#80 | Product Review – AXA IUL Protect
The primary difference between AXA IUL Protect and the outgoing BrightLife Protect is that IUL Protect has a built-in 1.25% asset charge that funds a new set of benefits – namely, a higher cap (10%), an indexed interest bonus (10% in years 11+) and fixed account credits in excess of 3.5% added to the indexed account (currently 0.25%). If you add up the value of all of these, they cost AXA about 1% but illustrate a benefit of over 1.5%, thanks to the magic of Indexed UL. This invariably increases profitability for AXA while illustrating markedly similar results to clients, with a bit of additional risk in IUL Protect because of the asset charge. In the end, if you like BrightLife Protect, then you’ll like IUL Protect. If you didn’t, then IUL Protect probably isn’t different enough for you to be converted.
According to one of my wife’s well-traveled friends, an extremely common English expression in Thailand is “same same, but different.” Once I heard it, I suddenly seemed to find application for it everywhere. It’s such beautifully efficient rhetorical device. Diet Coke and Coke Zero? Same same, but different. Democrats and Republicans? Same same, but different. And, as it turns out, AXA’s outgoing BrightLife Protect and its newly released IUL Protect? Same same, but different.
Let’s start with the parts that are the same. IUL Protect carries over AXA’s excellent and well-received Long Term Care Services rider. It also has the same NLG rider that AXA added to BrightLife Protect that guarantees the policy to year 40 or age 90, whichever is earlier. The key to the rider, though, isn’t the guarantee – it’s the cost. The NLG premiums are actually quite cheap, even below the premium solves at the maximum AG49 illustrated rate. Speaking of that, AXA told me that the premium solves for BrightLife Protect and Protect IUL would be virtually identical when run at max AG49 illustrated rates. After doing some very cursory benchmarking, that certainly does appear to be true. The differences in illustrated premiums are practically rounding errors. That shouldn’t really be a surprise since AXA copy/pasted the COI curve from BrightLife Protect over to IUL Protect. The feature of the COI curve that makes BrightLife Protect and IUL Protect competitive for death benefit sales is that the charges drop by 90% at age 96 and then go to zero at age 105. When you solve for a premium for $1,000 of cash value at age 121 in one of these products, you’re really solving for the cash value at the end of age 96 that will allow the policy to hit $1,000 (or close to it) at age 105, after which point it will grow dramatically because there are no more COI charges. Run an illustration and you’ll see this play out quite clearly. There are risks inherent in any COI slope that magically drops off or stays flat, but I’ll be covering that topic in more depth in an upcoming piece as it pertains to the industry as a whole. It’s not a risk that’s specific to IUL Protect and, frankly, the risk in this product is pretty benign. A bit of overfunding can mitigate a lot of it.
If the premium solves are pretty much the same, it may seem like any differences between BrightLife Protect and IUL Protect are immaterial, but that’s not the case. IUL Protect exemplifies a couple of key shifts happening in the IUL market that are worth noting. First, IUL Protect now has a built-in asset charge of 1.25%. For years, AXA has offered account options with an additional 1% charge that have higher caps. This is the first time that AXA has embedded the asset charge into the product itself, which follows a trend in the market to increase the option budget via additional policy charges in the base product. PacLife’s PDX product is obviously the prime example of this. What makes IUL Protect interesting is that the asset charge doesn’t go straight to the cap or to a multiplier, as you might expect. The cap in BrightLife protect is 8.5% and the cap in IUL Protect is 10%. The option cost differential between those two caps is something like 0.35% in today’s low-vol, low-rate environment. IUL Protect also has a higher guaranteed minimum cap than BrightLife Protect – 4% versus 3%. This might sound trivial, but it’s not. AXA is basically guaranteeing that the portion of the asset charge dedicated to delivering a higher cap will always do so, even in the guaranteed minimums. But 0.35% is only a small portion of the 1.25% asset charge, so where’s the rest of it going?
Like all IUL products now, it seems, IUL Protect has a multiplier – 110% starting in year 11. That probably eats up another 0.35% or so of the asset charge, bringing the total “value” to the customer of the 1.25% asset charge to about 0.70% including the increase in the cap. But, here’s where the magic happens – the illustrated benefit of the higher cap and the multiplier is significantly more than 0.70% thanks to 50% option profit assumption embedded in every IUL illustration. The increase in the cap buys an extra 0.73% in illustrated rate and the multiplier adds 0.61%, for a grand total of 1.34% in illustrated value for the low price of 0.70% of the 1.25% asset charge. And we still have 0.5%(ish) left of the charge to account for.
Another 0.25% goes to a material modification of the way that the indexed account, which AXA calls the Select Account, mechanically operates. You can find a description of the change in the narrative section of the illustration, but it’s a bit hard to follow because of all of the strange labels that AXA uses. Basically, AXA has set the maximum option budget for IUL Protect at 3.5%, which evidentially buys a 10% cap at today’s prices. If the fixed account rate in IUL Protect exceeds 3.5%, then AXA pays the difference to the policyholder as a base fixed rate (which they call the Extra Interest Credit) rather than spending it on additional indexed upside. For example, today’s fixed account rate in IUL Protect is 3.75%, meaning that 0.25% is added to any return in the Select Account, regardless of indexed performance. If it goes up in the future to, say, 4.75%, then 1.25% will be added to the Select Account, regardless of indexed performance. Not to worry, though, if the fixed account falls below 3.5%. AXA doesn’t deduct the difference from the Select Account, but obviously the option budget and cap will shrink if the fixed account rate falls below 3.5%.
