#212 | John Hancock Protection IUL 20
John Hancock’s nearly uninterrupted rise to prominence in the Indexed UL space has always been a two-front war: Protection IUL and Accumulation IUL. As is always the case with John Hancock, both products are fine-tuned for dominance in their particular arenas. Accumulation IUL is a dreadnaught for the illustration war, practically bristling with weapons – high illustrated rates, charge-funded multipliers and a dynamic fixed interest bonus – but sinking low in the water due to policy charges that ring in as nearly the highest in the industry. The illustration war in accumulation products runs hot and Accumulation IUL has always been a reflection of that.
But the war in death benefit IUL products is a cold one. Everyone knows that death benefit products should, theoretically, be less obviously risky than accumulation products. Therefore, policies loaded up with obviously risky charge-funded multipliers like PacLife Pacific Discovery Protector (PDP), the clone of PacLife’s best-selling PDX accumulation product, have traditionally had little appeal. Instead, producers appear to want death benefit Indexed UL products to deliver extremely low illustrated premiums without a lot of obvious risk. In order to deliver that, insurers have to bury what they’re doing. But no product has buried its internal mechanics better than John Hancock’s Protection IUL series and won more sales as a result – and the 2020 version is just a new riff on the same theme.
At first blush, the product retains many of its most defining features. The account options are the same as in the outgoing product, with the Base Indexed Capped Account offering a stratospheric 12.75% cap and 7.35% maximum illustrated rate. The charge-funded option, called the Capped Indexed Account, offers a 9.5% cap and 65% multiplier for a 2% asset-based charge. Although this option might smell more conservative because of its 5.92% maximum AG49 illustrated rate, it’s not – the net rate is a whopping 7.77% (5.92% * 1.65 – 2%). These two accounts allow John Hancock to straddle the market. For producers who want a high illustrated rate, there’s the Base Indexed Capped Account. For producers who want to feel more conservative, whatever that means, by illustrating less than 6%, there’s the Capped Indexed Account. The other accounts are just window dressing.
Protection IUL 2020 also carries over industry-high premium loads of 35% in the first 10 years and 32% after that. These seemingly exorbitant premium loads aren’t quite so offensive when paired with the fact that Protection IUL’s base charges are quite low, although the base charges do have a trimmed-down Advanced Contribution Charge as found in Accumulation IUL. Think of the premium loads as a cover charge for admission – but that doesn’t mean clients won’t ask you why in the world their first statement has a charge equal to almost half of the premium paid, because they very likely will. Finally, Protection IUL 20 has the same declining (and largely hidden) fixed interest bonus as in the 2018 product that varies by age and risk class.
As a result, Protection IUL 2020 holds the same ground as the outgoing product – dirt cheap illustrated premiums with precious little cash value along the way. If you liked the old one then you’ll like this one. But that doesn’t mean that nothing changed. This is a cold war. The strategic shifts are not always obvious.
As I wrote in my review for Protection IUL 2018, Protection IUL products have always made a hidden bargain with the insured. In exchange for very low illustrated premiums, the client takes on a boatload of product complexity, albeit complexity that is transparent – all of the unique moving parts in the outgoing PIUL18 and new PIUL20 are fully guaranteed and specified in the contract the client receives after purchasing the product. PIUL18 looked great on a level-rate illustration, but had to the potential to crumble with even slight underperformance because of a highly complex and dynamic COI rate function that effectively penalized policies that were underperforming. On the flip side, that same dynamic COI rate function could make COIs disappear for overperforming contracts. The problem was that it was impossible to know the actual COI rate until it was charged, making administration of the policy extremely difficult. John Hancock’s response to my article was to rightfully point out that while PIUL18 was admittedly highly complex, that complexity was offset by the incredibly powerful LifeTrack system that provides a precise funding roadmap to ensure that the policies stay on track no matter what real-world returns they earned. It’s a fantastic and brilliant system that can virtually eliminate lapse risk as long as the client is willing to make every recommended adjustment. But at what cost? That’s where the complexity comes into play.
The new Protection IUL 2020 does away with the dynamic COI rate function and has replaced it with the Policy Value Credit (PVC). As with the old product, the Policy Value Credit is an integral part of the story – it is, in fact, more important than anything else in the product. Let me give you a real-world example. For a male, 45, Preferred and $1M of death benefit, the 10 pay premium to endow at age 121 is about $11,500 using the Base Cap account max AG49 illustrated rate of 7.35%. If you take the PVC out of the policy, it lapses at age 84. That’s a single, level rate scenario. The difference is even more pronounced under real-world, stochastic returns. The chart below shows the same scenario but over 200 random S&P 500 return strings to mimic what the policy will do in the real world.
