As the back-office administrator of thousands of life insurance trusts for fiduciaries across the country, we deal with every type of policy, including EIUL policy. We findthe 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 provide an overview of the product. Our second installment will contain a review of policy mechanics. Third, and finally, we discuss how to manage the policy, including a discussion on the assumptions used in policy projections.
The equity index universal life (EIUL) policy is one of the hottest life insurance policies on the market today. According to industry statistics, EIUL sales were up 11% in 2018, 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.”
So, why is the policy so popular?
Reasons For EIUL Policy Popularity
Insurers sell EIUL policy as a conservative alternative to variable universal life insurance. An equity index ties together the returns on policy cash value. For example, the S&P 500, which functions like a VUL policy, participates in the upside of the equity market. The difference between an EIUL policy and a VUL policy is the limit on the downside. The carrier determines that downside, otherwise known as a policy floor. Most carriers place their floor at 0%. The carrier credits the policy with the floor if it is 0%, and the policy has a negative return. Agents publicize the fact the policy cannot “lose money.” Even though the return is not negative, the deducted monthly charges still reduce the policy’s cash value.
Carrier Cap Limit
The cap also limits the upside of the policy, and restricts the rate of return that it later credits to the policy. If the index tied to the policy returns 15%, and the cap is 10%, then it will only credit the policy with 10%. The carrier often sets the cap to reflect the pricing of the hedges used in the product. We will talk more about this in the second installment.
The carrier also sets the participation policy, which is the percentage of the actual index return the carrier uses when crediting the policy. If the participation rate is 100%, then the carrier will use 100% of the actual policy, subject to the cap rate. If the carrier uses 200%, an index returning 5% will create a crediting rate of 10%, subject to the cap rate.
EIUL Policy Variables
The carrier does not guarantee all three variables in a policy – the floor, the cap, and the participation rate. For example, the carrier may guarantee the participation rate or the floor, and allow the cap 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 an insured pays a stated premium in full and on time, the policy will stay in force, no matter what happens in the equity market. However, those EIUL policies will lapse when the cash value in the policy goes to zero and there is no additional premium.
Rate of Return on EIUL Policy
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. 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.
- “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