#393 | The Other IUL Market
Back in June of last year, I published #365 | The Other Whole Life Marketabout the stunning rise of Final Expense Whole Life, a non-participating policy sold with small face amounts and big commissions on a simplified underwriting platform to (generally) low-income seniors to cover their funeral expenses. Massive marketing organizations (IMOs) have been built around Final Expense that are (generally) staffed by young, hungry and hustling agents who, if social media is to be believed, make a very nice living selling Final Expense insurance and recruiting other agents to do the same. Final Expense is a force in life insurance and, as I wrote in #365, it may be the only experience that many Americans have with our products, for better or worse.
However, Final Expense IMOs have begun to scale to such a degree that they need more to sell than just Final Expense. The prototypical FE IMO is, at its core, a recruiting machine that feeds on leads. New agents sign up, get/buy leads, pound the phones and make sales. What about leads where Final Expense isn’t a fit – as in, relatively young, healthy (and hopefully) wealthy prospects? They need another product to sell on the same ultra-simple underwriting model with a bit more sizzle on the upside. Instant issue Indexed UL fits the bill.
Mutual of Omaha was arguably the first large Final Expense WL seller to realize the potential of cross selling Indexed UL in the FE IMO community. In 2019, it released Indexed UL Express, a Standard-only, instant-issue product built (more or less) on its traditional retail Income Advantage IUL chassis but with some slight modifications. The net result is a product that, pound for pound, competes with the fully underwritten retail offering when issued at the same rate class. Could a client do better if they got Preferred on the fully underwritten product? Yes, definitely. But that’s the price of convenience.
Convenience seems to count for quite a lot. Mutual of Omaha is a juggernaut in the Final Expense space, so cross selling Indexed UL Express made it a smash success out of the gate, growing Mutual of Omaha’s Indexed UL policy count from just 3,000 in 2018 to over 75,000 (estimated) in 2023. Other companies took note. F&G rolled out InstApproval, a similar program, in 2021 in an exclusive product but the program started to percolate into its other offerings, dramatically boosting sales. Transamerica and National Life have also followed suit in their distribution channels that, increasingly, cross over into Final Expense as well.
The net result is an enormous uptick in policies issued at these companies relative to their more traditional competitors. Take a look at policies issued stretching back to 2018 for this cohort relative to three of the top Indexed UL sellers that are not in this market (in gray):
The difference is stunning. The traditional large Indexed UL writers are indicative of what basically every other company has experienced – a general contraction in policy count as Indexed UL skewed towards wealthier people and premium financing. By contrast, the companies that focused on instant issue and smaller face amounts have grown by leaps and bounds, both in terms of policy count and overall premium. There are clearly two different strategies at play. One is starting to sputter. The other is gaining a head of steam.
In some ways, the revolution going on in Indexed UL is exactly what everyone has been saying that the life insurance industry needs. It’s a modern, digital-first process that makes buying life insurance easier for clients. It’s geared towards the incredibly diverse swath of middle America – exactly the folks who have been traditionally “underserved” by life insurers. Tens of thousands of young, newly-recruited agents are entering the system and using social media to promote their businesses. There will be hundreds of millions of dollars in death claims paid to clients that would not have had insurance without the explosive growth in this channel and with these products. All of this is objectively positive for the industry and presents a much needed opportunity for growth.
As a result, virtually every company in the Indexed UL space is starting to think about how to execute on a strategy geared towards this new and growing market. The problem is that doing so requires a skillset that most insurers don’t have. They’ve been so focused on the high end of the market that they’re not built for the game being played in the middle market. It requires a serious shift in thinking and not every insurer is willing to make the jump – and, as you’ll see, there are some good reasons for hesitation.
