The National Association of Insurance Commissioners is facing increasing scrutiny over the regulation of indexed universal life insurance illustrations.

Dick Weber, representing the Life Insurance Consumer Advocacy Center in California, became the latest industry expert to highlight IUL illustration issues during an NAIC Life Insurance and Annuities Committee call this week.

Current disclosure standards are likely to leave consumers with unrealistic expectations about policy performance and retirement income potential, Weber said. A 59-year veteran of the life insurance industry, Weber took care to separate the product from how it is being sold.

"The issue is not the product," Weber told regulators. "It's the illustration of IUL that is creating issues for us."

The center is seeing increased litigation involving IUL policies across the country, Weber said.

“There are quite a few cases both in California and nationwide, that are involving indexed universal life, and it is on that basis that we thought it would be valuable to bring you the information that we've acquired,” he told the committee.

The promise of predictable returns

Existing actuarial guidelines, including Actuarial Guideline 49 and its subsequent revisions, primarily address maximum illustrated crediting rates and certain policy features but do not fully address how illustrations portray long-term risks and performance variability.

According to Weber, many IUL illustrations present a constant crediting rate over decades, which may lead consumers to assume future returns will be fairly predictable when they are anything but. He argued that policyholders often focus on projected benefits while receiving insufficient information about potential downside outcomes.

The concern is particularly acute, he said, when insurance agents also serve as registered investment advisers or certified financial planners and therefore operate under fiduciary standards requiring recommendations to be in a client's best interest.

“The best a policy we'll ever look is when it's first depicted in a sales illustration,” Weber said.

Roughly 70% of IUL sales to high-net-worth consumers are marketed primarily as tax-free retirement income strategies rather than as death benefit products, Weber said.

He presented a hypothetical example in which a 45-year-old client contributes $25,000 annually for 20 years and is shown the ability to withdraw nearly $89,000 annually during retirement. While the illustration reflected an internal rate of return of about 6.55%, Weber said a stochastic analysis of 1,000 simulations using historical market returns produced dramatically different results.

Under those simulations, he said, only about 10% of scenarios sustained policy performance through age 100, while approximately 905 of 1,000 simulations resulted in policy failure before that age.

“What's important is, first, for the agent to understand, and then especially the customer to understand,” Weber explained. “Not that this makes it a bad product, but that they understand what we call the good, the illustration, the bad, and the ugly. Understand how it works, understand the upside, and understand the downside.”

'Always front-loaded'

Weber also examined the impact of lower policy cap rates. In one example, reducing an illustrated cap rate by one percentage point — from 10.5% to 9.5% — caused the modeled success rate to fall to roughly 1%, with 989 of 1,000 simulations failing before age 100.

In one legal case, involving a registered investment adviser who recommended a premium-financed IUL strategy, Weber said the illustration projected retirement income lasting for decades and relied on assumptions that policy credits would consistently exceed financing costs.

Applying the same stochastic analysis, Weber said the policy showed a high likelihood of lapsing before the insured's life expectancy, potentially exposing the client to significant tax consequences if the policy terminated after years of loans and withdrawals.

“IUL is almost always front-loaded with expenses,” Weber noted. “That's not necessarily bad, it's just that the illustration doesn't express that.”

Among his recommendations, Weber urged regulators to consider allowing or requiring stochastic analysis as part of the illustration process, enabling consumers to evaluate a range of possible outcomes rather than a single projected scenario.

He also suggested replacing traditional paper-based illustrations with interactive digital tools that would allow consumers to test various assumptions and better understand the impact of changing crediting rates, participation rates and policy caps.

Weber noted that the NAIC's life insurance illustration model was developed in the mid-1990s, before widespread internet use and long before modern tablet-based technology became commonplace.

Regulators did not debate the proposal during the meeting because of time constraints. The Annuity Illustration Working Group is taking small steps to update the model governing annuities. But regulators have to date not moved to meaningfully tackle IUL illustrations.

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