This post will cover EIUL policy illustration. In the last two posts, we explained the popularity of the equity index universal life policy, as well as the mechanics. While an equity index connects to the policy, it is a fixed product, and the bulk of the premium goes to the carrier’s general account to satisfy the floor. Additionally, the balance goes to purchase options that provide the policy’s upside.
Secondary Death Benefit Guarantee
Some EIUL policies come with a secondary death benefit guarantee. We consider these policies to be premium-driven. The requirement to pay a stated premium in full and on time drives the policy performance. If policy does not perform, the guarantee is reduced or lost. Like a guaranteed universal life product, this type of policy provides the trust with a guaranteed death benefit. An EIUL policy also has the opportunity for much higher cash value growth.
Cash Value in EIUL Policy Illustration
An EIUL policy without a death benefit guarantee is a cash-value-driven policy. Like any universal life chassis policy without a death benefit guarantee, the policy persists until the cash value in the policy goes to zero. At that time the policy will lapse unless additional contributions are forthcoming. For the TOLI trustee managing a non-guaranteed EIUL policy, this is why the crediting rate assumptions are so important. The higher the assumed return is in the “as sold” illustration, the lower the expected premium is for the grantor.
Life insurance agents have shown returns above 8% in as-sold illustrations in the past, but Actuarial Guideline 49 tempered this. AG 49 was a regulation that went into effect in phases starting in 2015. Pre-AG 49 illustrated returns were as high as 8.5%, with an average return of 7.38%. After the guideline took effect, the highest return shown was 7.7%, with an average return of 6.58%. (1)
A projected return shown in the as-sold illustration is just that – projected. It is the hoped-for return that may or may not come true. Since a higher projected return generates a lower expected premium, showing a prospect the higher return makes the sale easier.
EIUL Policy Illustration Ties To S&P 500
However, crediting rates approaching 7% may not be attainable in this product. Many of the policies we have seen are tied to the S&P 500. Though it may be reasonable to assume that the S&P 500 may average a 7% return, the crediting rate in an EIUL policy does not include dividends. A look back over the last 60 years shows that while the S&P total return was 10.46%, it was only 7.23% without dividends. Also, while the policy floor does limit downside risk (negative returns), the cap also limits returns. If you look back at the S&P 500 over the last 42 years, you would have avoided eight years of investment losses with the 0% floor. However, you would have lost the upside gain greater than 10% in over half the years, creating a drag on actual returns credited. (2)
The Rate of Return in an EIUL Policy Illustration
So, what return should a TOLI trustee insist upon when bringing in an EIUL policy? We have always suggested that no matter what return is shown by the salesperson, a 5% return should also be shown. A grantor can hope for the higher return. But as a trustee, you need to record the outcome at the lower return and make that a part of your trust file. A grantor should draw and sign a document that clearly states that additional funding will be needed if clientele do not achieve the higher return rate.
In a perfect world, the grantor would fund the policy at the higher premium required. It is always better to fund a policy assuming a return that can be surpassed than one that cannot be met.
However, if that does not occur, then a grantor should have a document in place that clearly shows they understood that the higher return might not be achieved.
As a TOLI trustee, you cannot predict the future outcome, but it is prudent to prepare for it.
- IUL Rate Projections Drop Slightly in Illustrations, Cyril Tuohy, insurancenewsnet.com, July 21, 2017.
- Results as of 2017 as shown in chapter 10 of the TOLI Handbook, available as a free download at http://www.TOLIHandbook.com