There are clear table stakes to getting into this market. The first, obviously, is the sales and underwriting process. It must be simple, digital and as close to instantaneous as possible. The underwriting result is less important than the speed of the decision, which is a complete reversal of the typical underwriting mantra at large insurers. Second, the carrier must have payouts in-line with Final Expense at more than 150% of Target. Third, commissions must be processed daily. Fourth, the carrier must build distributor relationships and potentially lock down exclusivity at a large IMO. As an outsider – and I am definitely an outsider to this market – it seems these are the bare minimums.
Ameritas has followed these steps perfectly in recently launching an Indexed UL with Ethos that is currently available through Family First Life (FFL), a massive Final Expense IMO owned by Integrity Marketing. Celebrity-backed Ethos took in something like $200 million at a multi-billion dollar valuation (in 2021) to “democratize” life insurance with a direct-to-consumer model but has made a pivot to assisting agents with its proprietary tech platform. Although I’m sure Ethos wouldn’t quite put it this way, the pivot is a tacit acknowledgement that D2C is exceedingly challenging and that agents play an integral role in the sales process. The combination of Ameritas, Ethos and FFL – carrier, technology and distribution – is what every company looking to get into this space will have to get right.
Nailing the product design is also essential and, to do so, that means the carrier flipping the usual Indexed UL thinking on its head. Generally speaking, these small-face policies are sold at or near Target premium and illustrated at the maximum rate. Max-funded policies are few and far between. Most insurers have built their Indexed UL to illustrate well in LIPR and/or premium financing scenarios. Those scenarios essentially don’t exist in this space. Instead, agents are selling protection with a splash of cash value and upside potential. It’s basically positioned as non-par Whole Life with upside potential.
The average annual premium is around 0.9% of the face amount for the major companies in this space. Using Mutual of Omaha’s default “Easy Solve” (endow at 95) option on IUL Express as the baseline, that’s roughly a 42 year old Male for a $250,000 death benefit. The Target premium is spitting distance from the Easy Solve result and that’s not an accident. Because total commission payout percentages are so high (which feeds the many layers in the distribution), the Targets on these policies tend to be a bit lower than a typical IUL policy.
In that cell, a Whole Life policy from Mass Mutual would cost more than twice as much as the Mutual of Omaha product. There is no such thing as a free lunch. If the premium is half the price of Whole Life – which is based on fully guaranteed charges and interest credits – then the client is taking risk elsewhere. My general take is that current charges in Universal Life policies can be assumed to be guaranteed for the purposes of risk analysis. That doesn’t necessarily apply to policies like this one. Mortality experience on these sorts of instant-issue products isn’t as well understood as it is on fully underwritten contracts. I would argue that the potential for future charge adjustments is much higher on these sorts of policies.
The other obvious source of risk is the crediting rate. As I’ve written (and many others have pointed out as well), illustrated Indexed UL at the maximum illustrated rate is, at best, a 50/50 proposition for lapse. If equities don’t deliver 12.5% average total returns and/or the Cap declines, then the picture is substantially worse. No one should ever, under any circumstance, sell any UL without a secondary guarantee – but especially Indexed UL – as a quasi-fixed premium product. That is a recipe for disaster. If anything, clients should put the Whole Life premium into the Universal Life and then make premium adjustments over time. Doing so is the only way to properly set expectations and ensure that the policy does what it’s supposed to do over the long run.
But, of course, that’s not how Indexed UL is generally sold and that’s certainly not how it’s sold in the Final Expense channel. The sales process in Final Expense hinges on a “rate card,” which is exactly what it sounds like – a table of premiums at different ages and face amounts. A rate card makes sense for Final Expense because everything is guaranteed, but it is not remotely appropriate for Indexed UL because of the non-guaranteed elements. And yet, here’s the rate card in the carrier’s marketing flier for an instant issue IUL marketed in the Final Expense space:
The ”rate card” is one way that the product has to be calibrated in order to fit the channel, but the other is the pure optics of the upside potential. Increasingly, Final Expense IMOs are waking up to the fact that 42 year old buying an Indexed UL policy is a loyal listener to WIIFM – what’s in it for me*. Cheap premiums aren’t necessarily an inducement, but the optics of high potential upside certainly are.
