#82 | Mutual of Omaha Income Advantage IUL

Executive Summary

If you like policies that are simple, low-cost and illustrate well, then you’re going to love Income Advantage IUL. Income Advantage delivers solid, consistent and easily explainable performance starting almost right away. Contrast that to most modern accumulation IUL policies, where the client pays egregiously high policy charges today in exchange for benefits that start 10+ years from now. It takes a very, very long time (25+ years, sometimes) for the crop of high charge, high illustrated benefit Indexed UL products to deliver better performance than Income Advantage. As the saying goes, a bird in hand is worth two in the bush – and that’s why Income Advantage deserves to be a best-seller, even though we all know that it will tragically lose out to more complex and aggressive products.

Quick Take

Pros

• Low-cost and well calibrated policy charge structure
• Simple and straightforward crediting mechanisms
• Relatively high cap and illustrated rate – for now

Cons

• Can only be issued under GPT

The Upshot

A simple, classic and well-designed IUL that makes a highly compelling case without resorting to the complex, incomprehensible and all-too-clever mechanisms employed by many of its competitors.

Full Review

Every year, the automotive press heaps praise on Mazda, a little Japanese automaker that tends to go little noticed by the public. I can’t remember the last time a new Mazda didn’t win its inaugural comparison test at every magazine. And yet, awards don’t correlate to sales. Mazda is a niche player by any metric. But that doesn’t stop automotive journalists from taking every opportunity to expound on the virtues of Mazda cars – sales be damned.

Forgive me, then, for having a bit of Mazda-syndrome about Mutual of Omaha’s Income Advantage IUL. I’m going to heap praise on it with no expectation that it will garner much attention or sales. It excels at things that simply don’t seem to matter in today’s Indexed UL market. It’s simple. It’s transparent. It doesn’t have any complex bonuses or multipliers. Its policy charges are lean and incentivize funding that aligns with the purpose of the product. Income Advantage IUL is, in other words, the opposite of PacLife’s best-selling PDX.

Even a cursory look at the product chassis relative to its peers will highlight just how different Income Advantage IUL is from the 27 other IUL products in my sample set. As you can see in the table below, both premium loads and base charges are significantly below average and both are nearly at the bottom of the bunch.

This story translates into some tangible benefits for consumers that often go underappreciated in today’s IUL market, where long-term illustrated values tend to dominate the discussion. Imagine modern IULs as having spring mechanisms, where the account values are suppressed in the early years through high policy charges and then shoot past their natural state in later policy years via multipliers and bonuses. Although these mechanisms illustrate quite well because they add even more leverage to an already leveraged product, they also add more complexity and risk. Income Advantage IUL, on the other hand, has no spring mechanism. There’s no artificial compression and then explosion of value. It just delivers solid, reliable, predictable year-over-year performance that translates into the best account values in the business in the earlier years of the contract.

For comparison, take a look at year-over-year cash-on-cash returns in John Hancock’s Accumulation IUL, which has both a multiplier and a persistency bonus, versus Income Advantage. I ran both illustrations on a 45 year old male with 7 pay maximum-non MEC premiums and at the same 6.06% rate. You can see the seemingly arbitrary and binary changes in performance in the John Hancock policy as charges burn off and bonuses come in and out. By contrast, Mutual of Omaha’s is pretty much steady, reliable, and predictable all the way through – and delivers superior performance to John Hancock for the first 24 years. That’s right, 24 years.

The comparison of these two policies represents not just a performance tradeoff, but also a philosophical tradeoff. Which would you rather sell, a policy that you can be fairly certain will perform well over the next 20 years or a policy you are fairly certain will not perform well over the next 20 years but might perform well from years 21-40? Which one would you rather administer? Which one would you rather explain to the client every year? These are questions that, I think, producers don’t ask enough when dealing with life insurance in general, but especially with IUL. The only time long-term illustrated performance is compelling is at the point of sale. After that, the client just sees charges and credits in the annual statement. And after 20 years, so much time will have passed and so much will have changed that any linkage between the original illustration and the actual performance will be broken, even if the policy is mechanically doing what it’s supposed to. In the long run, I don’t have any reason to believe that Income Advantage will perform better or worse than its competitors, but I do have a reason to believe that its simple structure and low charges will facilitate easier administration and more client satisfaction. In the end, what’s more important than that?

Of course, not all is perfect in the garden. Mutual of Omaha’s surrender charges are higher than many of its peers, although certainly not the highest in the industry. This is a bit of a tradeoff for having exceptionally low policy charges. Also, Mutual of Omaha credits indexed interest based on the end of year account values, which is a slight penalty compared to the industry-standard mid-point account value based indexed crediting, although the penalty is small in this product because of its low charge structure. Finally, Income Advantage is only offered with GPT. This is a strange quirk, given that almost all products these days offer both CVAT and GPT, and I hope that Mutual of Omaha adds CVAT at some point in the future. Each DOLI test has its proponents and I happen to be a fan of CVAT. But one of the outgrowths of the fact that this product only has GPT is that the Target premium and policy charges are calibrated to an Option 2 death benefit. The Target is twice as high as it is for Option 1 and the policy charges are basically identical. So make sure you sell this product with an increasing death benefit, even if you only hold it for a year. Your client is paying the same charges regardless of how much you get paid.

You might have noticed that I haven’t given any credit to Income Advantage for its relatively high 11.5% cap. That’s because the cap (and commensurate maximum AG49 illustrated rate) is the last reason to choose this product. Caps are temporary. Charges are forever. I would have written the exact same review if this product had been launched with a 10.5% cap.

I’m often asked to divulge my “favorite” IUL product and my usual answer is I like the simple ones. In today’s market, that eliminates at least half of all IUL products. If the person presses me a bit further, then I’ll say that I like the IUL with the lowest policy charges, because IUL should be more about managing downside risk rather than delivering maximum upside potential. That eliminates 80% of what was left over from the first cut. To be honest, this means that I don’t love a lot of IUL products – but I do really like Income Advantage, minor shortcomings aside. It might just be my new favorite. My hope is that Mutual of Omaha will continue to build products like this one, if for no other reason than to provide producers with real alternatives to the growing crop of high-charge, high-complexity IUL products that are sprouting like kudzu. The industry needs a counterweight and I’m happy to say that, at least for now, Mutual of Omaha has given us one.