With the PVC, the chance of Protection IUL 2020 making it to age 121 with real-world returns is about 41%, meaning that 59% lapse prematurely with the average age of lapse at just 89. If that’s a surprising number to you, take a look at this series on death benefit Indexed UL product probabilities. But stripping out the PVC looks even worse. Just 3 of the 200 scenarios made it to age 120 and the average age of lapse for the rest was 83. So yes, the PVC is important. It’s one of the key components of the product. And yes, if you’re planning on selling this product, you should absolutely know how the broad strokes of how it works. Your clients will see it on their statements and when it becomes a line-item equaling 50%+ of the COI charges in the contract, they’re probably going to ask you what it is.
At its core, the Policy Value Credit is a COI discounting mechanism. The basic formula is very simple. The PVC is equal to the lesser of The Current COI Discount or the Guaranteed COI Discount, multiplied by the policy face amount. The Guaranteed COI Discount is set at 30% of the monthly guaranteed COI rate. The Current COI Discount changes every year in accordance to a unique table for each age and rate class, but generally floats around 30-50%. However, in no event can the PVC exceed the COI charges, so it is truly a COI refund mechanism and nothing else. Based on the way the Policy Value Credit is filed, it appears that all of these rates are fully guaranteed for each policyholder. Those are the basics. The chart below shows the PVC in relation to COI charges in the scenario detailed above.
This looks pretty straightforward, right? Unfortunately, and as seems to always be the case with John Hancock, there’s more to the story. The PVC has another piece, called Component B (as opposed to the Component A calculation detailed above), that serves as a way to limit the total PVC payout in certain situations. The basic calculation for Component B is that it is equal to Component A minus Factor B multiplied by the policy account value. Factor B is another annually changing, table-driven input that is different for every age and risk class. Don’t worry about the actual value. The intuition is what counts. Follow the formula. Component B is a reduction in Component A. Big numbers are bad for policyholders. Component B is equal to Component A, which is a COI discounting mechanism based on the base face amount of the policy, minus a factor multiplied by the policy account value. If policy values are small, therefore, then Component B actually increases. By extension, therefore, Component A decreases.
To put it simply, Component B is designed to restrict performance in scenarios where the product is already underperforming. This is the same effect that was embedded in the outgoing Protection IUL 2018’s dynamic COI rate formula but, in this case, it’s much more muted. The chart below shows the same stochastic scenarios as outlined previously, but this time with a version of the product that does not have a Component B.
You can see the effect of Component B fairly clearly. The bigger the underperformance, the more that Protection IUL 2020 underperforms the cloned version of the product without Component B, although the average gap is still only a couple of years. I looked at a level pay scenario as well and got similar results. It seems a little bit odd that John Hancock would build this extra feature that really doesn’t materially change the dynamics of the product, but they have to price to some pretty extreme scenarios under Canadian accounting and some of those scenarios probably tap into Component B more than anything we’d look at under this lens.
The pertinent question for producers is how to illustrate this product in light of its indexed crediting methodologies and inherent complexity. The answer, as always, is to illustrate conservatively. Do you think a 59% lapse rate with an average lapse age before 90 is acceptable to most clients, especially given that the data is pulling from historical S&P 500 Total Return performance in excess of 12% and a cap of 12.75%? If you asked them, they’d probably say what one policyholder said when presented with the same facts – “if there’s even a 0.01% chance that this policy lapses, then it’s not acceptable.” Hmm.
At that confidence interval, you’d be illustrating this product at something like 4%. The level-pay premium would jump from $6,320 to $9,792, an increase of 54%. For some perspective, this new premium would blow through the Protection UL illustrated premium of $7,269. For even more perspective, the client could buy a Protective Indexed Choice UL illustrated at 4% for $9,355 and get a guaranteed death benefit until age 118. In fact, there are a bunch of Indexed UL products that illustrate better at 4% and a whole slew of Guaranteed UL products with lower guaranteed premiums. This is the dark side of the Protection IUL design. Funding any more than the bare-bones minimum it is not a great idea thanks to the 35/32% premium load. Think of it like paying a tax on premiums paid. Most products charge a 6-8% tax. Protection IUL charges up to 35%. If taxes are incentives, then the clear incentive in Protection IUL is to pay as little as possible. Hence, the 54% penalty for dropping the illustrated rate to 4%. It is not designed to be accommodative to funding at higher, more conservative levels.
To put it bluntly, the only thing that Protection IUL 20 does well is illustrate dirt cheap premiums for scenarios where the expected lapse rate is greater than 55% (which is to say, illustrated premium/death benefit solves using the maximum AG49 illustrated rate) and it gets there using some very complex product mechanisms. If that’s what you want in the products you’re selling, then it delivers. But if you want a product that is robust in the real-world and you’re planning on funding it realistically, then there are plenty of other options worth considering with a lot less complexity, better cash value and stronger guarantees.