Americo’s forthcoming Instant Decision IUL is going to test the limits of optical appeal. A couple of weeks ago, everyone was buzzing about this new product and its 15.25% S&P 500 point-to-point annual Cap with no fee. It’s been a very, very long time since any Indexed UL policy has cracked a 15% Cap on a standard S&P 500 design. On top of that, Americo is offering a whopping 6.25% in the fixed account. The question on everyone’s lips is how Americo is doing it and, as always, it ain’t magic.
Part of the story is simply that investment yields are high and Americo is almost certainly using a new money portfolio to support this product. Given the high mortality and turnover in small face IUL, it’s probably reasonable to assume that the investment duration is around 5 years for this product. Americo currently offers a 5.3% crediting rate on its Multi-Year Guarantee Annuity (MYGA). Typical MYGA pricing spreads are around 1.5%, which would put the total net yield supporting the policy at 6.8%. That is dead-on for the current price of a 15.25% S&P 500 Cap. Folks, this is what a true new money IUL looks like.
However, a good chunk of the required spread in a MYGA is to cover the required capital for the sort of assets that produce returns high enough to deliver the 6.8% return – C-1 in the RBC regime. Americo doesn’t seem to be pricing much C-1 into the spread. Why not? Because, unlike a MYGA, there is not a lot of cash value in these IUL policies. Clients are paying Target premiums. It takes a long time to build real cash value and, in the meantime, Americo can make plenty of margin on the other policy charges.
The net result is that despite its 15.25% Cap and colossal 8.42% illustrated rate, the policy squeaks out a meager 1.06% return on cash value after 30 years on the endowment solve used in the online educational video. If clients were smart, they’d do a 7 pay maximum non-MEC premium into the policy. But that’s not the way these things are sold. Instead, clients are basically shown the 8.42% headline rate – which the video presenter says without a hint of comedy is “a very reasonable number for interest earned on average for this policy” – but the rate is being almost completely chewed up by the charges on a premium to endow. Numerous comparable IUL policies illustrate the same or better cash value at much lower rates for this particular cell and funding pattern. It’s all about the optics.
The Indexed UL market is in the midst of a profound change. The top end has been gutted by the decline in premium financing sales wrought by higher interest rates. The standard LIRP sale is under pressure from lackluster Caps and illustrated rates. Long-time agents are disillusioned by how carriers have (often rightly) adjusted in-force rates. Carriers are pivoting to Variable UL with indexed accounts to court financial advisors and RIAs. The future for IUL as a separate and distinct product category is dim. What Indexed UL can do, Variable UL can do better.
However, Variable UL is not available to the legions of agents selling Final Expense. They’re not in the business of holistic financial planning. They have no intention of getting their CFP or their CFA. They’re in the business of getting leads, pounding the phones, making sales and recruiting other people to do the same thing. They need more grist for the mill. Final Expense provides plenty but going forward, so will Indexed UL. Increasingly, Indexed UL may be seen less as a complex financial tool geared towards the upper end of the market and more as a cookie-cutter, small-face, transaction policy designed for everyday Americans.
Therein lies the danger. It is not a simple product – it is incredibly complex, counterintuitive and unpredictable. The agents and distributors in this space are simply not equipped to handle it. The skills required to succeed as the agent of a Final Expense IMO are not even remotely applicable to analyzing indexed crediting dynamics. Carriers who promote the crediting characteristics of Indexed UL in the Final Expense IMO channel are creating the future Exhibit 1-A of the reasons to register Indexed UL as a security. And the problem is compounded when IUL is sold on a minimum premium design as a “rate card” product. There is both opportunity and danger in this new Indexed UL market. And for carriers looking to jump in – tread carefully.
*This is one of my dad’s favorite little sayings, so blame him for how cheesy it is!
