#94 | John Hancock Accumulation IUL 17

Executive Summary

John Hancock’s general modus operandi is delivering exactly what its distributors want to see at the expense of complexity and over-engineering. Accumulation IUL 17 is a high-comp, high-charge, high-benefits product with strong illustrated performance and enough of the appearance (and function) of conservatism that distributors skeptical of IUL might still embrace it, especially since it has John Hancock’s name on it. Hitting that sweet spot came with a bit of complexity – particularly the Policy Credit, which lasts from years 20-40 and can be as high as 0.85% but is limited by a counterintuitive maximum credit calculation found in the policy filing. The Policy Credit itself is a more sustainable and appropriately priced structure than bonuses found on other policies and, as a result, Accumulation IUL 17 is a best-of-breed choice for the part of the market where it competes.

If you wanted to label a life insurer in the independent space as “white shoe,” you’d be hard pressed to find a better example than John Hancock. They have a practically telepathic understanding of their distributors and consistently deliver competitive, innovative and purposeful products. You can imagine, therefore, that Hancock has been a little annoyed about their inability to get a toehold in the fast-growing Indexed UL segment. Looking at 2016 IUL sales numbers, John Hancock was punching well below its weight and competing with companies half its size, a third of its clout and a tenth of its distribution force. The problem, in my mind, was twofold. First, the distributors that John Hancock knows so well and has such deep relationships with generally weren’t the ones selling a lot of Indexed UL. Second, John Hancock wasn’t willing to build a hyper-aggressive Indexed UL product that would win with the distributors that were big in the Indexed UL space. But now that its distributors are starting to sell more (a lot more) Indexed UL, Hancock can do what it does best – deliver a product tailored for that market to telepathically deliver what its best distributors want. That product is Accumulation IUL 2017.

What do its more traditional, old-line distributors want? With Indexed UL, they want to feel like they’re being conservative while showing an incredibly competitive illustration. They’re fundamentally skeptical about Indexed UL (and for good reason) and are turned off by high illustrated rates and other obviously aggressive policy attributes. But, they’re also realists about their competition and feel the need to win on the spreadsheet. No surprise, then, that Accumulation UL is designed to perform best at a 6% rate, which is what “feels” conservative to a lot of distributors. That’s the key.

Accumulation IUL accomplishes this in two ways. First, it adds a currently declared 1.15 multiplier (1.05 guaranteed) to indexed interest in the capped S&P 500 point-to-point account, which currently has a 10% cap and a 6.09% illustrated rate, beginning in policy year 6. This has the almost immediate effect of raising the illustrated rate from 6% to 6.9% without throwing any red flags on the illustration. The fixed account, which currently credits a healthy 4.2%, has a 0.65% fixed interest bonus starting in year 11. It’s probably not coincidental that a 10% cap costs about 4.2% in today’s market and 0.65% is about 15% of 4.2%. Hence, the 1.15 multiplier. Like everyone else, John Hancock sees the undeniable magic of turning a fixed interest bonus into an indexed interest bonus. What was once 0.65% is now 0.9% on the illustration at the maximum AG49 illustrated rate of 6.09%. Like I said – magic.

The other trick that Hancock has up its sleeve is the Policy Credit, which the more interesting part of the story. The Policy Credit is paid out as a 0.07% guaranteed monthly interest credit, which I’m going to refer to in shorthand as a 0.85% annual interest credit, from policy years 21 to 40. Quick math tells you that adding 0.85% to 6.9% means that a “conservative” 6% illustrated rate in Accumulation IUL is actually illustrating at a little north of 7.75% once the Policy Credit kicks in. But quick math would lead you astray. Let me explain.

If you run an illustration at the maximum 6.09% illustrated rate with a maximum non-MEC premium, you’ll notice that the Policy Credit starts strong in the 20th year and then drops well below 0.85%. But if you run the same illustration at a lower rate, say, 4%, then you’ll see the full 0.85% Policy Credit. What you’re seeing is that the Policy Credit has a Policy Credit Limit, which is basically an alternate value that serves as the maximum amount eligible to earn the 0.85%. It’s a bit complicated, but the Policy Credit Limit amount is basically equal to: initial face amount plus the account value minus the actual death benefit. For example, in the 30th year of a contract with a $1M face, you might have an account value of $1.2M and death benefit of $1.9M, which means that the Policy Credit Limit is equal to $1M + $1.2M – $1.9M = $300k. Or, put differently, the client was supposed to get a Policy Credit of $10,200 (0.85% * $1.2M) but instead got $2,550 (0.85% * $300k). Yes, well, good luck explaining that one to clients. But at least it’s spelled out in clear English in the policy contract.

