#217 | Nothing is Real and Everything is Possible

This July will mark my 13th year in the life insurance industry and, although it’s not the nice, round number that usually gets people thinking about the passage of time, for whatever reason I’ve found myself stopping to think about just how much has happened in the last 13 years. The only memory I have of my first day at the office in 2007 is running my first illustration on WinFlex. It was a red pill moment. I saw those numbers pop up on the screen and I knew that I was hooked. This is going to sound so ridiculous but it’s true – I spent the first six months at NFP literally dreaming about life insurance. All of my friends were still in college and I was out on my own in a strange city. The only thing I had to do was twist and spin this new Rubik’s Cube of life insurance products. I couldn’t get enough. I was obsessed.

I think my career would have turned out very differently if I’d come into the business in a different era, but in retrospect, I hit the jackpot on timing. I can’t help but chalk it up to divine providence. It turned out that the Rubik’s Cube I was holding was the most complex, least understood, fastest growing and many-faced product ever conceived by this industry – Indexed UL. One of my first assignments at NFP was to take a look at the products offered in this nascent category and see what I thought of them. I think I’d been in the business all of 2 or 3 months before I started to voice my disbelief in the 10.5% default illustrated rate used in AIG’s new Elite Global IUL. I made enough noise about it that AIG flew me out for my first trip to Las Vegas and put me up at the Bellagio for a producer conference on Elite Global IUL to hear the pitch from none other than industry legend John McSwaney in the hopes that I’d come around. I don’t think that conference had the desired effect, especially when I heard McSwaney say, from stage, that it would be “irresponsible” to illustrate AIG Elite Global at less than 10%. I didn’t know much, but I knew a 10% illustrated rate was bullshit. And that got me even more interested.

This July, I will have spent the majority of the last 13 years opening the many doors and exploring the many passages of Indexed UL. They’ve led me to places I never would have anticipated – derivatives textbooks, investment banks, state regulators, insurer home offices, independent actuaries, finance academics, options traders – all in what feels like a seemingly endless quest to know more, to see more, to find the right patterns that will eventually solve this Rubik’s Cube of Indexed UL. I’m still looking. There are still more faces to this puzzle and new ones seem to be emerging all the time. Looking back over these last 13 years, the miracle is that my desire to solve this puzzle has coincided with Indexed UL becoming the dominant product in the independent side of the industry. If that hadn’t happened, no one would have cared and I couldn’t have built a business that funds my quest. I would have had to put down the puzzle a long time ago. So, thank you for subscribing – you keep me going.

But that’s not actually the point of this abnormally personal article. The point is that, actually, my career shouldn’t have unfolded this way. I’m a symptom of the problem, not a sign of the solution. The problem is that Indexed UL is, as I said before, the most complex, least understood, fastest growing and many-faced product ever conceived by this industry. It should not be all of those things. It should not be a puzzle that takes more than 13 years to crack. We, as an industry, have no business building products like that. If Indexed UL had never been built and I’d been relegated to just the traditional suite of Whole Life, UL, Guaranteed UL and VUL products, this newsletter wouldn’t exist. There wouldn’t be enough to write about. Those products, with the exception of complex shadow accounts in Guaranteed UL, are comparatively WYSIWYG – what you see is what you get. There are only so many optical and mechanical tricks that can go on inside those products and they’ve all been done before. To put it into perspective, normal life insurance products are like driving a car to work. The quickest point is usually a straight line and you’ve done it a million times. Sometimes something interesting happens, but that’s rare. Indexed UL is like taking that same car and lapping the serpentine turns of the Nurburgring. High speeds, blind curves, flash downpours, snap oversteer and the ever-present specter of your car careening into the barrier. Both scenarios involve your car and pavement, but that’s where the similarities stop.

Indexed UL, in the same way, is like other life insurance products in that it involves a death benefit and an account value, but that’s where the similarities to traditional products stop. The interesting part is the track – the equity call options. Where Whole Life has its stable dividends, UL has its declared crediting rate and Variable UL has its external mutual funds, Indexed UL plays in world of call options, where nothing is real and everything is possible. There is an infinite array of option strategies on an infinite number of underlying asset classes available to life insurers. Quite literally, everything is possible. But nothing is real – options are not investments, they’re tools for speculation or hedging. They are non-linear financial instruments with pricing that makes fools of us all. They tell the honest truth in their market prices but constantly lie in their return expectations. In option trading, there is no such thing as a bad trade, only bad timing. Life insurers entirely miss this distinction. In their model, there is no such thing as a bad option trade – period. All strategies with Indexed UL are winning strategies, thanks to the ever-perfect timing of illustrated rates based on hypothetical historical lookbacks in Indexed UL products. And since all strategies with Indexed UL are winning strategies, life insurers have created a cottage industry in dreaming up new strategies with ever bigger winnings, ever more complexity, ever more speculative elements. That’s what passes for innovation in Indexed UL and there is no functional limit to how far afield these designs can go. Everything is possible – and nothing is real. It should not be so.

Life insurance at its best is a simple product that protects families, provides stability and preserves capital. Life insurance at its worst is a complex product that uses temporary dislocations in financial markets to create the illusory promise of high returns with little risk. I’ll know that it’s time for me to hang up my shoes when our industry is at its best, not its worst, and I’m anxiously looking forward to that day.