#149 | Lincoln WealthAccumulate IUL 2019 – Part 1

The primary goals of all product reviews for this site are to provide an independent, objective and technical analysis of the inner workings of the product and to place it into correct context within the life insurer’s portfolio, the market segment and the industry as a whole. Any statements about how well this product illustrates are only statements of fact, not endorsements of any kind. I don’t endorse products and, if I did, I certainly wouldn’t do so on the basis of something as shallow as illustrated performance. This is a technical review, not an editorial. Part 1 introduces the product and its place in the market. The remaining posts – Part 2, Part 3, Part 4 and Part 5 – are the heart of the review.

If you know nothing else about Lincoln Financial, you know that they play for keeps. Lincoln has earned a top 3 spot in Guaranteed UL sales for more than a decade with several years in the pole position. Until recently, they held an unchallenged monopoly in Guaranteed VUL with VULone, a product that has practically singlehandedly saved the entire Variable UL category from extinction. Lincoln’s pioneering MoneyGuard grew an entirely new product category and remains the measuring stick for all of its new competitors. No company has proven itself to be a more adroit and ruthless competitor than Lincoln and no company has more of an ability to swing a market practically overnight than Lincoln. Their ripples almost inevitably turn into tsunamis.

It’s no surprise, then, that Lincoln is now turning its attention to the fastest growing part of the life insurance industry – Indexed UL. Lincoln has been in the IUL space since its first product, Life Elements IUL, was launched in 2009 but it was never their focus for several good reasons. First, Lincoln’s distribution network is primarily comprised of traditional, old-line BGAs that were not particularly interested in selling Indexed UL until a few years ago. Second, Lincoln wasn’t exactly signaling that it wanted to sell products that weren’t all about guarantees. Recall that a few years ago Lincoln both raised COIs on in-force policyholders and dropped all non-guaranteed crediting rates and eliminated all non-guaranteed crediting bonuses on every single policy on the books (and still hasn’t raised them, by the way). Finally, Lincoln wasn’t exactly sure what it took to win in Indexed UL. The companies that were growing rapidly and carving out market share were generally smaller life insurers with limited distribution and a singular focus on Indexed UL. That’s not Lincoln. Even when they rolled out updated and more competitive Indexed UL products in 2011 and 2014, sales amounted to little more than a dribble.

Last year, Lincoln made what it hoped would be its first step towards a dominant position in the Indexed UL market with WealthAccumulate 2018. It had the requisite tools for competitive success, particularly an account with a large Index Credit Multiplier funded with a 1% asset-based charge. Unfortunately for Lincoln, John Hancock stole their thunder by rolling out Accumulation IUL 2018 on the same day sporting a 2% asset-based charge and a then-massive 55% multiplier. Both products targeted the same market but Hancock’s illustrated performance was far better than Lincoln’s. Hancock’s product flew off the shelves and Lincoln’s gathered dust. In losing the fight to Hancock, Lincoln learned a very clear lesson – Indexed UL is nothing more than an illustration war. All the nice stories about the features and benefits of your product fall flat in the face of illustrated performance. In order to win, you have to win the illustration war. And that’s exactly what Lincoln set out to do with WealthAccumulate IUL 2019.

They succeeded. WealthAccumulate IUL 2019, which I’ll call WA 2019 for simplicity’s sake, illustrates almost comically well. At its maximum AG49 illustrated rate of 6.12%, the product can easily generate cash value IRRs in excess of 7.5% without illustrated distributions and over 10% cash value IRRs with illustrated distributions. These figures put WA 2019 in the rarified air of John Hancock Accumulation IUL 18 and PacLife PDX, although WA 2019 handedly beats both of those products in illustrated income by as much as 25% in some cells. Lincoln’s product is the new benchmark for illustrated performance. As if to put an exclamation point on that statement, so many people were trying to run illustrations for WA 2019 the day that it was released that WinFlex Web had to allocate additional bandwidth to get illustration runtimes down from a reported 7 minutes per illustration. That is insane. Like I said, Lincoln’s ripples turn into tsunamis. Now just imagine what happens when Lincoln tries to make a tsunami.

Before I get into what makes WealthAccumulate IUL 2019 illustrate so well, I think it’s worthwhile to point out that this product marks the first new Indexed UL charge chassis for Lincoln since LifeReserve IUL Accumulator 2011. I wrote a scathing review of that product when it was launched and never warmed up to the way Lincoln built it and its successors, IUL Accumulator 2014 and WealthAccumulate 2018. The core issue for me was that the base charges in the first 7 years of the policy were nearly double competitor base charges. I just couldn’t get behind the idea of a consumer shelling out 25% of a maximum non-MEC premium just in a base charge in the first year, regardless of how efficient the policy was thereafter. Fortunately, Lincoln remedied this issue for WA 2019. The base charge now stretches to 11 years and is more in-line with peer products, although the total amount is still higher than most peers. To compensate for spreading out the base charge, Lincoln raised the premium load from 5% to 7.5%. COIs are unchanged. In my mind, this is a more balanced approach to pricing the product that will serve Lincoln well in targeting competitiveness for certain cells and blunting the adverse impacts for policyholders of flat returns during the base charge period.

