Selling Indexed UL For Upside Potential, Downside Protection

By Linda Koco
InsuranceNewsNet

NEW ORLEANS – There is a huge opportunity in the emerging growth product, indexed universal life insurance, said Bobby Samuelson in a workshop here. But when entering this market, the industry “needs to know where the landmines are,” he warned.

He named a number of landmines in his presentation, but focused heavily on one of them — sales based on illustrations.

The problem

The problem with indexed universal life (IUL) right now is that it is an “extremely illustration-driven contract,” contended Samuelson, who is executive editor of The Life Product Review.

“What I mean by that is, when people choose an IUL product, they tend to think about it as what product looks the best on this little sheet of paper that we call an illustration,” he told an IUL breakout session here at the annual Life Insurance Conference sponsored by LIMRA, LOMA, Society of Actuaries and American Council of Life Insurers.

But what is the probability that the illustration actually matches reality, he asked the audience. The question evoked some laughs.

“Zero?” he shot back. “We all agree with that?”

So the irony is that although the product is growing dramatically, “much of the basis for that growth is a sheet of paper that we all know not to be true,” he said.

So, he continued, the question for the industry is not how the product performs relative to the illustration but “how wrong are we going to be, and to what degree?”

As the product line develops, the industry needs to look at how to build IULs around those issues, Samuelson contended. Or to avoid the issues, the industry needs to explore how to manage expectations “so that the inevitable disconnect with the illustration and the real performance does not come back to hit us.”

Opportunities

With that as a backdrop, he laid out marketing opportunities that he sees for IUL.

One is to market the product’s upside potential (due to the index-linked interest crediting), and the second is to market the product’s downside protection. Putting those two together, he said IUL can be sold as principal protected products with the upside potential of the market, and take on the role of another asset class in the portfolio.

But a separate opportunity—the one he said is getting the most attention right now—is to market IUL based on illustrations. Over the long term, the numbers look awesome, he said. That helps fuel sales. Even so, the “yield is not intrinsic to the product,” he cautioned.

He presented several examples of how illustration-based sales might lead to difficulties. That could happen when the customer’s IUL performs at rates lower than illustrated.

IUL business could be “a lot more sustainable” in the long run, if sold as an asset class, with upside potential and downside protection, than if sold based on illustrated rate, he contended. 

If sold based on the illustrated rate, he said, issues could arise.  In retirement income planning, for instance, if an IUL is sold on a high illustrated rate basis, and  if the actual performance turns out to be lower than illustrated, then the customer could get an income that is much lower (or for a shorter period) than projected.

Clients love the upside potential, downside protection story of ILU, concluded Samuelson. It should be a component in every product, he maintained, and it can be included in any product.  The psychology is compelling and fits well with the principal protection focus of life insurance. In addition, the “tax advantaged wrapper” of life insurance is uniquely suited to the product.

A final benefit to selling IUL based on upside potential and downside protection: When the policy is sold that way, “people stick around longer,” Samuelson said.

Linda Koco, MBA, is a contributing editor to InsuranceNewsNet, specializing in life insurance, annuities and income planning. Linda can be reached at linda.koco@innfeedback.com.

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Linda Koco, MBA, is a contributing editor to InsuranceNewsNet, specializing in life insurance, annuities and income planning. Linda can be reached at linda.koco@innfeedback.com.