#232 | Lincoln AssetEdge VUL 2020 Review

If PennMutual Diversified Advantage VUL was the opening salvo of leveraged indexed accounts in variable products, then Lincoln AssetEdge VUL 2020 (AEVUL) is the first offensive. Lincoln’s Wealth Accumulate IUL 2019 was one of the most aggressively leveraged and illustrated products on the market when it was released at the beginning of last year. Its success catapulted Lincoln into the list of top-10 IUL writers by nearly tripling Lincoln’s sales from 2018 to 2019. Lincoln appears to have a winning formula, so why not apply that formula elsewhere? Enter AssetEdge VUL 2020.

But first, I think it’s important to note that AssetEdge VUL is and has been a slick product for quite a while. I think it’s one of the best overall accumulation VUL offerings on the market. The base chassis is one of the most competitive in the VUL space, especially for overfunding. AssetEdge VUL has a meager 3.5% premium load (tied with Protective for the lowest in the industry), no M&E and a 0.25% non-guaranteed bonus that starts in year 3. My only knocks on the chassis are high fixed charges and a steep and long surrender charge period. We’ll visit both of those in a minute. The available fund lineup is broad and includes some of the biggest names in the asset management business but, more importantly, there are some solid low-cost options – 0.23% for a State Street S&P 500 fund, 0.32% for a Vanguard domestic equity fund and a smattering of sub-40bps bond and money market funds.

This leads to an interesting opportunity for a smidge of pricing arbitrage. Combined with the 0.25% non-guaranteed bonus, the net investment expense on an asset-charge basis is negative 2 basis points for the State Street S&P 500 fund. Why is that? Life insurers run their VUL funds through their Variable Annuity fund agreements, which means the funds almost always have embedded 12b-1 fees and/or back-door revenue share agreements that increases their cost. This is an optics game that companies play in the VA space so that they can quote a lower M&E fee while earning a spiff off of the funds. But in VUL, that’s not really necessary. Companies can just charge policy expenses and they’d often prefer to do it that way than to take a spread on the funds. As a result, they provide a bonus – but the bonus isn’t specific to the fund. Instead, they pay a bonus based on the expected overall allocation and expected back-door fund revenue. Smart policyholders can receive a double benefit – the policy bonus funded by the average allocation of all policyholders and the low-cost fees of their specific allocation. The result is negative net asset-based expenses.

Finally, AssetEdge VUL was one of the first products to offer a solid suite of indexed account options – capped, participation rate and capped with high participation – all on the S&P 500. I have long believed that the best home for indexed account options is within a Variable UL chassis, which allows clients to use the indexed accounts for their real value as a fixed income alternative with an equity kicker alongside the real and diverse equity exposure courtesy of the separate account funds. Overall, I’m a huge supporter of offering indexed crediting accounts in Variable UL and even more so if the VUL contract allows for reallocation from an indexed account to a separate account fund and vice versa without any restrictions, which AssetEdge VUL does beyond the 10th policy year. This is an enormous benefit because the rates in the indexed accounts are based on a portfolio yield, but the contract provides full flexibility to move the funds in and out of the indexed account. Again, it’s another arbitrage opportunity for smart policyholders.

Alas, AssetEdge VUL was hardly flying off of the shelves. Why would producers who could sell an Indexed UL that paid them more commission, illustrated better returns, doesn’t require a securities license and can be premium financed instead sell AssetEdge VUL? Exactly. Never mind that it’s a demonstrably better product than its stablemate Wealth Accumulate IUL. What mattered was everything else.

But now the tables have turned. With the passing of AG 49-A, WealthAccumulate IUL 2019 is going to lose a lot of its luster along with every other leveraged IUL in the market. For this review, I’m going to use a 45 year old Preferred male with $1M DB and doing a 7 pay funding at $41,500 with a death benefit option switch and face reduction. Under that scenario and the current AG 49, WAIUL19 can illustrate a whopping $90k of illustrated income from years 21 to 40 and an IRR in excess of 9% on cash value. But under AG 49-A, WAIUL will be hard-pressed to crack $45k in illustrated income and a 5% IRR – numbers I would still argue are rather aggressive but are a very long fall from the current illustrated performance. What’s the solution? Undoubtedly, companies will figure out ways to game AG 49-A to boost their illustrated performance. That’s the hard way. The easy way is simply to switch to a chassis that allows for indexed crediting without having to comply with AG 49 or AG 49-A. And what chassis might that be? You guessed it – Variable UL.

This leads us, at last, to the big story with AssetEdge VUL 2020 – the introduction of leveraged indexed accounts. The short version is that Lincoln ported its account suite from WAIUL19 over to AEVUL20 lock, stock and barrel. The account options share the same names, fees, caps and structure. The only real difference is the rates for the multipliers, with AEVUL20 having slightly lower multipliers than in WAIUL19. But don’t think that means AEVUL20 illustrates worse than WAIUL19 because that’s not necessarily the case. WAIUL19 starts off in the hole in terms of policy charges with a 10% premium load and base charges that are similar to EAVUL20 but extend for an additional year. Take a look at how they compare in the Perform Plus account in terms of account value and income both pre and post-AG 49-A, which I estimated by switching to the Conserve account.

Y1 AVY10 AVY20 AVY30 AVY40 AVIllustrated Income Y21-40
Perform Plus WAIUL1932,383352,612782,1271,736,3773,778,38889,657
Conserve WAIUL1933,301307,331529,114938,9151,667,99042,960
AssetEdge VUL 202035,668352,990824,0351,765,3523,707,75488,289

The table tells the story. In today’s environment, WAIUL19 will illustrate slightly better than AssetEdge VUL 2020 when allocated into the same indexed accounts. But post AG 49-A, AssetEdge VUL 2020 will absolutely blow the doors off of WAIUL19 and any other Indexed UL in the market for that matter, assuming that Lincoln doesn’t apply AG 49-A to WAIUL19. I’m guessing that they’re going to take a wait-and-see approach on that one.

So here’s the big question – will it sell? Will Lincoln swap out its $150M+ in IUL sales for $150M+ in AEVUL20 sales? That’s highly unlikely, at least for now. Many of the people selling Indexed UL are not registered reps and the ones that are will have extra headaches (and oversight) with their broker-dealer in switching the sale from IUL to VUL. Even more importantly, many of the sales strategies in Indexed UL use premium financing and VUL policies have to comply with Reg T, which restricts margin to 50% of the account value. No dice for premium financing. Potential VUL-sellers make up a small portion of the current crop of IUL-sellers, especially the ones who have gone whole hog on leveraged IUL and are currently selling WealthAccumulate IUL.

The best possible outcome of all of these indexed account options hitting VUL products like AssetEdge VUL 2020 is that producers who are already selling Variable UL will now be better able to serve their clients by offering indexed options in a Variable UL chassis, a worthy and deserving place for indexed strategies. As I wrote earlier, I’m absolutely a supporter and proponent of indexed strategies in Variable UL products because I believe that they can offer an attractive alternative to traditional fixed income allocations, which is why I’m also a fan of indexed crediting on the annuity side of the house. Kudos to Lincoln for creating a VUL built for indexed crediting strategies and without long-term restrictions on reallocations, but my fear is that Lincoln is also courting exactly the wrong kind of agent with these leveraged strategies – the ones who chase illustrations from product to product in an endless quest to be repeatedly fooled by every trick life insurers can create to convince them that their product is better because it illustrates better. Those folks will suddenly be looking at VUL because it illustrates better than IUL. If that’s their reason for selling a great product like AssetEdge VUL 2020, then we’re all going to be in a world of trouble.