#332 | Ohio National Prestige Indexed Whole Life

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A few months ago, I covered the filing and mechanics of Ohio National’s new Prestige Indexed Whole Life product in #326 | The New Ohio National’s New Product. If you haven’t read that article, it’s worth taking a few minutes to comb through it before reading this article, but the short version of the story is that Prestige IWL is a very clever Current Assumption Whole Life design that (theoretically) combines the fixed premium and guarantees of Whole Life with the upside potential of Indexed UL. On paper, it’s the best of both worlds. The primary question I raised in #326 is whether the product would actually deliver in terms of pricing. At the end of the article, I wrote that “the stakes are too high for Ohio National to not do everything it can to ensure Prestige is a hit.”

But it appears that I was wrong. Although Prestige IWL is the best of both worlds in theory, it is arguably the worst of both worlds in practice. It offers neither compelling guarantees nor compelling upside potential. It is the product that focus groups would love, but no one would actually sell or buy in the real world. Let’s take it piece by piece, starting with the guarantees.

Recall that Prestige IWL has a 2% guaranteed interest rate, which is the lowest possible rate under the new Section 7702 formula. The result is that the guaranteed cash values take between 19 years (age 30) and 27 years (age 60) just to break even. That’s in the same ballpark as MassMutual Whole Life 10 Pay, one of the most expensive 10 Pays on the market. No one gets excited about the guarantees in Mass Mutual Whole Life 10 Pay – and they’re not going to get excited about the guarantees in Ohio National Prestige IWL, either. If the selling point is guarantees, Prestige IWL is going to fall flat.

The benefit of ultra-expensive, 2% guaranteed rate products is accumulation efficiency and that’s exactly how Ohio National is positioning Prestige IWL. The headline link on the microsite for Prestige IWL (https://www.iwl4life.com) is a competitive flyer that ranks IWL against traditional participating Whole Life products. The flyer shows IWL beating MassMutual at age 90 by a heady 38bps in illustrated cash value IRR. Illustrated distributions also look to be 8% or so higher. On paper, Prestige IWL is primed to be the most competitive Whole Life product on the market.

The problem, of course, is that the comparison is skewed. All of the other life insurers on the flyers are illustrated at their currently declared dividend scale interest rate. IWL, however, is illustrated using the AG 49-A maximum rate calculation based on the currently declared 9% S&P 500 annual point-to-point Cap, just like any Indexed UL. As I’ve written many times before, the AG 49-A rate is highly speculative. It assumes that the Cap never changes. It assumes that long-term equity returns are 12.5%, as they have been historically. It assumes that the pattern of returns we’ve seen for the last 30 years – steep declines followed by sustained gains – will repeat itself. And even if all of those are true, it uses the average, which means that there is an embedded 50% failure rate for any illustration that uses the AG 49-A maximum illustrated rate. The AG 49-A rate is not conservative and it is certainly not comparable to the actual declared dividend of a company selling Whole Life. Ohio National should know better than to compare the two as if they are.

 A more accurate comparison would be to convert the 9% Cap to its intrinsic, fair market value, which is around 4.7%. Perhaps not coincidentally, 4.7% is the Ohio National’s 2021 declared dividend interest rate for its participating Whole Life block. Illustrating at 4.7% paints a more accurate picture of the actual underlying economics of Prestige IWL relative to the other Whole Life products. I didn’t recreate the whole competitive piece, but I did run Prestige IWL illustration against MassMutual Whole Life 10 Pay. Take a look at how the illustrated IRRs stack up over time:

Using the fair-market value of the currently declared Cap, Prestige IWL is far less efficient than MassMutual Whole Life 10 Pay despite having nearly identical guarantees. Consequentially, the entire competitiveness story for Prestige IWL against traditional participating Whole Life hinges on using the AG 49-A lookback illustrated rate. Prestige IWL may be a Whole Life product, but it operates and illustrates like an Indexed UL. It is exceedingly strange to me what Ohio National is attempting to position it as a participating Whole Life alternative. It’s not.

I don’t know who they think they’re going to fool. Agents who sell traditional Whole Life have spent the last decade or so making the conscious choice to not sell Indexed UL. If they’d wanted to sell Indexed UL, they would have done it already. Even the companies that offer more traditional participating Whole Life chassis with stronger guarantees and some form of indexed crediting, such as OneAmerica and Guardian, see the vast majority of their premium going into the traditional participating strategies.

