Chasing the Index: Life and annuity indexed products explode

It seems that every insurance company wants a product tied to an index these days. And why not? Indexed life insurance and annuity products are selling faster than contracts can be processed.

Literally. Many producers complain of processing delays as new business backs up.
When business is hot, innovation generally follows. American Life & Security Corp. is the latest insurer to get creative with an indexing option.

The Lincoln, Neb.-based insurer recently announced its American Fusion multiyear guaranteed index annuity. While it remains to be seen whether “MYGIA” catches on as the newest industry product acronym, the marriage of a traditional MYGA and a fixed indexed annuity is unique.

The five-year MYGIA works like this: An annual guaranteed 4% rate return is augmented by a potential “bonus interest credit” at the end of the term. If the S&P Index grows by 25% over the five years, a 14% bonus is applied to the contract, giving owners a 6.76% annual yield.

The product “threads the needle,” said Thomas Bumbolow, head of distribution & business development for Midwest Holding, a subsidiary of American Life, allowing the insurer to capitalize on the index craze while still giving consumers safe, guaranteed growth.

The product is right for agents as well since they can collect a higher commission on an indexed product.

“It’s a tweener product, so we tried to come up with a tweener commission,” Bumbolow explained. “Make it fair and give everyone a reason to focus on this, not just the clients but the agents as well, and it has to work for the carrier. I think we’ve threaded the needle the right way.”

Index products seem to include something for everyone — from the consumer who gets to participate in the market to the agent getting a higher commission to the carriers and marketing middlemen looking for big sales numbers.

But troublesome disrupters remain close at hand.

In particular, regulators and consumer advocates are ratcheting up the pressure on proprietary indices. The illustrations generated by these immature indices are fodder for class-action lawsuits.

Then there are the ever-changing economic indicators. Rising interest rates mean fixed-money investments are suddenly yielding up to 5.5% in some cases.

But despite all of that, analysts expect indexed products — both life insurance and annuities — to lead the way in sales for at least the foreseeable future.

“As folks are moving from the accumulation stage in their pre-retirement to retirement, they’re much more sensitive to being able to have principal protection and not have to go through some of the market corrections and volatility that they may have gone through in the past,” said Sutton White, head of annuity product at Life Innovators.

The birth of indexes

Equity indexed annuities first appeared in 1995 as an innovative new product design that gave consumers a path to earn interest based on the performance of a stock market index, most commonly the S&P 500, without any downside risk.

By 2006, the industry realized the word “equity” proved too confusing. Products were renamed “fixed indexed annuities” to help avoid any perception of a direct investment in the stock market.

The perception of all fixed products grew following the great recession of 2008-09. Millions of near retirees were crippled financially when retirement accounts lost a huge chunk in the market collapse. “Flight to safety” entered the retirement planning lexicon as new indexed products offered the opportunity to participate in market gains without ever losing valuable retirement dollars.

On the life insurance side, Transamerica offered the first indexed universal life product in 1997. IUL caught on quickly. IUL offers permanent life insurance protection with the opportunity to earn market-like returns inside the policy.

IUL offers benefits similar to a Roth IRA: cash value grows tax deferred, and income can be tax free. Policyholders can access this growth at any time their policy is in force on a tax-deferred and tax-favored basis.

IUL is a little bit different from a fixed indexed annuity because the cost of insurance is embedded in the contract, White noted.

“If the performance doesn’t meet a certain threshold, you actually could wind up either losing money because of cost of insurance or even having your policy lapse,” he said. “So the performance on the illustration for an IUL is much more important in terms of how the policy is going to behave, than with a fixed index annuity.”

At last count, more than 50 insurers offered an IUL product. In the first quarter 2023, the most recent quarter available, Transamerica Life’s Transamerica Financial Foundation IUL was the No. 1 selling indexed life insurance product for all channels combined, Wink, Inc., reported.

The sales story

Total 2022 indexed life sales hit $2.7 billion, an increase of 10.9%, according to Wink data. Fourth quarter sales saw both a record-setting quarter and a record-setting year for indexed life sales. IUL held about 25% of the total individual life insurance market in 2022.

Meanwhile, indexed annuities posted monster sales in 2022 and, so far, in 2023. Annuity sales totaled $310.6 billion in 2022, surpassing the prior annual record set in 2008 by 17%, according to LIMRA data.

Fixed indexed annuity sales were $79.8 billion, up 25% from 2021 and 9% higher than the record set in 2019. In the first quarter 2023, FIA sales were $23.1 billion, up 42% from the year-ago quarter and 4% higher than the record set in the fourth quarter of 2022.

Registered index-linked annuity sales reached $41.1 billion in 2022, 6% higher than the prior year and a new all-time high for the product line’s sales. RILA sales totaled $10.4 billion in the first quarter of 2023, up 8% from the prior year.

But regulation is threatening to skewer 2023 sales — for the good and bad.

On the life side, sales for the first quarter were $635.5 million, down 15.5% compared with the previous quarter, and up 0.8% compared to the same period last year, Wink reported. Overall indexed life sales include both indexed UL and indexed whole life.

“Indexed life was the only product line not to experience a decline in sales, over this time last year,” said Sheryl J. Moore, CEO of both Moore Market Intelligence and Wink, Inc. “Sales for the [second] quarter will likely prove challenging, thanks to the implementation of AG 49-B.”

