After record year, indexed universal life likely to stumble in 2023

While 2022 is expected to have been a record year for indexed universal life products, next year might feature a speed bump mid-year, according to industry analysts.

Although the fourth quarter is not expected to be a record-breaker on its own, it caps a banner year. Sheryl Moore, CEO of Moore Market Intelligence, projected that it will supersede last year’s blazing performance.

“I am projecting total 2022 IUL sales to be more than $2.7 billion in target,” Moore said. “This will be significantly greater than the last record of $2.4 billion that was achieved in 2021.”

This was despite the product’s connection with equities, which had a challenging year. The marketing message of not losing principal while gaining on the upside was a winner, Moore said.

“I hate saying this motto with index life, but zero is your hero. When the markets going down, the worst case scenario is that you earn 0%,” Moore said. “And the reason I hate that is because you still pay for the insurance charges that come out of the policy. So you're really not getting zero. You're having a negative adjustment to your cash value to pay for insurance charges.”

IUL illustrations cited

A bigger issue in Moore’s estimation is IUL illustrations, which regulators are likely to adjust this year after the past few years of discussing the issue. Moore and others have said that hybrid, proprietary and unproven indexes are confusing and misleading consumers, something that regulators are expected to act on.

The National Association of Insurance Commissioners have been looking at updating Actuarial Guideline 49, which was enacted in 2015 to rein in IUL illustrations. That guideline was itself an addition to Life Insurance Illustrations Model Regulation 582, adopted in 1995 when the products were just being developed.

Even after a few years of kicking around AG 49 amendments, the NAIC was not able to move on a new model in 2022. But the NAIC has floated a couple of “quick fixes” that may be enacted this year, which could trip up IUL sales.

“I'm anticipating that things will change this year,” Moore said. “We didn't have a ton of disruption in 2022. But it's just basically anytime there's a change to the product or the illustration, it can cause a decline in sales.”
Moore said she has heard a quick fix, which she referred to as AG 49-B, might be adopted in the second quarter. But the NAIC might even go further and reopen the original model, 582.

“If AG 49-B goes into effect in May 2023, I think it could reduce indexed life sales by as much as 15%,” Moore said. “That will be just a temporary stopgap until 582 is reopened and rewritten. But if you asked me, AG 49-B will probably be in effect for a couple of years at the very least.”

Four options offered

The NAIC put out four options for comment in October to guide the use of indexes and the addition of fixed bonuses to illustrations. According to Eversheds Sutherland, a law firm involved in insurance regulatory matters, the four options are:

1. Limiting the maximum amount of leverage that could be illustrated to that of the Benchmark Index Account. The Securian Financial Group proposed this option.
2. Limit indexed illustrated rates to the 145% net investment earned rate limit on the Benchmark Index Account currently in AG 49-A. A group of six life companies proposed this option.
3. This option would: (1) remove the lookback methodology in Section 4(A) of AG 49-A that uses historical index return data combined with declared elements to produce a maximum illustrated rate; (2) install the hedge budget in Section 4(C) of AG 49-A as the maximum illustrated rate for any indexed account; and (3) reduce the 45% factor in Section 5(A)(i) of AG 49A to 0%. The third option is based on the recommendation of The Coalition of Concerned Insurance Professionals, which clarifies a prior submission from Bobby Samuelson, Executive Editor, The Life Product Review, and Sheryl Moore, President & CEO, Moore Market Intelligence.
4. Products and strategies with the same hedge budgets would illustrate using the same rates of return. Michael Yanacheak, Actuarial Administrator, Iowa Insurance Division, proposed this option to help ensure that illustrations remain consistent with their intended purpose which is to demonstrate how policies operate rather than to promote comparisons based on illustrated rates of return.

Elaine Tumicki, LIMRA corporate vice president, said she agrees that the change would disrupt IUL sales this year. But she said the potential change was just one of the potential question marks for 2023.

“The other question mark, though, is what's going to happen with the economy,” Tumicki said. “Inflation is going to continue to be high and if wages don't keep up, then people have less discretionary income to spend on life insurance. If unemployment increases, that that is a factor that that can impact sales. So, there's a whole range of external factors, economic factors that the industry can't control.”

Steven A. Morelli is a contributing editor for InsuranceNewsNet. He has more than 25 years of experience as a reporter and editor for newspapers and magazines. He was also vice president of communications for an insurance agents’ association. Steve can be reached at [email protected]

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