Insurers appear to be sidestepping a recent rule meant to tamp down on overly rosy projections of returns in indexed universal life insurance policies via new product features, an alarming trend that may deceive or confuse would-be buyers, advisers said.
The features, known as interest bonuses or multipliers, have become mainstream among insurance companies selling indexed universal life, a type of cash-value insurance that's become increasingly popular over the past few years.
The uptake of these features, advisers said, coincides with a rule issued by the National Association of Insurance Commissioners in 2015. That rule, Actuarial Guideline 49, tried to rein in unrealistically high projections for the cash accumulation in IUL policies. The rule set a formula to determine a maximum rate of accumulation insurers could use in illustrations — a primary sales tool for insurance agents, since they help clients visualize what they can expect from a product.
Now, though, bonuses and multipliers have created an environment in which some insurers are projecting cash-value growth at a greater — and more unrealistic — rate than under the prior regime, advisers said.
"It certainly makes the illustration look better," said Tom Love, VP of insurance analytics at ValMark Financial Group.
"I think without a doubt it's a response to [AG 49], bowing to competitive pressures," Mr. Love said. "I think [insurers] might be following the letter of the law but not the spirit of the law."
Indexed universal life insurance sales have grown significantly. IUL's share of overall universal life insurance product sales is currently more than 50%, roughly two and a half times what it was at the beginning of the decade, according to Limra, an insurance industry group. The first quarter of 2019 marked the 10th consecutive quarter of sales growth for IUL.
The product works similarly to an indexed annuity. Growth in a policy's cash value is linked to a stock market index such as the S&P 500 and capped to the upside; interest credited to a policy over a given period can't be less than 0%.
Bonuses and multipliers give the client an extra annual boost in the credited interest rate. Lincoln's WealthAccumulate IUL, for example, offers clients the option of a 56% or 28% bonus. If the client were to get a 6% return one year, a 56% bonus would increase the total credited interest rate to 9.36%.
Clients often pay extra money — in excess of 1% annually — for these bonuses. Lincoln's WealthAccumulate product, for example, allows clients to buy four different bonuses with asset-based fees that range from 0% up to 6% annually. Those are in addition to other policy charges. Clients run the risk of paying a high annual fee to insurers to access a bonus, but not getting a substantial return from the bonus in a year of down markets, advisers said.
"Lincoln's WealthAccumulate IUL product provides policy owners protection and choice, and complies with all applicable regulations and actuarial guidelines, including AG 49," said spokesman Jay Russo. "We explain what each bonus does for each index-linked account and what the fees are."
Pacific Life Insurance Co., the largest IUL seller, has a PDX product with a unique multiplier — its formula isn't explicitly explained in the insurance contract, yet it drives a "significant portion," roughly 40%-50%, of the illustrated performance, Mr. Love said.
A Pacific Life spokesman didn't return a request for comment.
The problem, advisers said, is insurers seem to be using these bonuses to illustrate returns at rates higher than they otherwise could under the AG 49 rules, and don't clearly disclose that returns are based on that higher amount, advisers said.
Paul Berlin, president of Executive Planning Inc., described it as a "façade."
"You're lucky if you're going to get half [of what they've illustrated]," he said.
Some insurance company officials have expressed discontent with the way firms are using bonuses, while others say the product design and illustrations fall within the letter of the law.
"There's nothing wrong with the bonus design," said Walter White, president and CEO of Allianz Life Insurance Co. of North America, about the product feature generally. However, he acknowledged it could be a problem depending on the specific insurer's design and how it's illustrated.
The American Council of Life Insurers, a trade group, is planning to submit comments to the NAIC on the topic in order to seek clarification on the illustration of bonuses and other features of AG 49, said Brian Bayerle, ACLI's senior actuary.
An NAIC spokesman didn't return a request for comment.