A layer of new restrictions

Actuarial Guideline 49-B took effect May 1. Put forth by the National Association of Insurance Commissioners, AG 49-B requires that index accounts cannot be illustrated above the benchmark index account and the maximum illustrated rate must include bonuses. The guideline also limits illustrated rates to a maximum of 145% of whatever an IUL portfolio is earning.
AG 49-B amends AG 49-A and is the latest NAIC attempt to rein in illustrations, particularly around uncapped volatility-controlled indexes with a fixed bonus. AG 49-B is seen as a patch until the NAIC reopens illustration regulation.

The NAIC wrote and adopted the overall life insurance illustration model in an acrimonious process that concluded in 1997, well before IUL existed.

Speaking at a LIMRA conference in April, Tim Pfeifer predicted that an AG 49-C is likely to come. Pfeifer is president of Pfeifer Advisory, which offers consulting services on life insurance product designs.

The growth of proprietary indices is what gives regulators heartburn. At one time, the S&P 500 was used in almost all index products but came with limited ability to design product features. So, carriers created their own indexes and haven’t looked back.

Since then, more than 150 indexes have been created. Unlike the S&P 500, few of them have any solid history to draw from.

“The interest rate environment is really what drove the proliferation of it because it was just impossible to get a competitive cap rate on the S&P,” White explained. “Even two years ago, we were seeing caps on the S&P at 4% or 3.5%. That’s where you can offer a proprietary engineered index with a much higher cap and/or participation rate.”

With no history to draw from to support illustrations, insurers created “backtested” hypothetical performance from proprietary index components. But critics say this results in misleading illustrations untethered from reality.

Illustrated rates are expected to come down now that AG 49-B is in place. IUL sales might follow. Lower illustrated rates are likely to suppress IUL sales up to 15%, Moore said.

The lawsuits

Unsurprisingly, those shaky illustrations and complex product details have prompted lawsuits — against both IUL and indexed annuities.

IUL is a target for many class-action-oriented law firms, as well as consumer advocates who claim it is confusing and rife with scam funding mechanisms.

A 2022 lawsuit filed in Arizona bankruptcy court described one such scam. The three plaintiffs purchased Minnesota Life IUL products from producers. According to their lawsuit, the plaintiffs were sold IUL policies accompanied by a future income payments feature.

Using various marketing efforts, producers allegedly targeted pensioners with the FIP strategy by offering them a lump sum in exchange for a portion of their future pension payments. Scammers pushing FIP allegedly used brokers and insurance producers to find investors — often retired veterans, teachers and firefighters.

Unknown to many investors, the future pension payment terms required them to pay what often equated to an annual interest rate exceeding 100% over a five-year term.

Insurers settled several such class actions over IUL over the past two decades.

Fixed indexed annuities are drawing similar litigious scrutiny over illustrations. In Texas, a former Lincoln Financial agent is a lead plaintiff in one such suit. The nine plaintiffs allege that the insurer misrepresented the potential returns with its OptiBlend fixed indexed annuity.

Former agent Henry Morgan and eight other plaintiffs, all Morgan’s clients, signed FIA contracts in February 2020, court documents say. Plaintiffs say Lincoln led them to expect the consistent 6% gains illustrations showed.

The lawsuit claims a Lincoln marketing consultant “made several oral representations to Henry Morgan and, on information and belief, made the same misrepresentations to other brokers, agents and customers, that when the market was no longer in the bull direction a return would still be generated because of the dividend stock mix in the index.”

In its response, Lincoln claimed the marketing information referenced in the lawsuit was emailed to Morgan and other Lincoln agents and marked, “For agent use only. Not for use with the public.”

Lincoln further noted that all of the plaintiffs signed an application in which he or she acknowledged that “all payments and values provided by the contract, when based on experience of the index account, are not guaranteed as a dollar amount.”

That case has been ordered to mediation by the judge.

Future regulation

There are many consumer advocates who would like to see all indexed products regulated as securities by the Securities and Exchange Commission. At present, only RILAs face that higher level of scrutiny.

The so-called Harkin Amendment to the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act was intended to keep fixed-index annuities outside the SEC’s jurisdiction. IUL is similarly protected by Dodd-Frank.

Assuming that indexed products remain state-regulated for the near term, sales forecasts appear strong.

Expectations are for FIAs to continue to reach new record levels as investors seek out solutions with a balance of protection and growth, LIMRA said. A majority of the growth projected in the FIA market will be in products without a guaranteed living benefit. The growth is anticipated to flatten out between 2023 and 2027.

IUL sales should remain strong but could flatten out or decline slightly due to regulation pressures and a post-pandemic dip in life insurance activity.

Insurers will certainly keep tweaking index products in response to changing economic conditions and demographic profiles. RILAs have sold so well, the concept is being replicated on the life side by eager insurers.

The question remains whether RIUL spreads throughout the life insurance world, Pfeifer said. Brighthouse has filed for its own RIUL product, he added.

“Is this the next thing we’ll see?” Pfeifer asked during LIMRA’s Life Insurance and Annuity Conference this spring. “This will be a securities-type product that will be structured like an IUL. ... So, this would be kind of a counterpart to the RILA product.”

The Dow Jones gained more than 40% over the past five years, despite a worldwide pandemic, the Russia-Ukraine conflict, generational inflation and associated economic upheaval. As long as equities give out those gains, indexes will remain hot.

For a smaller insurer like American Life, taking a creative index product like American Fusion to the market is a possible path to a bigger profile.

“We’ve seen some unprecedented moves in the stock market, and folks certainly don’t want to miss out on that,” Bumbolow said. “Being able to have a product that is principal protected, while also giving you a little bit of the upside for some of these indices. I think that’s the real driver behind this.”

InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at [email protected]. Follow him on Twitter @INNJohnH.