One of the reasons why the base charges in all of Lincoln’s products have been so high is that the target premiums are absolutely gargantuan. WA 2019 is no different. I didn’t look at every cell but my quick survey shows that Lincoln’s target premiums for WA 2019 are something like 10-15% higher than competitor products. Ultra-high compensation is table stakes in Indexed UL these days. Gone are the times when IUL targets were just 25% higher than traditional UL targets. Now, they’re nearly twice as high and Lincoln is at or near the top of the pack.

The big changes for WA 2019 are in the crediting strategies. That should come as no surprise. Virtually every new Indexed UL product is incorporating some angle on crediting strategies in order to boost illustrated performance. WA 2019 has four indexed account options – Conserve, Balance, Perform and Perform Plus. You might remember some of those names from the previous product, but the only one that is actually carried over in full is the Conserve account, which retains its 8.75% cap, 1% floor and 0.35% fixed interest bonus. The other three accounts all sport new asset-based charges and guaranteed Index Credit Multipliers starting in year 1, as outlined below.

  Balance Perform Perform Plus
Cap 10% 10% 12.25%
Asset Based Charge 2% 4% 6%
Guaranteed ICM 28% 56% 56%

With WA 2019, Lincoln is obviously upping the ante with the largest asset-based charges in the industry, at least until PacLife PDX 2 and its Enhanced Performance Factor comes out with a reported 7.5% charge later this month. But there’s something amiss in the connection between the asset-based charge and the ICM. The usual math for charge-funded ICMs is very straightforward. If a carrier charges 2.25% for a 50% ICM, like Nationwide does, then you can reasonably assume that their option budget for the product is 4.5%. If Nationwide were to raise their asset-based charge to 3.25%, which is allowed in their contract, then the ICM would reasonably jump to 72% (3.25% / 4.50%). Simple enough.

But here, Lincoln’s math doesn’t work. Just a quick glance at the comparison of the accounts shows that the direct connection between the asset-based charge and the ICM has been broken. Why would 4% and 6% asset-based charges deliver the same guaranteed Index Credit Multiplier? They wouldn’t, even if you take into account the fact that the cost of a 12.25% cap is higher than a 10% cap. Lincoln is making it obvious that something else is going on inside of these indexed account options – something called the Positive Performance Credit (PPC). The illustration describes the Positive Performance Credit as beginning in year 2 and being added to the Index Credit Enhancement, so it’s obviously some form of ICM. Beyond that, the illustration and the filing don’t say much. All you can reasonably assume is that some portion of the asset-based charge is being used to fund the PPC and that the PPC is the reason why this product blows the doors off of its competition. Certain charges for uncertain benefits.

If you’re experiencing a little bit of déjà vu right now, that’s because at first blush the PPC sounds eerily similar to the Performance Factor in PacLife PDX. Both are non-guaranteed. Both do not disclose their mechanics in either the illustration or the filing. Both have a massive impact on illustrated performance and are the primary reason why the product is so competitive. But where PacLife never really came clean on how the Performance Factor works, Lincoln describes the PPC in detail in supplemental marketing pieces. That made my job quite a bit easier. There will be no 10 part review for WA 2019 because the PPC modeled perfectly in my Dynamic Illustration Tool without any significant calculation error like I found for PacLife PDX, which ultimately turned out to be another mysterious part of the Performance Factor (QX) rather than an error. I’m disappointed that Lincoln chose not to disclose more of the PPC in the illustration, but I also understand their desire to keep the illustration readable and to not invite confusion for producers who, frankly, aren’t going to take the time to understand the PPC whether it’s disclosed or not. That’s the unfortunate state of the Indexed UL market. Illustrated performance is king. Nothing else matters.

Even though WA 2019 is a dreadnought bristling with weapons for the illustration war, Lincoln tried to be somewhat circumspect about the way clients will really interact with their policies and maintain some level of conservatism. For example, Lincoln chose to make asset-based charges and ICMs a part of particular indexed account options rather than a part of the base contract, which is how Hancock and PacLife do it. That allows policyholders to opt out of additional charges and leverage should their risk tolerance change in the future and/or performance doesn’t pan out for the leveraged accounts. Lincoln also built a no-cost Return of Premium rider into the base chassis that is available regardless of the index account option.To put it in option terms, they have essentially embedded a zero-cost 20 year put option on the performance of the policy as long as the client satisfies a certain (and high) funding requirement.

If you want to boil down what makes WA 2019 unique, besides the sheer magnitude of the available leverage and illustrated performance, it’s the two features that sit on opposite sides of the risk spectrum – the PPC for juicing performance and the ROP for providing the client with a put option if things don’t pan out. These are both slightly different tacks on standard Indexed UL features that, it turns out, have profound implications for WealthAccumulate IUL 2019 as a product and potentially the industry as a whole.

Want more great content like this? Join the hundreds of other people who have subscribed to The Life Product Review to get access to nearly 150 archived articles and weekly new content. Just click here