#172 | Lincoln WealthPreserve IUL 2019 Review
Back in February of this year, Lincoln snuck in a product change that went almost unnoticed, even by yours truly, to their death-benefit oriented WealthPreserve IUL. In fact, I didn’t even notice it until I was working on some slides for a presentation and couldn’t get the numbers in the Dynamic Illustration Tool to match the illustration. Only then did I notice that Lincoln had affixed a new date behind the name of the product and made some changes that are, shall we say, rather interesting.
The original WealthPreserve IUL was a fairly lean and straightforward product that I wrote about favorably when it was released. I thought Lincoln did a nice job of incorporating safety mechanisms into the base chassis that don’t pop on the illustration but provide tangible value under real-world conditions. But with the 2019 version, Lincoln threw all of that out of the window by cramming a huge charge-funded multiplier into the chassis with all of the finesse of a drunk Eagles fan exiting a bar after losing the Super Bowl.
The design itself is simple. Lincoln added a guaranteed 155% Index Credit Multiplier for the life of the contract that is implicitly funded by base per thousand charges that are more than twice as large as the old contract and last for a whopping 30 years rather than the original 10 years. The net result is that WealthPreserve IUL has been catapulted to near the top of the spreadsheet for both total fixed charges and competitive positioning. It seems like the same tradeoff as the original PDX – higher fixed charges for an Index Credit Multiplier.
But looks are deceiving. In this case, the simplicity of the charge/multiplier relationship in WealthPreserve IUL is a problem. When PacLife rolled out PDX, people rightly pointed out that fixed charges can drive a policy into the hole. It is mathematically impossible for an asset-based charge to lapse a policy on its own because the dollar amount of the charge shrinks as the account value shrinks. But a fixed charge stays the same regardless of the account value, which means it has no slow-down mechanism to prevent forcing a policy into lapse. PacLife (correctly) argued that the multiplier mechanism in PDX had the self-correcting feature of increasing the size of the multiplier by the ratio of the fixed charge to the account value. In other words, if policy account value drops then the multiplier will increase, all else being equal. This allows PDX policies to essentially dig their way out of the hole created by the fixed charges courtesy of increasingly large multipliers applied to index returns.
WealthPreserve 2019, on the other hand, has no such mechanism. Instead, policyholders who get pushed into the hole by a few bad years in the market and steep fixed charges get the same multiplier as they did before, which means that the chance of digging out of the hole is vanishingly slim. Don’t believe me? Just drop a couple of zeroes into your illustrations and watch what happens. For my part, I ran WealthPreserve IUL 2019 through the DIT with an endow at age 121 solve based on the maximum AG49 illustrated rate and got a lapse rate of a whopping 81% in real-world scenarios. Most DB IUL products ring in at about 55% lapse rates for the same scenario (if that’s surprising to you, then read the series on DB IUL). Just to be clear, what I’m saying is that this ill-conceived fixed charge funded multiplier makes fully 81% of policies lapse with variable, real-world returns – even scenarios where average returns are higher than the maximum AG49 rate. WealthPreserve IUL is the most sensitive product to sequence of returns that I’ve ever seen. Bar none. It’s not even close. In fact, WealthPreserve IUL is so sensitive to the sequence of returns that it’s almost not sensitive to the actual average return. Take a look at the chart below, which shows lapsed policies in yellow and persisting policies in blue across 1,000 S&P 500 scenarios ranked from best to worst:
Policies are lapsing all over the board. No other policy produces a chart that looks like this. High average crediting rates don’t ensure persistency, as in other DB IUL products, because a few bad years can spoil the whole show. High returns only count if they’re applied to large account values. The problem with WealthPreserve 2019 is that a down year sucks enough account value out courtesy of the fixed charge that high returns apply to a smaller account value and the policy can’t recover. And, to make matters worse, the age where these policies start lapsing is about 7-8 years earlier (93) than other DB IUL products.
Don’t be fooled by highly competitive premiums in WealthPreserve IUL. Yes, it illustrates well, but it is likely not going to work well in the real world. All DB IUL products that are thin-funded based on the maximum AG49 rate have a 50-50 shot at working in the real world. WealthPreserve IUL has a less than 20% chance of actually working in the real world. Look, I don’t say this often but I’ll say it this time – this product, now that it includes the charge-funded multiplier, is badly designed. It just is. There are so many better DB IUL options that are more likely to succeed at a similar price-point or, better yet, products that are a little bit more expensive but also include long-term guarantees. If you’re going to sell WealthPreserve IUL, then at least make sure that you fund it to maintain the guarantee for the maximum period (40 years or age 90). Higher funding will mitigate the inherent risk in the design itself and reduce the probability that a few bad years tank the product.
This update to WealthPreserve IUL is something of a hack job. That’s why I’m poking so much fun at it. Usually, Lincoln is pretty clever and purposeful when they create new products. But this one was either handled by the summer intern or Lincoln was hamstrung, from a technology standpoint, to using fixed charges to offset the multiplier. I’m inclined to think that the latter is the case. Lincoln’s WealthAccumulate IUL uses asset-based charges to fund its multiplier options. Lincoln obviously sees the benefits of that design over the clunky design used in WealthPreserve and I’m fairly certain they’ll be making an update later this year to switch to an asset-based charge design. But in the short term, WealthPreserve IUL poses some serious problems. Charging flat fees for a guaranteed multiplier is a bad idea no matter what way you cut it – especially for the minimum premium solves where the product has traditionally been positioned.