We have written as recently as November of last year about the issues trust-owned life insurance (TOLI) trustees encounter when dealing with policy illustration projections. If you are a fiduciary managing a policy, a sales or an in-force life insurance ledger may be one of the only tools you have to predict the outcome of a policy under your care.
However, life insurance illustrations are simply hypothetical projections – at best, just a guide. Too often, they are a sales tool, and the person purchasing the policy (you, if you are the trustee) often assumes they can reasonably expect that the outcome projected for the policy will occur. This is rarely the case for many reasons, chief among them being overly optimistic rate of return projections and non-guaranteed interest rate bonuses and multipliers that are not readily seen in an illustration.
This has been a significant concern for us with equity index universal life policies that we have been tasked to review and then help manage for trustees. These policies have become popular as a ”more conservative” alternative to variable universal life policies because though they track an index (the S&P 500, for example), they have a limit to the downside that “eliminates losses.” Many variable universal life (VUL) policies assumed cash value rates of return of up to 12% annually, and when we first began seeing these EIUL policies (often as a replacement for a VUL policy), the crediting rates in the projected policy crediting rates shown in sales illustrations approached 8%, which the salesperson told the grantor was a reasonable assumption. We disagreed and have pointed out one carrier who actually sells the product has an online “translator” that shows that in order to obtain an 8% crediting rate for the policy, under most common policy parameters (10% cap, 0% floor), the index tracked would have to exceed a 12% return. The regulators also disagreed, and in September of 2015, the National Association of Insurance Commissioners (NAIC) placed limitations on the crediting rate that could be shown on both sales and in-force ledgers to approximately 7%.
The limitations placed by the NAIC dampened EIUL sales since the policies could not illustrate as well. It was not long until carriers figured out how to game the system by adding interest bonuses and multipliers that were barely decipherable in an illustration. The ploy worked, and sales rebounded, but now the NAIC is going to take another look and has created a subgroup to review the regulations, which according to one article on the matter, “enabled some insurers to show double-digit returns that many considered unrealistic.” (1) We applaud the second look and hope the outcome will generate a more reasonable methodology for EIUL illustrations.
One of the most significant risks to a TOLI trustee is accepting a policy that has little hope for success. Many EIUL policies purchased in the last few years will fail. How many are in your portfolio?
- NAIC To Reopen IUL Illustrations Guideline, John Hilton, January 11, 2019, insurancenewsnet.com