#190 | National Life Peak Life IUL

We all know that the illustration is not the real-world. Typically, folks chalk up the gap between illustrated performance and real-world performance to changing policy parameters such as policy charges or the crediting rate. But the problem is different with Indexed UL because it credits interest based on the performance of an external index, which means that IUL has one additional moving part that is completely out of the control of the insurer. Imagine a scenario where the average crediting rate over 50 years is 6%. Will the policy’s performance match the illustration at a level 6% shown at issue? Absolutely not. There will be some degree of drag depending on the exact sequence of returns and the interaction of that sequence of returns with the policy charges. On average, for a vanilla Indexed UL product, variability of returns shaves somewhere in the neighborhood of 0.2% right off of the top of illustrated performance in Indexed UL. In other words, a 6% illustrated level rate will actually deliver the equivalent of a 5.8% in the real world. This is what I call “deadweight loss,” because that’s what it is. Dead weight. It’s just the price of putting variability into life insurance policy crediting. But some products have more deadweight loss than others. And, as it turns out, Peak Life from National Life of Vermont has more than its fair share.

But first, why you should care about the products sold by the little company in Montpelier, Vermont? National Life Group has been around under various names for a very long time and was one of the first companies in the Indexed UL space. It has long had an established presence in Indexed UL, but recently has been climbing up the LIMRA sales charts, much to the dismay of larger, more established players. Depending on which sales reporting service you watch, National Life is either #2 or #1 in the market. They are an absolute Goliath in Indexed UL, but a Goliath that only fights in certain battles. National Life derives most of its sales from two markets – multi-level marketing and edgy premium financing arrangements. From what I’ve heard, the split is about 60/40 between the two. On the MLM side, National Life has built underwriting and processing capabilities that cater to the small-face, transactional nature of MLM business, which delivers huge policy counts. On premium financing, National Life has gotten cozy with firms that have program-based financing platforms geared for executive deferred compensation, like NIW’s Kai-Zen/Tri-Zen program. Beyond these two categories and a couple of other niches where the company has a cult-like following, National Life is a non-entity. But increasingly, they’re spreading into new markets and agents are bumping into National Life policies. That’s why you should care. National Life is big in Indexed UL and only getting bigger – and they’re growing in spite of their products rather than because of them.

I’m reviewing Peak Life because it is, true to its name, the pinnacle of the National Life product lineup – but compared to most other Indexed UL products on the market, it is quite unremarkable in most of its structure. It has a 9.75% cap, which is down significantly from the old version’s 12.5% early last year. It has a few other fairly standard indexed crediting options and a single proprietary index from Credit Suisse. There’s nothing particularly remarkable about the premium loads or cost of insurance structure. By every usual metric, Peak Life is a completely mediocre Indexed UL product. As mediocre as Peak Life looks on the illustration, it manages to produce even worse performance in the real world. How is that possible? Well, I’m about to tell you, but buckle in. This one ain’t for the faint of heart.

As I mentioned earlier, some products have more deadweight loss under real-world performance than others. There are typically two product design decisions that produce large amounts of deadweight loss. These are, from a performance standpoint, fatal flaws in design. The first of these flaws is an excessively large or excessively long fixed charge structure. Fixed charges are exactly what they sound like – a fixed dollar amount deducted from the contract on a monthly basis for a certain period of time after the policy is issued. These charges generally pay for commissions, carrier profit and, in a lot of cases these days, temporarily higher caps. Fixed charges cause serious problems for IUL policies in the real world in ways that aren’t apparent from a level rate illustration. On a level rate illustration, the fixed charges gradually get diluted against a constantly growing cash value thanks to premiums being paid and consistent earnings. But in the real world, the returns are variable and the vast majority touch either the cap or the floor. In the event of a floor credit, the policy values drop by the amount of the policy charges – which, in the early years, are dominated by the fixed charges that can be anywhere from 4 to 40 times as large as initial COI charges. These fixed charges create immense sequence of return risks because their impact on performance in asymmetric. In good sequences of returns, the effect of fixed charges diminishes because the account value is growing. But in bad sequences of returns, fixed charges loom large by creating a negative feedback loop as the same dollar amount is deducted from a diminishing account value. Digging out of that hole is really, really difficult. That’s what makes high fixed charges so toxic to real-world policy performance in both the short and long run.

