#411 | New Accumulation IUL Releases

Over the past couple of weeks, four new accumulation-oriented Indexed UL products hit the market in what is undoubtedly the most active burst of product launches in years. The last time something like this happened was before AG 49-A was enacted four years ago. Back then, all of the new products were incorporating charge-funded multipliers to dramatically increase illustrated performance. They were a direct response to the stunning success of PacLife PDX, the first product to use charge-funded multipliers, after its release in early 2017. Carriers felt like they had no other choice but to follow suit. Once Pacific Life created nukes, many other Indexed UL writers felt like they had to arm up.

The response from life insurers in the wake of AG 49-A, which eliminated the illustrated benefits of charge-funded multipliers, was less uniform. Some companies that didn’t use charge-funded multipliers aggressively pursued strategies to boost illustrated performance using engineered indices and fixed interest bonuses. Many of the companies that relied on charge-funded multipliers reluctantly, but eventually, went down the same path in order to maintain their illustrated competitiveness. Some companies, such as Securian, Mutual of Omaha and Penn Mutual, took a principled stand against fixed interest bonuses and engineered indices because they actually produce worse results for clients despite illustrating better. The revisions to AG 49-A, also referred to as AG 49-B, attempted to put a clamp on the illustrated benefits of using fixed interest bonuses with engineered indices.

It roundly failed to do so, as we’ve covered in previous articles. AG 49-B still allows substantial latitude for life insurers to illustrate returns above the Benchmark Index Account, flying in the face of the intent of AG 49, AG 49-A and AG 49-B. However, carriers have generally been hesitant to push the limits. Symetra, Allianz and National Life all illustrate substantially better returns in their non-BIA strategies than in their BIA. But many companies have reworked their illustrations to ensure consistency across the accounts, even if they could get away with showing better illustrated performance with engineered indices and fixed interest bonuses.

And they don’t necessarily need to. When interest rates were low, illustration gimmickry was the only way to keep an edge on illustrated performance. Now, the advantage goes to life insurers who carve off new business into a new portfolio with higher yields. Best case, exploiting the loophole in AG 49-B picks up something like 50bps in illustrated rate. New portfolios are much more effective – and there is no regulatory ambiguity about using them. Consider the fact that an Allianz Life Pro+ policy from 2016* has a 9% S&P 500 Cap and a 5.79% illustrated rate. That is arguably what all Allianz policies should have for an S&P 500 Cap. But the new product released last week has an S&P 500 Cap of 12.5% with a 7.42% illustrated rate – a gain in illustrated performance of 1.63% just by creating a new portfolio. Magic. Little wonder why virtually every company writing Indexed UL is doing the same thing**.

And that includes the two new products from North American and Lincoln. North American Builder Plus 4 sports higher top-line rates than the outgoing product, Builder Plus 3. The top-line S&P 500 Cap went from 9.5% to 10.5% and the Floor increased from 0.05% to 0.25%. The net result is a bump in maximum illustrated rate from 5.97% to 6.6%. The rates for the other strategies are better across the board as well, although the rate increases for the Fidelity Multifactor Yield strategies are uneven. The High Par strategy got a 30% boost to the Participation Rate, but the regular (high bonus) strategy got an 80% boost. This remedies Builder Plus 3’s problem in the wake of AG 49-A where its most aggressively illustrated crediting strategy became one of its worst illustrating strategies thanks to an ultra-low Participation Rate.

The core policy charge structure for Builder Plus is largely unchanged except for a modest 1% increase to the premium load. North American has also finally toned down its outdated asset charge and offsetting asset bonus structure. The old product had a 1.2% asset charge with an offsetting 1% asset bonus starting in year 11. The new product has a 0.33% asset charge with an offsetting 0.5% asset bonus, which means that there’s a net 0.37% pickup in illustrated performance relative to the old product before even factoring in the higher baseline illustrated rates.

Lincoln WealthAccumulate 2 IUL (2020) – 8/12/24, which has easily the most cumbersome name in the history of product naming, has a similar dynamic. The new product has an 11.5% Cap and a maximum headline illustrated rate of 7.01%, substantially better than the outgoing product’s 10.5% Cap and 6.55% illustrated rate. The offered rates in the other accounts have also improved by varying degrees. The policy charges are identical except for slightly reduced surrender charges in the new product. The Targets are also identical.

If the policy charges in both new products are identical to the policy charges in the outgoing products, then the only reasonable explanation for improved rates is improved yield in the underlying investment portfolio for the new product relative to the old one. In fact, Lincoln provides a helpful comparison thanks to offering a full suite of indexed accounts specifically for loaned values. In the case of an account only available for loaned values, the “portfolio” yield supporting the rates is the interest rate charged on the loan. The new and outgoing Lincoln products have the exact same Caps and Participation Rates in the loaned accounts. That tells you that the core product structure is unchanged. The only difference is in the underlying new portfolio yield – and that goes for both the Lincoln and North American products.

The (bizarre)  video from North American launching their product excitedly highlights that the new product is “likely to be a high performer” with numbers that “go [rocket ship]” and will “make you and your clients a lot of…” because it’s designed to “show well and perform well” so that clients can have “more funds available in retirement.” Right. All of that from a new portfolio? As I’ve written before, the yield on the new portfolio will eventually converge to the yield on the old portfolio as the assets turn over. It’s inevitable. Any increase in actual performance for the new portfolio and its new policyholders is paid for by depriving the old portfolio and old policyholders of higher yields from new sales. Carriers let old policyholders subsidize new policyholders as interest rates fell and now they’re creating new portfolios so that old policyholders can subsidize new policyholders even as interest rates rise. That ain’t how it’s supposed to work.

