s a lot of moving parts to IUL,” Konopik said, and one of his concerns is that some agents are “not getting as much training as they need when selling IULs."

Advisors who “gloss over” IULs and sell policyholders on the advantages of relatively risk-free, cash-value growth; and on the income streams IULs provide, instead of on the life insurance aspects of the policy and its death benefit; aren’t painting an entire picture of IULs, Konopik said.

“IUL has an opportunity to play a large role in a financial-advisor practice, as long as they find solutions for clients where the IUL fits,” Konopik said. “IULs have the capacity to do a tremendous amount of good for a lot of clients for a piece of their overall protection and for financial benefits of that client long term.”

Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. Cyril may be reached at[email protected].

Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. He can be reached at [email protected].