Indexed Life & Annuities: Unlocking Opportunity

Three decades after the first insurance company tied a product return to an index, those now-fully mature indexed products continue to dominate sales, innovation and regulatory discussions.

The allure is obvious: an opportunity to participate in market gains while not actually being in the market, and at the same time eliminating (or nearly eliminating) any chance of losing money.

It all sounds like a great deal on paper, and consumers agree.

On the life insurance side, indexed universal life owns about 25% of the market. Fixed indexed annuities represent about 25% of annuity sales, while the fast-growing registered index-linked annuities are up to a 12% market share.

The experts who make predictions say those numbers are far more likely to grow than to contract.

We break down the history, inner workings, innovation, sales, target audience, controversies and future prospects of indexed products.

Three decades of index evolution

A now-defunct company named Keyport Life Insurance introduced the first index to the life insurance industry when it brought KeyIndex to market in 1995.

The first fixed indexed annuity, KeyIndex was designed to offer the potential for market-linked growth while providing principal protection.

From those inauspicious beginnings, a sales trend percolated to life. Indexed annuity and life insurance are the sales engine powering most of the big companies today.

Those early indexed annuities were called “equity-linked annuities” to reflect the tie to stock market gains. It would not be long before “indexed” annuity emerged as the more accurate product name, since there is no direct investment in stocks.

Innovation came relatively quickly once the concept of indexing the market to award gains caught on with consumers. Transamerica introduced the first indexed universal life insurance product in 1997.

IUL policies offer a death benefit alongside a cash value account tied to a chosen stock market index. These early life and annuity products generally tracked with the S&P 500 Index or a comparable option like the Dow Jones or Nasdaq.

A pair of events combined to drive indexed product sales following the mid-2000s. First, the economic crisis of 2008-09 cemented the value of these 0%-loss products. “Zero is a hero” became the rallying cry for fixed products.

Second, the near-zero interest rates made traditional life insurance and other
financial instruments less attractive. Indexed products won market share as a result.

IUL rose from approximately 8% of total life sales premium in 2010 to 25% in 2022. FIAs topped $30 billion for the first time in 2009. By 15 years later, those sales fell just short of $127 billion. (Product sales data provided by LIMRA and Wink, Inc.)

Along the way, the low interest rates combined with the desire to offer customized products led to the creation of proprietary indexes. Proprietary indexes can be designed to focus on particular market segments — for example, U.S. large and mid-cap technology companies —  that incorporate volatility control mechanisms or target specific investment goals.

Beginning about 15 years ago, insurers began partnering with investment banks to design the custom, rules-based indices. The Barclays Trailblazer Index and the J.P. Morgan MOZAIC Index are two early and popular models.

Today, nearly 200 custom indexes exist to support different life insurance and annuity products.

“From the insurance carriers’ perspective, it’s just what they need to differentiate themselves,” explained Alfred Eskandar, founder and chief operating officer of Salt Financial. “It makes it difficult to compete with profitable products when everything is the same.”

How do indexes work?

Index fundamentals are basically the same for both annuities and life insurance. In both cases, the consumer hands the insurer money, in the form of either a lump sum or premium payments.

A portion of that money goes to pay any insurance costs, such as mortality charges and fees. The rest goes into the policy’s cash value. The insurer issues credit to the account based on the performance of the chosen index.

Common index crediting strategies include participation rates and caps, which limit the earnings in exchange for the zero floor. For example, if the index goes up 12%, with an 8% cap and 100% participation, your policy gets 8% credited to cash value.

The insurer also participates in the index yield via call options. First, the insurer generally invests the premium or lump sum in bonds or a fixed-income instrument. The insurer then uses a portion of that yield to purchase call options on the chosen index.

The options provide the upside exposure to index performance.

While some clients prefer the traditional name brand S&P 500, explained Jack Elder, senior director of advanced planning at CBS Brokerage, others are best served with a proprietary index.

“The S&P 500 remains a familiar and transparent benchmark, which can be appealing to clients who value simplicity and name recognition,” he said. “That said, engineered indices — often designed with volatility controls or diversified asset classes — can offer crediting potential in a low-rate or volatile environment.”

Leading the way in a highly competitive market

As consumers moved further from the economic crisis, a taste for risk returned. But just a little risk. With that, registered index-linked annuities were born.

Equitable Financial is credited with creating the RILA concept — in which losses are capped in exchange for a chance to earn a greater market return — in 2010. Today, about 25 annuity sellers have a RILA product, and it is the fastest-growing annuity segment.

RILA sales totaled $17.4 billion in the first quarter of 2025, the most recent available data, up more than 255% over the same period in 2020.

“There are a lot of insurance agents who sell indexed annuities who have now tried the RILAs and are like, ‘Gosh, it’s really hard for me to go back to talking about an indexed annuity with a 9% cap when I can present this product to my client with a 20% cap if they’re just willing to accept a little bit of downside exposure,’” noted Sheryl Moore, CEO of Moore Market Intelligence and Wink. “I am projecting record sales of structured annuities and RILAs unlike anything we’ve seen. … It is going to eclipse indexed annuity sales. They’re very, very popular.”