The impact of the Policy Credit Limit is pretty material. Take a look at the chart below, which shows the effective crediting rate on an Accumulation IUL for illustrations at 6%, 5%, 4% and 3% illustrated rates. The first jump in the illustrated rate is from the 15% indexed interest bonus. The second jump is the Policy Credit.

When I first saw the limit in action, I assumed that it was actually a hard dollar amount that could be credited to the policy. That seemed logical to me but obviously it’s not the case. Strangely enough, the actual dollar amount of the Policy Credit is actually bigger as the illustrated rate goes down. At 3%, which receives the full 0.85% on the account value in all years, the total Policy Credit paid on a 45 year old Preferred male with a $1M policy and funding at $45,000 for 7 years is about $93k over the 20 years. At 4%, the total Policy Credit is $108k because it’s bumping up against the limit. At 5%, when the limit is in play every year, the total Policy Credit is $93k – virtually identical to the payout at 3%, but a much smaller percentage of the account value. And at 6%, when the Policy Credit Limit is far lower than the account value, the total Policy Credit payout is a paltry $69k. The better the policy performs, the lower the Policy Credit, both in terms of hard dollars and as a percentage of the account value. Strange, indeed.

But John Hancock rarely makes cavalier product design decisions and the structure of the Policy Credit Limit is obviously intentional. Its defining characteristic is that it adds more value as the illustrated rate drops and disappears into the background as the illustrated rate rises. This is exactly the opposite of the way that most life insurers are building bonuses in Indexed UL, so what’s John Hancock up to? This is yet another telepathic read of their distributors. The target market with Accumulation IUL 2017 is distributors who don’t sell much Indexed UL and still house a fair bit of skepticism about the category. The litmus test they usually employ to suss out the smoke and mirrors found in too many Indexed UL illustrations is to drop the illustrated rate a few hundred basis points. Well, no surprise, that’s when the Policy Credit works its magic and Accumulation IUL 2017 only looks better, relative to its peers, as the illustrated rate drops.

Take a look at the table below, which shows PacLife’s PIA 5 product (no crediting bonus or indexed interest multiplier) against Accumulation IUL 17 (which obviously has both). I blended the PIA 5 product so that its performance would be relatively similar to Accumulation IUL 17 even though PIA 5 doesn’t have an indexed interest multiplier. Also, keep in mind that the multiplier actually works against Accumulation IUL 2017 as the crediting rate drops because the bump from the multiplier shrinks. But, as you can see, the Policy Credit more than makes up for the loss.

PacLife PIA 5 JH Acc IUL 2017
CSV IRR Year 20 Year 40 Year 20 Year 40
6% 4.81% 5.08% 4.97% 5.96%
5% 3.79% 4.07% 3.80% 4.90%
4% 2.75% 3.04% 2.60% 3.86%
3% 1.70% 1.52% 1.38% 2.69%

This is classic John Hancock – a very clever design that delivers exactly what its distributors want to see, even if it involves a bit more complexity. The combination of both the Policy Credit and the indexed interest multiplier mean that Accumulation IUL 2017 looks solid at its maximum illustrated rate and at lower illustrated rates. For a skeptical distributor that wants a competitive product without crushing clients when the illustrated rate is lower, like PacLife PDX does, then Accumulation IUL 2017 fits the bill perfectly. And, to boot, Accumulation IUL pays some of the highest Targets in the business. It’s a pretty compelling package, no?

Now, of course, there has to be a way to pay for all of this and even a casual look at an illustration will show you exactly where the funding comes from – the base charges. You can even see the base charges eating into Accumulation IUL relative to PIA 5 in the year 20 CSV IRRs in the table above. For a 45 year old male with a $1M policy, the average base charge for the 38 products currently in my IUL database is about $3,000 annually for the first 10 years. Accumulation IUL 2017 clocks in at an average of $4,500 annually and goes for 15 years, with a slightly higher amount in the first 3 years that drops to a lower amount thereafter. But there’s more to the story with the base charge on Accumulation IUL.