To put Peak Life into perspective, its $4,100 fixed charge for a 45 year old Preferred male is almost spot-on average for all IULs, but where it differs from the pack is that it deducts the fixed charge for 30 years. Yes, 30 years. Virtually every other insurer deducts the fixed charge for anywhere from 5-10 years. Most carriers are just trying to recapture commission, make their margin, subsidize their cap in the short run and then stop deducting fixed charges. But not Peak Life – and why is that? It’s not because Peak Life is more profitable than other products, although I’m sure it’s plenty profitable. My gut is that Peak Life has a high and long fixed charge because that charge is being used to fund the “free” indexed credit multiplier embedded in the product. Theoretically, therefore, the extra risk embedded in the product from the fixed charges should be offset by additional upside performance. But as you’re about to see, that’s not what happens in Peak Life.

The second kind of design flaw is a misleading multiplier or bonus structure that works one way on the illustration but differently in the real world. Peak Life also suffers from this flaw. Every single other index credit multiplier on the market works in a fairly simple way – the multiplier is applied to the index credit. If you have a 50% ICM and a 6% indexed credit, then you get a 9% total credit. Simple enough, but Peak Life works differently. It has a 15% ICM or 1%, whichever is less. On the base illustration, which shows a roughly 6% illustrated rate, the 15% ICM adds an extra 0.9% of illustrated crediting rate. On the illustration, the fact that the credit is capped at 1% is not a problem, but it is in the real world. When the product hits the cap of 9.75%, it should deliver a 1.46% ICM credit for a grand total of 11.21%, but instead, it delivers just 10.75%. This might not sound like a big deal at first, but think about the impact using back-of-the-envelope math. If the cap gets hit 50% of the time, as it would have been historically, then that means that roughly 0.46% should be credited but isn’t about half the time, which equates to 0.23% in deadweight loss over the lifecycle of the product. In other words, just running real-world cap and floor combinations on Peak Life means that real-world performance will systematically underperform the illustration by 0.23%. This isn’t a 6.03% illustrated rate product – it’s a 5.79% illustrated rate product that is masquerading as a 6.03% illustrated rate product.

Admittedly, this math existed in the previous Peak Life product and I never wrote about it in part because people weren’t asking about National Life and because 0.23% won’t break the bank unless, of course, you’re leveraging it to the hilt with participating loans. But the new Peak Life product doubles down on this issue by adding options to deduct an asset-based charge to have a higher multiplier and, guess what, all of those multipliers are subject to maximum percentage credit just like the old Peak Life. The new product offers account options that look like this:

Enhancer – Lesser of 15% ICM or 1% in all years

Enhancer Plus – 1% asset charge for the lesser of 35% ICM or 3% in all years

Enhancer Max – 3% asset charge for the lesser of 85% ICM or 7% in years 1-20, scaling proportionally with 2% asset charge from years 21-30 and 1% charge thereafter

Now, let’s look at how much multiplier interest is not credited due to the maximum credit percentage when the product hits the cap (which, again, happens about 50% of the time in the real world)

Enhancer Enhancer Plus Enhancer Max
Asset Charge 0.00% 1.00% 1.00% 2.00% 3.00%
ICM * Cap 1.46% 3.41% 3.41% 5.85% 8.29%
Max Credit 1.00% 3.00% 3.00% 5.00% 7.00%
Lost Credit 0.46% 0.41% 0.41% 0.85% 1.29%

The way to read this chart is that dividing each of these numbers by 2 will roughly give you an idea of how much deadweight loss is produced by these maximum credit amounts performance. In other words, the Enhancer Max with a 3% asset charge to fund the multiplier overestimates its illustrated performance by a whopping 0.65%. Now that ain’t nothing. Theoretically, therefore, this product with a 6.03% illustrated rate should really use about a 5.4% illustrated rate to account for deadweight loss, right?