Sales leaders in the highly competitive indexed annuity space include Athene Life & Annuity, Sammons Financial Companies and Allianz Life of North America. National Life Group and Pacific Life lead the way on the IUL side.

Moore continues to see intriguing innovations from indexed product sellers. The multi-year guaranteed indexed annuity is a hybrid financial product combining features of both fixed index annuities and multi-year guaranteed annuities.

It offers a guaranteed minimum interest rate for a set number of years, similar to a traditional MYGA, while retaining the potential higher returns based on the performance of a market index.

A new index crediting option, the best entry option, bases the index measurement on the lowest point in the market over, for example, the first 90 days of the contract.

“That way, if the market goes down, you have a greater opportunity to participate in a larger growth in the index than you would have normally started your index measurement,” Moore explained. “That is pretty exciting.”

An index for all seasons

Overall, index innovation is giving insurers and consumers virtually unlimited choices, from investment areas to crediting options. Want environmental, social and governance or climate change investments? You got it. Indexes with cryptocurrency holdings? Can do. And, of course, the old standby S&P 500 has a lengthy lineup of indexes to appeal to conservative customers and those who like to sprinkle in a bit of risk.

Here are the main categories most indexes fall into:

1. Traditional market benchmarks. Well-known stock indexes such as the S&P 500, Russell 2000, and the Morgan Stanley Capital International Europe, Australasia, and Far East. Simple and transparent, but they often come with lower caps due to higher volatility.

2. Volatility-controlled and risk-
managed indexes. Designed with banks — Barclays, BNP Paribas, Morgan Stanley and J.P. Morgan are big players — to manage volatility. Allow insurers to offer higher participation rates and more stable crediting.

3. Multi-asset and diversified indexes. Mix of stocks, bonds, commodities, or currencies. Aims for balanced performance across market cycles.

4. ESG and thematic indexes. Focus on ESG or other themes. Growing but still niche in life insurance products.

5. Proprietary and custom insurer-branded indexes. Exclusive collaborations between insurers and banks. Dominate new launches because they differentiate products and often project higher crediting.

Principal protection is the name of the game

The target market for indexed products is a fairly large demographic. Those who want market-linked growth and downside protection are usually professionals, higher earners and retirement-focused individuals who value both life insurance coverage and cash accumulation.

But indexed products are not just for the wealthy, said Alan Assner, head of individual annuities at The Standard. 

“There’s not one specific type,” he said. “It’s really those risk-averse folks who have a lot of their money in conservative assets who might look to siphon a piece of that off to put into an annuity to earn additional return with the idea that they can’t lose money. Or folks even in the middle of the risk spectrum who have some other assets associated with conservative investments.”

And tax deferral is always an attractive option for many people, he added.

“The ability to do that allows someone to grow and potentially continue to delay and defer taxes on that particular growth, whereas with a CD, you pay tax on that interest every year,” Assner said.

IUL can play a key role in legacy planning, noted Jack Elder of CBS Brokerage. It’s part of the overall versatility that makes IUL a big seller.

“It can serve as a legacy planning tool, a supplemental retirement income source or a liquidity reserve for future needs,” Elder said. “These clients are drawn to the idea of control—over premiums, access to cash value and how the policy fits into their broader financial strategy.”

‘We just aren’t comfortable’

Indexed products are not without their detractors. On the IUL side, controversy revolves around concerns about misleading sales tactics, high fees, complex features, suitability for certain investors and the potential for financial losses due to market fluctuations and rising costs.

Paul LaPiana is the head of brand, product and affiliated distribution at MassMutual. The insurer never entered the IUL market due to these issues, he said.

“We have taken a pause because of some of the ways the IUL products have been illustrated and marketed,” LaPiana said. “We just aren’t comfortable. We would put restrictions on product design, and we would put governors on illustrated rates. And people would tell us, ‘Your product’s not competitive.’

“So, we just haven’t gone down that path, because culturally, we don’t think it’s aligned to what we’re trying to deliver.”

IUL products have been the subject of several waves of lawsuits over the past decade, typically focusing on illustrations, cost-of-insurance charges and sales practices.

One of the biggest lawsuit waves involves premium-financed IUL sales, that is, borrowing to fund policies. Plaintiffs claim insurers and agents sold complex IUL strategies that were unsuitable for retirees or high-net-worth families.

IUL premium financing is generally pitched as a way for wealthy individuals, families or businesses to buy large life insurance policies without tying up their own cash. Instead of paying premiums directly, the policyholder borrows money from a bank or a lender to cover the cost of the insurance.

“I think there are a lot of marketing approaches to indexed life that are problematic,” said Moore. “There’s a lot of premium finance business going on, which shouldn’t be sold in the scenarios that we’re seeing.”

In one such lawsuit, Montana funeral directors claim a premium financing “scheme” cost them millions.

