#252 | AG 49-A & Lincoln Wealth Accumulate 2 IUL
Of the Four Horsemen of the leveraged Indexed UL market, two have already revealed their post AG 49-A product changes. PacLife has released PDX 2 2020, a product that exemplifies the strange contradictions of AG 49-A when followed to the letter. In that product, multiplier accounts illustrate worse than non-multiplier accounts, which goes directly against original intent voiced by the regulators to create a level playing field between leveraged and non-leveraged products. John Hancock has released Accumulation IUL 20, which uses a hypothetical Benchmark Index Account to provide aircover for multiplier-based account options that deliver better illustrated performance than their non-multiplier counterparts – also going directly against what AG 49-A was supposed to do. With every new AG 49-A compliant product, it looks as though there’s a new wrinkle of AG 49-A to unfold, a new area for “interpretation” that every carrier sees differently.
The third of the Four Horsemen, the newly released, AG 49-A compliant Lincoln WealthAccumulate IUL 2, is certainly no exception. First, let’s talk about the things that haven’t changed. The product chassis is largely the same as the outgoing product. The COI charges are identical. The premium loads have decreased slightly, from 10% to 9%, still a curiously steep number for an accumulation-oriented product. The excess premium load, which mostly targets funding above the maximum non-MEC limit, has dropped from 50% to 20%. The 11-year fixed policy charges have also come down a smidge, although they’re still some of the highest in the market, ringing in at 5th out of 45 Indexed UL products.
The 2020 version, however, also sports a new charge – a 1% asset-based fee that declines by 0.1% annually over the first 10 years of the product, which seems to attempt to offset some of the reduced fees elsewhere. The surrender charge has also been slightly increased. The net effect of all of these changes to the product chassis can be summed up by a phrase I’ll borrow from Jeremy Clarkson – the 2020 version is “near as makes no difference” to the 2019 version. There are certain cells where that won’t be true but, in the bulk of overfunded designs, the two products should be spitting distance from one another, all else being equal.
So then what has changed? What’s changed is the particular strategy that Lincoln is now employing to optimize their product under the prevailing regulatory guideline which, in this case, is AG 49-A. After watching Lincoln for more than a decade, I’ve come to think of them as fundamentally opportunistic. They seem to take advantage of what they perceive to be a way to gain relative competitive strength in the market, even if the opportunity is short-lived. I would argue that the outgoing product, WealthAccumulate IUL 2019, is a classic example of Lincoln’s opportunism. They saw the enormous, overwhelming success of PacLife PDX in 2017. They dipped their toes in the water with WealthAccumulate IUL 2018, decided that it wasn’t enough leverage, and then went full bore on WealthAccumulate IUL 2019. Its massive 6% asset-based charge coupled with the creative Positive Performance Credit generated some of the most jaw-dropping illustrated performance in the industry. WAIUL 19 became a full-fledged member of the leveraged IUL horsemen.
But from my vantage point, they weren’t doing it because they’d fundamentally convinced themselves that multipliers were a superior solution like PacLife and John Hancock did. They’re too mercurial, and maybe even too smart, to believe that any one thing in this crazy business is always better than another thing. They got into leveraged IUL because they saw the opportunity to carve out a piece of the market in a way that was both profitable and low-risk. When AG 49-A changes the game, then it should come as no surprise that Lincoln is going to change how it plays. There are new opportunities and for an opportunist, it’s never a bad time to leave behind an old strategy and take up a new one.