Prestige IWL certainly isn’t going to get them to change their minds. Some of the best elements of the participating Whole Life story, particularly the fact that PUAs are locked in after they’ve been earned and the cash value can never decline, aren’t even present in Prestige IWL. I understand that technically Prestige IWL is a Whole Life product, but I think it’s more accurate functionally to call it a fixed premium Indexed UL product. And that’s exactly how agents selling true-blue participating Whole Life are going to look at it.

If Ohio National is trying to reclaim some of its lost territory with its most loyal agents and perhaps grab some business from some of the larger companies, then this is the wrong product written by the wrong company. Prestige IWL has more non-guaranteed elements than a typical participating Whole Life contract. That’s exactly the opposite of what agents even willing to entertain the notion of writing Ohio National policies would want to see. In my view, the overture of Prestige IWL to participating Whole Life sellers is going to fall flat.

But that doesn’t mean Prestige IWL doesn’t have a market. I would argue that the natural fit for Prestige IWL is agents selling Indexed UL who don’t have a tool to compete with the guarantees of Whole Life. Prestige IWL fits the bill – and these agents tend to have less concern about selling products from life insurers with checkered pasts. Ohio National has a shot with some of those agents, some of whom may not really be aware of what’s been going on over there for the last couple of years. They might just be excited to get access to a new carrier with a different sort of Indexed UL (excuse me, Indexed Whole Life) product.

However, there’s a bug in the ointment – Prestige IWL is not competitive against other Indexed UL products. There are three primary reasons why. First, its Cap of 9% is strong these days but not compelling enough on its own, certainly not when you consider that other mutual companies like Penn Mutual are offering significantly higher rates. Second, to Ohio National’s credit, Prestige IWL doesn’t have an engineered index and uses only a moderate fixed interest bonus of 0.2% starting in the 11th year, which means the product is going to illustrate far worse than almost every other Indexed UL on the market that uses engineered indices and huge fixed interest bonuses.

The third reason is by far the most problematic – Prestige IWL is a hugely expensive product in terms of policy charges. Take a look at the first 20 years of policy charges relative to 42 other current and past Indexed UL products on the market for a 45 year old Preferred male and $1M of death benefit funded at Ohio National’s premium for 10 years. Each blue bar represents the cumulative charges from an Indexed UL product. The black bar is Prestige IWL.

The net result is that even at the maximum AG 49-A illustrated rate, Prestige IWL can’t hold a candle to the current crop of Indexed UL products in terms of illustrated performance. To give you some perspective, I’ve been keeping a benchmark of illustrated income on the top Indexed UL products for the past few months and periodically updating the numbers. In general, Indexed UL products for this cell produce illustrated income in the S&P 500 account of between $150,934 (Lincoln) to $198,779 (AIG). Prestige IWL illustrates just $128,992 of income in the same cell – far behind any flagship accumulation Indexed UL product in market. Consider then that the average illustrated income for these IUL products when allocated to the engineered index account is well over $225,000 and it’s obvious that Prestige IWL isn’t even in the conversation against traditional Indexed UL.

In a world without tradeoffs, Prestige IWL it would be a smash hit (excusing the fact that it’s written by Ohio National). But the real world has tradeoffs. Even Ohio National’s own Indexed UL products have the same 9% Cap with significantly lower policy charges, at least last time I looked. It’s highly likely that their own IUL products out-illustrate Prestige IWL. The guaranteed values in Prestige IWL appear to cost something but because this is a Current Assumption Whole life chassis, they don’t provide the same sort of tangible year-by-year downside protection that the indexed crediting features from OneAmerica and Guardian provide.

And to make matters worse, the guarantees in Prestige IWL are of the sort of rock-bottom, minimum cumulative values that no one is asking for. Pacific Life has offered a 2% compounding alternative value guarantee since the first PIA product and I’m not even sure most agents even know that it’s there. It’s certainly not a key talking point and not enough to steer business to Pacific Life on its own, which is more or less what Ohio National is banking that its guaranteed minimum values will do. Just for fun, I put the same premium into Prestige IWL and PacLife PIA 6 to see how the guaranteed minimum values stack up. The alternative minimum guaranteed value in PacLife PIA 6 absolutely blows the doors off of the guarantees in Prestige IWL, albeit with the caveat that it uses non-guaranteed policy charges. Take a look:

In theory, the idea of a Current Assumption Whole Life with indexed crediting works. In practice, it doesn’t. At least, not for this product written by this company. But I’m not willing to write the category off yet. Ohio National is right when it calls this product “groundbreaking” – in some ways, it is. There’s something very creative, very elegant here. But the execution, pricing and marketing misses the mark. For all of the reasons outlined in this article, I don’t believe that Prestige IWL is going to be enough to turn the tide against Ohio National. They’re going to need a lot more than this.