Initially filed in July 2024, the lawsuit centers on the sale of $67.5 million worth of premium-financed life insurance policies. Defendants include MassMutual Life Insurance Co. and Penn Mutual Life Insurance Co. The policies were sold over several years, beginning in 2014.

The plaintiffs, who operate Stevenson and Sons Funeral Homes in Miles City, Mont., claim that a broker working on behalf of both MassMutual and Penn Mutual misrepresented the premium-financed policies as “responsible, safe and tax-friendly” estate planning tools.

“The financial catastrophe into which Defendants led Plaintiffs could have been avoided had Defendants told them what the tripartite structure actually is: a high-risk, interest-rate-sensitive, and volatile structure unsuitable for low-risk estate and retirement goals,” the lawsuit stated.

Illustrating a problem

The most persistent problem with the dozens of proprietary indexes is their lack of history. That lack of history creates a barrier to illustrations that are key to selling the products.

Insurers are getting around that by creating “backtested” histories, essentially a simulated performance record showing how the index would have performed in the past if it had existed, based on historical market data and the index’s current rules.

The practice makes a lot of people uncomfortable.

“In my opinion, you’re saying, ‘Here are some made-up numbers. I hope they induce a sale,’” said Moore. “The illustrative rates I’m seeing on products right now, especially those hybrid indexes, are often into the double digits, which is so interesting to me because these indexes were not developed to outperform, say, the S&P 500 index option.”

State insurance regulators are reticent to reopen the overall life insurance illustration regulation, which was created before IUL even existed. However, they are again probing around the edges of an actuarial guideline designed to limit unrealistic illustrations.

During the National Association of Insurance Commissioners’ summer meeting in August, the Life Actuarial Task Force discussed proposed changes to Actuarial Guideline 49-A.

Regulators are determined to limit their amendments to a specific section of AG 49-A to address insurers who are including “historical averages exceeding the maximum illustrated rate and backcasted performance,” as the amendment proposal form reads.

The illustration irregularities were uncovered after regulators reviewed illustrations from 13 companies, explained Ben Slutsker, director of life actuarial valuation at the Minnesota Department of Commerce.

“The disclosure that probably brought up the most concern is for companies that have indices that show historical returns for years before that index existed,” Slutsker said. “There are concerns over whether that could be backfitting already knowing what history is, and it’s being shown to the consumer, who may not see that.”

Approved in 2020, AG 49-A limits the maximum illustrated rate that insurers can use in policy projections to prevent unrealistic growth assumptions. It includes restrictions on exaggerated benefits from indexed loans, a strategy that previously allowed aggressive return assumptions.

Regulators found that insurers often displayed multiple historical averages over different time frames, often side-by-side with the maximum illustrated rate, regulators noted. The historical averages were sometimes two to four times the maximum illustrated rate.

Regulators first sought to tamp down illustrations in 2015 with AG 49, which required companies to use a uniform method for calculating illustrated index credits and capping them at 145% of the annual net investment earned rate.

Insurers almost immediately got around AG 49 by offering IUL bonuses and multipliers. That led to AG 49-A and AG 49-B in 2023. The last update standardized the maximum illustrated interest rates for IUL policies, particularly those using volatility control indexes.

It also requires that illustrations for these policies use the same leverage as the benchmark index, like the S&P 500, and prevents insurers from adding bonuses to the maximum illustrated rate.

There will undoubtedly be more updates to come.

Looking into the future

Executives and analysts agree that innovation of indexed products will continue. And we know that economic conditions will continue to fluctuate and baby boomers are going to retire in high numbers through 2030.

“With over 10,000 people retiring every day, with a tremendous amount of wealth about to be transferred, plus the uptick in the market performance for the last couple of years, principal-
protected products are in unbelievable demand,” said Eskandar.

More importantly, those people nearing retirement remember the financial crisis of 2008-09 and the COVID-19 crisis in 2020.

“Nobody wants to go through a 30% pullback when they’re approaching retirement,” Eskandar said.

Interest rate cuts are one immediate variable that should send shock waves through indexed products (See this month’s In the Know on page 50 for more information). The Federal Reserve was to meet in September after this issue went to press. A rate cut,
either in September or during a near-future meeting, is expected.

When rates fall, insurers earn less on their general account investments such as bonds. Likewise, insurers become less generous in their index crediting strategies. For example, caps may drop from 6% to 4%.

“When interest rates come down, it puts more pressure on the index itself, because you’re going to get a lower participation rate. So you need the index to really perform,” Eskandar explained.

In a world of ever-expanding index product shelves, the best thing agents and advisors can do is seek continuous education, Moore said.

“If they don’t understand a feature, they’re not going to feel confident going into that meeting and they may not explain it appropriately to their client,” Moore said. “So, really the best advice that I can give insurance agents is that they need to go with something that they feel comfortable with so they can exude that confidence in the meeting with the client.” 

Correction: An earlier version of this story incorrectly stated that MassMutual once offered IUL products.

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.