And that’s exactly what’s happened with WealthAccumulate IUL 2020. The most substantive changes are in the indexed crediting lineup. Gone are the monikers of Conserve, Balance, Perform and Perform Plus, which previously denoted different levels of asset-based charges and multipliers ranging from 0% to 6% annually. They’ve been replaced with the four S&P 500 based on crediting options shown below:
|S&P 500 Traditional Account||S&P 500 Fixed Bonus Account||S&P 500 Performance Trigger Account||S&P 500 Multiplier Account|
|Net Illustrated Rate||5.48%||5.47%||4.71%||5.64%|
There are several things worth noting about this new suite of S&P 500 options. First, there is no Benchmark Index Account. Lincoln likely added a 0.25% floor to the Traditional Account specifically so that it would not be classified as a Benchmark Index Account. This allows WealthAccumulate IUL 2 to offer a hypothetical Benchmark Index Account with a maximum illustrate rate of 5.92%, which we’ll discuss later. Second, the addition of a Performance Trigger option is a nod to annuity-land, where Performance Triggers (or whatever the company wants to call it) are becoming increasingly popular. A Trigger option is more accurately called a binary option – either it pays off or it doesn’t. If the S&P 500 is up, then the credit is 6.5%. If it’s down, then the credit is 0%. Simple, straightforward and approachable. That’s the appeal.
Third, WealthAccumulate IUL 2 does offer a leveraged option courtesy of the Multiplier Account, which has a 2% asset-based charge to fund a 50% multiplier. As we’ve seen in other multiplier accounts in other products, the illustrated rate is artificially suppressed in order to keep the net illustrated rate in compliance with other parts of AG 49-A. Here, the 8.5% cap is illustrated at 5.09% and the net illustrated rate, which includes the interest from the multiplier and deducts the asset-based charge, is 5.64%. Why that number? John Hancock employs a similar strategy in their Accumulation IUL 2020 product but sets the maximum illustrated rate so that it bumps up against the limitation in AG 49-A of 1.45 times the Hedge Budget. Quick-and-dirty math tells you that the Hedge Budget for the 8.5% cap and 0% floor combination is 4% (2% / 50% = 4%). Multiplying 4% by 1.45 yields 5.8%, which is higher than the net illustrated rate here of 5.64%. Lincoln appears to have left some chips on the table. What’s going on?
In my quick read on this product, it looks like Lincoln calibrated the illustrated rate of 5.09% and net illustrated rate of 5.64% in order to roughly equalize the cash value performance of the Multiplier Account with the Traditional Account. As I’ve written in previous posts on AG 49-A, accounts with multipliers illustrate worse performance than accounts without multipliers, all else being equal, because of the timing of charges and credits. The simple way to think about the problem is that any indexed credit is applied to the average account value throughout the year. Because multipliers have additional charges, they lower the average account throughout the year and therefore the account value basis for the indexed credit is lower, which results in a lower indexed credit. Charges change every year so offsetting this effect is tricky and inexact. But Lincoln has gotten very close to it. Take a look at the comparisons below, which show the ratio of cash values between the Traditional and Multiplier accounts under different funding patterns.
|Max Non-MEC Funded||$200k Single Pay||Minimum Premium Solve||Level Overfunded|
As the figures above demonstrate, the illustrated performance between the Traditional and Multiplier accounts are virtually identical for overfunded designs. But when you start looking at underfunded designs, where other policy charges enter the mix, the gap begins to widen and the Multiplier begins to lag behind the Traditional account. It appears that Lincoln viewed the AG 49-A mandate through a different lens than PacLife and John Hancock. Hancock views AG 49-A as not necessarily excluding an illustrated advantage for multipliers as long as the total rate was in conformity with the rest of the guideline. PacLife took a strict interpretation of the guideline and therefore its multiplier options illustrate worse than the non-multipliers. Lincoln, however, falls somewhere in between and is arguably the closest to what regulators intended with AG 49-A, that multiplier accounts illustrate similarly to non-multiplier accounts. Such is the strange world of AG 49-A. Three nearly identical products illustrating different performance depending on the company’s particular interpretation and application of AG 49-A.
Lincoln might have passed up on the opportunity to use multipliers to increase illustrated performance, so what opportunity did they grab? The one presented by the use of a proprietary index. The 5th account option in WealthAccumulate IUL 2 – and by 5th, I mean the one that Lincoln sets as the default on WinFlex, lists first in the illustration and gets special attention in marketing materials – is the Fidelity AIM Dividend Index. I’ve been predicting for quite a while now that AG 49-A would result in life insurers pivoting to focus on proprietary indices and that’s exactly what Lincoln is doing in WealthAccumulate IUL 2. The Fidelity AIM Dividend Index illustrates at 5.92% without additional fees or multipliers, which means that it blows the doors off of the other options in the product in terms of illustrated performance. How is that possible?