The short story is that every dollar paid to the product over the Target premium increases the base charge by a declining scale starting at 1.5% in the first year and declining to nothing by the 10th year. The longer story is that Hancock assesses the additional base charges on a rolling excess premium amount over and above the Target…look, it’s complicated. But the effects are material. Take a look at the chart below, which is also included in the Policy Structure Analysis at the end of the article. You can see that funding above the Target premium leads to meaningfully higher base charges. The single pay premium, in this scenario, was $200k, which is less than the cumulative 7 pay premium. Hence, the reason the base charge in the single pay scenario drops below the 7 pay base charge.

Probably more than any other product save PacLife PDX, Accumulation IUL 2017 illustrates the dilemma of the modern Indexed UL product – high charges, high commissions, high illustrated performance. But in this case, the structure of the product lends some credibility and creates, I think, the right incentives for the carrier. Yes, the policy charges are extremely high and that’s always a problem in isolation, but a fair bit of those charges go to fund the high commissions. Whether or not that’s a good trade for your clients is up to you. The remainder of the charges go to fuel the benefits – and that’s actually what I like about the Policy Credit. If Hancock decides to clamp down on the cap and the policy performance suffers, then the Policy Credit increases both in terms of dollars paid and as a percentage of the account value. It’s the opposite of the way the incentives run for basically every other bonus structure found in other products.

And it also virtually guarantees that, in the long run, the client will get repaid for the high policy charges. Take the 3% illustration as example – total base policy charges over the first 15 years are $72k for a 7 pay, of which approximately $42k goes to pay for the commissions (using the math borrowed from products that blend compensation). That leaves $30k in charges to theoretically fund the Policy Credit. And what’s the Policy Credit amount over years 21-40? $93k. Of course, the client is would still be unhappy with the overall bargain of the product, but at least the high early policy charges will get paid back over the long run, even and especially in low return scenarios.

In my mind, the only big open question is how much other assumptions like persistency, mortality and premium funding played into the sustainability of the benefits. For example, how does Hancock pay a higher Policy Credit when the illustrated rate drops and vice versa when it rises? It might be that they’re assuming that they’ll pick up profit from other sources like COIs or interest spread in low performing scenarios that will pay for the higher Policy Credit. Or it could be that they’re “borrowing” it, in effect, from policies that perform better. The first one is pretty stable and supportable, the second one is pretty tricky and could lead to some adjustments to the cap if things don’t break the way JH originally thought. The same goes for the degree to which the higher base charges from overfunded contracts actually goes to fund more benefits – in other words, are those charges subsidizing a negative spread that’s only exacerbated as the account value gets bigger? Or are they going to pay the Policy Credit for policyholders that don’t overfund? Again, it’s kind of tricky stuff. My experience with Hancock is that they tend to try to treat all policyholders equally, so I’m willing to give them the benefit of the doubt, but there could be more fragility in the Accumulation IUL 2017 structure and pricing than meets the eye. It’s very hard to tell, especially given that Hancock prices under a different (and more sophisticated) regime than its US-based peers.

In short, if I had to choose a product with high policy charges, high targets and more moving parts, Accumulation IUL 2017 would be my pick. John Hancock went out of its way to make the mechanics of this product simple, transparent and intuitive. The only calculation that I had to pluck out on my own was how the base charge changed with the premium pattern, but that was pretty easy to do. Everything else was spelled out in the policy contract in simple, straightforward language. Now, would I pick this product over other, lower cost and even simpler options? No, I wouldn’t. It takes a very long time for the benefits in this product to materialize – too long, in my opinion, but that’s the name of the game for competing in Indexed UL these days. For what it is and where it plays, Accumulation IUL 2017 is the best of the lot.

One final note – John Hancock has taken a markedly more conservative approach to illustrating indexed loans than many of its peers. John Hancock interprets (correctly, in my opinion) that AG49 specifies that the total indexed credits that can be earned on loan balances cannot exceed 1% more than the illustrated loan charge. Other companies would slap their multiplier on top of the 1% spread to make it a much larger number – 1.9%, if John Hancock also took that interpretation. This makes Accumulation IUL illustrate a bit more conservatively than its peers in income scenarios. However, John Hancock interprets AG49 (again, probably correctly) to mean that any fixed interest bonuses can be added to the 1% illustrated crediting spread on the loan balance. As a result, the Policy Credit is also earned and illustrated on loan balances and that helps income solves. If you really want to compare Accumulation IUL to its peers, look at the illustration both with and without income solves or using only standard loans.