A Three-Part Series for Trust-Owned Life Insurance (TOLI) Trustees
As the back-office administrator of thousands of life insurance trusts for fiduciaries across the country, we deal with every type of policy. We have found the equity index universal life policy to be one of the most misunderstood policies in the TOLI space. This three-part series provides a thorough background in the policy, its mechanics, as well as proper management. In our first post below, we will provide an overview of the product. In our second installment, we will review policy mechanics, and in our final post, discuss how to manage the policy, including a discussion on the assumptions used in policy projections.
Part One: The EIUL Policy
The equity index universal life (EIUL) policy is the hottest life insurance policy on the market today. According to industry statistics, EIUL sales were up 11% in 2018 (1), while the rest of the industry was relatively flat. This was after a 2017 selling season that saw sales up 8%. According to one industry spokesman, EIUL sales were “clearly where the action was.” (2)
So, why is the policy so popular?
The policy is sold as a conservative alternative to variable universal life insurance, a sale that became easier after the economic collapse a decade ago – a meltdown that still reverberates with some today. The returns on the policy cash value are tied to an equity index, for example, the S&P 500, so like the variable universal life policy, it participates in the upside of the equity market – with limits. The difference between an EIUL policy and a VUL policy that allows it to be promoted as more conservative is the limit on the downside – the policy floor – which is determined by the carrier. Most carriers place their floor at 0%. If the policy floor is 0% and the index the policy is tracking has a negative return, the policy will be credited with the floor – 0%. Agents publicize the fact the policy cannot “lose money,” though it should be noted that even though the return is not negative, the cash value in the policy will still drop because of the policy charges deducted monthly.
The upside of the policy is also limited – by the cap, which restricts the rate of return that will be credited to the policy. If the index tied to the policy returns 15%, and the cap is 10%, the policy will only be credited with 10%. The cap is set by the carrier and is often reflective of the pricing of the hedges used in the product. We will talk more about this in the second installment.
The participation rate, set by the carrier, is the percentage of the actual index return used when crediting the policy. For example, if the participation rate is 100%, then 100% of the actual performance will be used, subject to the cap rate. If 200% is used, an index returning 5% will create a crediting rate of 10%, again, subject to the cap rate.
The three variables in a policy – the floor, the cap, and the participation rate – are not all guaranteed by the carrier. For example, the participation rate or the floor may be guaranteed, with the cap allowed to float depending on carrier costs. Check with the carriers on policy specifics.
Some of the policies come with a secondary death benefit guarantee. As long as a stated premium is paid in full and on time, the policy will stay in force, no matter what happens in the equity market. However, those EIUL policies without a secondary death benefit guarantee will lapse when the cash value in the policy goes to zero and no additional premium is forthcoming.
Like all UL policies without a secondary death benefit guarantee, the higher the rate of return assumed in the policy, the lower the projected premium need will be. Though the policy is tied to an equity index, it performs more like a current assumption universal life policy – a fixed product – and the projected rate of return of the policy should probably fall more in line with fixed, rather than equity, returns. We will discuss that further in our third installment.
If you are accepting one of these policies into your trust, you must understand how the policy works and what prudent assumptions for future policy performance might be.
We will discuss both in our next two posts.
- “Index Life Sales Keep Growing: Wink,” Allison Bell, ThinkAdvisor, March 15, 2019
- “Indexed Universal Life Continues Its Hot Streak,” Cyril Tuohy, InsuranceNewsNet, March 1, 2018