Right. That’s the way it should work. And in isolation, that’s the way it probably would work, but remember that Peak Life still suffers from the first design flaw of high and long fixed charges. ITake a look at how the performance of the product looks in terms of year 40 CSV IRR with a 100% allocation to the Enhancer Max accounts:

Scenario Cash Value IRR Deadweight Loss
Level Rate – 6.03% Max AG49 Illustrated Rate 6.30%
Average Real Returns – No Charge / No Limit 5.83% 0.47%
Average Real Returns – Charge / No Limit 5.31% 0.99%
Average Real Returns – Charge / Limit 4.74% 1.56%

Let me interpret. The Peak Life illustration run at the maximum AG49 rate shows a 6.3% CSV IRR on a 6.03% illustrated rate. Pretty nice. If we assume that the multiplier is not limited by the maximum percentage credits and not partially funded by the fixed charges in years 11-30, then it produces a 5.83% average return across real world scenarios that average out to 6.03%. This is a 0.47% deadweight loss and it’s pretty much in-line for a typical product with a similar charge-funded multiplier structure. I’ve written about this phenomenon at length in other posts. But then Peak Life takes a turn for the worse. When we extend the charge back out to 30 years, which is what it does in the real product, the deadweight loss doubles to nearly 1%. That extra 0.5% is reflective of the increased risk inherent in using high and long fixed charges to fund the multiplier. Bad trade. But we still have to add back the effect of the limiting the ICM interest by the maximum percentage credit, which bolts on nearly 0.6% in deadweight loss. So by the time we’re done modeling things as they actually are, a product that looks like it delivers 6.3% CSV IRR will actually deliver just 4.74% in the real world. And that assumes the cap stays where it is, forever, so it’s not a real projection. It’s just the haircut to the illustrated performance that everyone will see when they look at the product. In other words, you need to run the illustration at about 4.7%, not 6%, to right-size the performance.

This is why Peak Life is fundamentally a poorly designed product. It commits the unforgivable sin of structurally overestimating its illustrated performance relative to how it will perform under the variable rates of the real world. But why did National Life build Peak Life this way? Because it’s cheap. Think about pricing a product like this. Using fixed charges rather than asset charges means that on the level rate illustration, those charges look cheap compared to an asset-based charge to fund the same benefit. Similarly, forcing the maximum credit from the ICM to cap out at a prescribed maximum percent means that the cost of the ICM is lower than it otherwise would be. Without the maximum percentage credits, the ICM levels would undoubtedly be lower, which would make the product illustrate worse at the maximum AG49 rate even though it would likely perform as well or better in under real-world scenarios. See what’s going on here? National Life traded real value to create more illustrated value. Welcome to modern Indexed UL product architecture. They’re not the first to do this and I’m sure they won’t be the last.

The challenge with communicating the flaws in Peak Life’s design is that it’s complicated and, to make matters worse, the illustration never shows (and can’t show) the impact of variable, real-world crediting. Even well-informed producers will be at a loss for how to explain this to clients. That’s the tragedy. If you’ve managed to hang on for this whole article to understand what’s going on with Peak Life, you’re still almost hopeless in communicating it to clients. Almost. I would argue that you can turn it into back-of-the-envelope math. Show them the high and long fixed charges. That’s real money really being deducted from their policy. Show them the fact that the product clearly states that the multiplier interest credited is capped at a specified amount that leaves money on the table when the credit hits the cap, which happens far more often than they probably think. Show them what happens to illustrated performance at a 4% illustrated rate. These things will make the complicated theory something concrete that they grab a hold of.

In the end, I rarely say to avoid a product, but if you’re selling Indexed UL then I’d tell you to avoid selling this one – at least, until National Life fixes the problems.