#200 | John Hancock Accumulation IUL 19 – Part 2
As discussed in the last post, every life insurance product is like a multivariate equation made up of policy charges and credits. John Hancock Accumulation IUL 2019 is no different except that the mechanics of its policy charges and credits are more complex than almost any other product in the market. Undoubtedly, these complex mechanisms combine to produce great illustrated results, but the tradeoff is that they are difficult to understand intuitively and explain to a client. Let’s start first with the policy charge side of the house.
No matter what way you cut it, AIUL19 is one of the most expensive products in the industry, sporting the 5th highest fixed charge in the industry for a 45 year old Preferred Male for $1M of death benefit. For that cell, the fixed charge over the first 15 years tallies up to a grand total of 6.86% of the death benefit, which in this case is $68,600 and equal to a whopping 1.5 times the maximum non-MEC premium for the cell. The outgoing product wasn’t exactly trim either, ranking 57th with 5.99% of the DB in fixed charges, but AIUL2019 significantly ups the ante. Extremely high fixed charges are a virtual guarantee on product profitability across the spectrum of funding patterns. To put this into perspective, the compensation for this cell at 140% total payout (internal and external) is about $26,000, which equates to just 40% of the overall policy charges not including relatively high premium loads of 7% in year 1 and 6% in years 2-10. John Hancock is unquestionable producing great returns for Mother Manulife with AIUL19 across almost any funding pattern or economic scenario. Most insurers would stop there, but not John Hancock.
Everyone knows that different funding patterns produce different profitability patterns. Most insurers deal with this discrepancy by pricing the product for a particular pattern and washing away undue gains and losses in the grand scheme of the overall sales mix. John Hancock, however, created a new pricing tool called the Advanced Contribution Charge (ACC) which, as far as I can tell, is unique to them. The goal, apparently, is to use the Advanced Contribution Charge to mitigate potential profitability shortfalls in heavily funded scenarios stemming from a variety of potential places – unsustainably high caps, future bonus payouts, COI margins, capital requirements, you name it. The cause isn’t important. What’s important is that John Hancock created a sophisticated, complex pricing mechanism to eliminate the possibility of being on the wrong side of the trade.
In broad strokes, the ACC increases the policy charges by a percentage of premium when the product has been funded beyond a certain, specified premium level. For example, if the premium threshold is $10,000 and the client pays $25,000, the extra $15,000 would be multiplied by 1.25% and that amount ($188) would be added to the fixed charge. But here’s the kicker – that charge continues to assessed for as long as premiums are being paid into the product up to 10 years. Once premiums stop, the policy charges start to burn off at a rate equal to 1.25% multiplied by the threshold premium ($10,000, in this example) and eventually zero out. Confused? That shouldn’t be a surprise since none of this is outlined in the illustration and is only apparent after digging into the charge report under multiple premium scenarios and reading the contract. But again, at a high level, there’s a build-up of Advanced Contribution Charges when premiums are being paid and then those charges burn off over time. This pattern creates something of a pyramid shape for the charge, with the peak in the last year of premiums being paid (or year 10). Here’s what it looks like on a real case scenario when premiums are funded at the maximum non-MEC level for 7 years:
When tacked on top of the regular fixed charges in the product, it looks like this:
These extra charges not trivial. When you run AIUL19 at a maximum non-MEC premium, the policy is literally the most expensive on the market in terms of fixed charges, ringing in at a whopping 8.8% of the death benefit or 30% of all premiums paid over 7 years. The ACC in AIUL19 is also significantly larger than in the outgoing product. For example, the same funding pattern in Accumulation IUL 18 would have racked up fixed charges equal to “just” 6.1% of the death benefit over the first 15 years. John Hancock has had marginal Advanced Contribution Charges since the initial rollout of Accumulation IUL several years ago, but it looks like the ACC is becoming a bigger and bigger pricing factor in the product.
To make matters worse, John Hancock also modified the Surrender Charge schedule to eliminate the only offsetting factor to the Advanced Contribution Credit. In the old product, the Surrender Charge schedule was reduced by the amount of the ACC, which mean that overfunding the product also reduced the Surrender Charge. The new product, however, has no adjustment in the Surrender Charge for the ACC, which means that the effective Surrender Charge in the new product is higher than in the old one.
John Hancock also increased the COI charges in AIUL 19 relative to the outgoing AIUL 18 and the original AIUL. Take a look at the COI slope of the old product versus the new ones:
The only thing certain about the new product relative to the old ones is that it’s more expensive and that, by extension, AIUL19 is much more expensive than competitor products. When you combine all of these things together, the benchmarking in the initial years is not favorable. Out of the 71 products I track in my Dynamic Illustration Tool, AIUL19 ranks 69th in terms of year 10 cash values at the maximum AG49 illustrated rate in the Base account. In the 20th year, AIUL19 is still at nearly the bottom of the pack despite the fact that its 6.51% illustrated rate is better than 50 of the 71 other products. The only way AIUL19 digs out of its competitive hole is by tacking on charge-funded multipliers. Using the Enhanced account, which is a pedal-to-the-metal 5% asset-based charge to fund a 122% multiplier, AIUL19 ranks a riskier and more precarious 10th out of 71 products. This is symptomatic of a core problem in today’s Indexed UL market. Products are generally becoming more expensive and extra charges are real, tangible and will be paid. The only way these heavier charge products are illustrating better is by tacking on higher caps (funded with those charges) or multipliers and then illustrating speculative, purely hypothetical, empirically unproven returns courtesy of the AG49 maximum illustrated rate. It’s not a trade I’d want or recommend anyone else take, regardless of how “sophisticated” they are.
But AIUL19 has another trick up its sleeve on the policy credit side of the house, one that dramatically improves the product’s illustrated performance (and especially its illustrated income) in later years across a variety of funding and performance scenarios. In order to solve the multivariate equation, John Hancock couldn’t just scoop up more profit, it had to put some of those charges back into the product. Rather than doing it with something as simple as a higher cap or as controversial as a higher multiplier, John Hancock did what it does best – create a complex and unique policy mechanism that delivers benefits in a counterintuitive and sometimes unexplainable way but unquestionably boosts policy performance. Enter the Policy Credit.