There are a lot of interesting angles to this strategy, particularly when rates do finally rise. IUL will become less attractive thanks to higher interest rates and there will be a significant number of clients who will be just as happy taking a fixed rate over an indexed rate. The Select Account in this product plays exactly to that story, but there are three main impediments to its adoption. First, it’s complicated and most independent advisors aren’t going to take the time to think through the story. Second, it’s inherently a split story. If you’re a producer who likes IUL, then you won’t like this product because it’s not an uber-IUL like PDX. If you’re a producer who likes traditional UL death benefit products, then IUL Protect is still an IUL and you’re still not interested in it. IUL Protect represents the middle ground – which, by the way, is open land that AXA might be able to turn into a goldmine. Time will tell. Third, AXA has been talking for years about the advantages of a new money rate in a rising rate environment but hasn’t been able to show much evidence it because, you know, rates haven’t really gone up. At this point, all people see from AXA are low crediting rates and COI increases. Personally, I think/hope that AXA will be a huge winner in a rising rate environment because they sure as heck deserve it after taking their licks since rates dropped in 2009. But since they don’t guarantee that they’ll increase crediting rates when interest rates increase, they’re going to have to prove themselves before people buy the IUL Protect story lock, stock and barrel.
[Update: As of 6/7/18, AXA announced that the Extra Interest Credit has increased from 0.25% to 0.5% because the fixed account rate has gone from 3.75% to 4.00%. A cynic might say that AXA had priced in a rate increase all along so that they could have another positive story roughly 6 months after launch, but I think they deserve the benefit of the doubt. Every indication is that they’re delivering on the story. Since January, all key indicators of new money yields have increased – Moody’s Aaa (0.45%), Moody’s Baa (0.55%), 12Mo LIBOR (0.5%) and 10 Year Treasuries (0.4%). AXA got a proof-point for IUL Protect and they’re not waiting to take advantage of it.]
So now we’ve accounted for 1% of the 1.25% asset charge, so what about the rest? Well, that’s for AXA. You can see that play out in the fixed account numbers – 2.75% in BrightLife Protect and 3.75% in IUL Protect. Also, if you recall, the multiple doesn’t hit for 10 years, so AXA also gets to keep something like 0.35% for 10 years before it pays out the multiple. Additionally, IUL Protect has slightly higher fixed charges in the first 10 years than BrightLife Protect. As a result, if you illustrate these two products side-by-side at the exact same premium, BrightLife Protect illustrates better account values for quite a while, even though its max AG49 illustrated rate is lower. For a 45 year old with a level premium, BrightLife Protect has better account values for about the first 35 years. In other words, it takes time for the illustrated benefits of IUL Protect to overcome its initial deficit. But, in the end, the illustrated premiums are basically the same. Which product is better? Well, you’ll have to wait 35 years to find out.
Why would AXA go through all this hassle to basically copy the product it currently has? There’s certainly a story in the new Select Account structure that, I think, will resonate with some advisors, particularly a contingent within AXA Advisors. The higher illustrated rate will alleviate some of the competitive pressure in the independent space because today, it seems, 6% is the illustrated rate target that everyone is pegging. But it seems that the real reason might be that the profitability of IUL Protect is invariably better than BrightLife Protect. AXA gets to pocket an extra 0.25% in asset spread for the life of the contract, an extra 0.35% for the first 10 years and charge higher initial fixed charges. In life, money now is better than money later. In life insurance pricing, money now is way, way, way better than money later because every year that passes means that future cash flows have to be discounted by capital costs, lapses and mortality. My conservative guess is that all of these changes took BrightLife Protect from being a something like an 8% ROI product to an 11% ROI product. In life insurance pricing, that is an unmitigated victory. And if you can illustrate the same result for the client in the metric that matters, then you can pop yourself a bottle of champagne. The fact that the illustration’s 50% annual option profit assumption is paying for the difference isn’t really important because everyone is doing it, after all.
In the end – same same, but different. Same illustrated premiums, different account values. Same Select Account, different crediting mechanism. Same illustrated premiums, different profitability. And for advisors, same basic value proposition, slightly different story about interest rates, if you choose to learn it and tell it. My gut is that many advisors won’t and, consequently, BrightLife Protect and IUL Protect serve the same market. Advisors that were selling the former will sell the later. Advisors that weren’t, won’t. But don’t think that the changes aren’t meaningful. IUL Protect is a little microcosm of what’s happening in the overall IUL market. Things appear to be the same, but they’re not. Every product requires more scrutiny than ever before. Fortunately, in this case, scrutiny shows that AXA’s changes were transparent and fairly easy to understand. Whether or not they actually grow sales or ultimately benefit consumers will be borne out over time.