Very simple. Lincoln followed the playbook that companies are increasingly following under AG 49-A. Step one is to modify your S&P 500 accounts so that you can have a hypothetical Benchmark Index Account. Step two is to set a cap rate for the hypothetical BIA that is higher than what you’d actually offer for a real BIA. In this case, the illustrated rate for the BIA is 5.92%, which corresponds to a 9.5% cap. Step three is to offer a proprietary index that delivers more illustrated bang for the buck than the S&P 500. If the S&P 500 offers a 5.92% illustrated rate for a 4.5% option cost, then the proprietary index needs to deliver the same 5.92% illustrated rate based on a hypothetical historical lookback but at 4% option cost, which is about what Lincoln has budgeted for the available S&P 500 accounts in the process.
The Fidelity AIM Dividend Index, which is based on a constantly rebalancing portfolio of Excess Return equity exposure (focused on dividend-paying stocks), Treasury futures and cash with a 5% overall volatility target, fits the bill. If that’s confusing to you, then you’re not alone. In my experience, insurance producers and their clients are wholly unequipped to handle conversations about indices like this one. But because of the low option cost and high illustrated lookbacks of this index and the numerous indices like it, they’re about to become ubiquitous on Indexed UL products. Proprietary indices are the quickest, cleanest and easiest way to generate maximum illustrated performance under AG 49-A. And Lincoln just provided a textbook example of how to do it.
Now, of course, none of this is meant to suggest that the illustrated performance of WealthAccumulate IUL 2 is anywhere close to the outgoing WealthAccumulate IUL. It’s not. For a particular cell, WealthAccumulate IUL operating under AG 49 could generate a monstrous 8.5% internal rate of return on an income stream of (in this example) more than $84,000 a year for 20 years when allocated to the most aggressive Perform Plus account. For that exact same cell and funding pattern, WealthAccumulate 2 in the Fidelity AIM Dividend Index account generates just $43,000 in annual income and an IRR that barely breaks 5%. For all of AG 49-A’s flaws, it has teeth. An IUL illustrated to the redline under AG 49 can scratch double digit returns. There’s no way that happens under AG 49-A. The market is going to have to fundamentally reset.
But the paradox of AG 49-A is that it still creates differential outcomes because of how companies interpret the guideline, even if all of the illustrated income and IRR figures have declined. Using the Traditional indexed account in WealthAccumulate 2, the illustrated income would be just $37,000 per year and the IRR doesn’t break 4.5%. If every company in the industry offered a Traditional account and one company came out with a Fidelity AIM Dividend Index account, then that product would be the top selling product in the same way that PacLife PDX IUL was when it rewrote the rules under the AG 49 regime. The differential might be smaller, but this is a very competitive market. Illustrated performance drives sales. And 0.5% of IRR has proven to be enough to swing tens of millions of dollars of production.
So what? Here’s what. If you’re a producer selling Indexed UL and trying to navigate the post-AG 49-A landscape, let me give you a quick piece of advice – don’t benchmark these products. They are not comparable. But if you must benchmark, then only do it for the account in the product that is the closest thing to a Benchmark Index Account if not actually a Benchmark Index Account. What we’re seeing under AG 49-A is that there is no truth in AG 49-A. It is all subjective. But the closest thing we have to truth is a Benchmark Index Account that is actually offered as an option. For PacLife, that’s the 1 year S&P 500 point-to-point account with a cap and the Classic Enhanced Performance Factor Rider option. For John Hancock, which as a hypothetical BIA, the next closest thing is the so-called Select account. For Lincoln, it’s the Traditional account. Ignore the other accounts, if you can. Those accounts are playing illustration games that may be in the letter of AG 49-A but certainly not in the spirit. It’s only a matter of time before they get squashed.