Even though new portfolios are by far the easiest way to juice illustrated returns, life insurers are still playing games on the edges of AG 49-B to maximize illustrated performance, particularly for policy loans. Consider the fact that Lincoln’s new WealthAccumulate 2 contract offers a 0.25% increase in the fixed interest bonuses across the board for all of the loaned accounts. Where did the extra 0.25% come from? An increase in the policy loan rate from 5.25% to 5.5%, meaning that the net benefit to the client was unchanged. The loan rate increased but was immediately offset by a higher interest credit.

Why did it make sense to increase the loan rate and pay it back in the form of a fixed interest credit? Because AG 49-A allows fixed interest credits to be added to illustrated loan arbitrage, which is capped at 0.5%. As a result, illustrated distributions improve with the new product even though the real-world economics for the customer are exactly the same as the old one. Illustrated income that is about 5% higher in the new product than the old one. If that doesn’t make sense to you, then consider it validation that you are a normal human being. If it does make sense to you, then you need to take a break from Indexed UL to reacquaint yourself with the real world.

North American’s product has been illustrating higher income using fixed interest bonuses for several years, particularly in its fixed indexed loan strategy, which I covered in a previous article. But one interesting tidbit about the new Builder Plus 4 product is that it explicitly restricts policy loans to year 3 rather than year 1. My view is that it’s a bit of a nod to the growing prevalence of infinite banking-esque concepts that are permeating the bottom end of the market. A lot of those sales involve premium payments and immediate premium loans. It is an immensely risky strategy that has been going on for as long as Indexed UL has existed, albeit under different names. As long as there is illustrated arbitrage, there will be people who – unbelievable as this may sound – actually believe that there will be real arbitrage every year. There are even entire sales strategies built around the concept, such as MPI Unlimited, founded by a former granite salesman turned self-styled financial guru espousing the power of compound interest. Some carriers play along. Mutual of Omaha, for example, has been working with MPI Unlimited for years. But other carriers have consistently pushed back on the concept for a range of risk reasons and worked to ensure that their illustration systems and contracts restrict the ability for people to borrow too much, too early. Add North American to the list.

Allianz’s new Life Accumulator product similarly continues to push the limit on illustrated performance under AG 49-B. The outgoing Life Pro+ Advantage illustrated best in the Classic accounts, which had a 0.9% fixed interest bonus, resulting in a maximum illustrated rate of 7.64%. The new product ups the ante by increasing the bonus on the Classic accounts to 1%, pushing the maximum illustrated rate up to 7.72% and increasing illustrated performance with policy loans. It’s the same absurd math as in Lincoln’s product.

There are more changes afoot for Life Accumulator. Allianz also introduced three Diversification Premixes that, of course, emphasize the engineered index allocations. The Aggressive Strategy pushes to the Select Allocations that with a 1% asset charge and 40% bonus multiplier. The Moderate Strategy goes into the Bonused Index Allocations with a 15% multiplier bonus but no asset charge. The Conservative Strategy allocates entirely to the aforementioned Classic Allocations. I agree with these characterizations. Paying a fee for more upside is more aggressive than not paying a fee which, in turn, is more aggressive than taking part of the return in the form of a fixed interest bonus as in the Classic Allocations. But which one illustrates the best? Take a look.

No, your eyes are not playing tricks on you and no, I did not mess up the labeling. In a complete inversion of everything you’ve ever been told about risk and reward, Allianz is pointing out in clear detail the complete nonsensicality of the current illustration regime in Indexed UL illustrations by showing that the most conservative allocation generates the best illustrated performance – and not by a small margin, either. It’s also worth pointing out that if a client took the $131,732 from the Conservative Strategy, their likelihood of success would be much lower than if they tried to take $101,959 out of the Aggressive Strategy. In other words, in the context of illustrated income, the most aggressive strategy is the Conservative Strategy and the most conservative strategy is the Aggressive Strategy. I wish that was just a tongue-in-cheek joke, but it’s not. This is actually how Allianz, the largest insurance company in the world, is marketing its US life insurance product. These are strange times.

Life Accumulator also doubles-down on Allianz’s long-term push towards minimizing the S&P 500 in order to earn more allocations to engineered indices. Part of that strategy is the Index Lock, which I wrote about in a previous article. The main point I made in that article is that exercising an Index Lock is a cost, not a benefit, to the client. Absent consistent clairvoyance about market moves, clients who lock regularly will underperform clients who don’t because they’re leaving the time value of the option on the table. Locking at low index values or early in the year leaves a lot of time value on the table. Take a look at a graph I used in the previous article showing time value of the option left over at various index gain levels throughout the year:

Who gets the leftover time value of the option? Allianz. In terms of profitability, Allianz would like everyone to lock all the time. The problem with the original lock was that the client had to initiate it. But in the past few years, Allianz has pushed the concept of an automatic lock into its FIA portfolio and now it has made its way into life insurance with Life Accumulator. The client sets a certain index percentage gain and the product automatically executes a lock. Allianz promotes it as providing certainty and stability, which it does.

But the tradeoff is that it necessarily leads to underperformance because of lost time value of the option for the policyholder and profits from gained time value of the option for Allianz. Even if Allianz reinvests those profits back into competitive rates, then it still creates an implicit subsidy from locking policyholders to non-locking policyholders. Index lock is, at best, a marketing gimmick that turns a real cost into a perceived benefit. Clients want control and they don’t realize they’re paying Allianz for it. Allianz certainly isn’t going to tell them.

The easiest way to do an index lock and guarantee profit for the insurer is to restrict the ability to do the lock to Excess Return indices with explicit volatility targets. Otherwise, the time value of the option gets tangled up in volatility and interest rate swings. As a result, Allianz has historically only offered Index Lock on its suite of custom-build Excess Return engineered indices with volatility targets. In the outgoing Life Pro+ Advantage product, only PIMCO Tactical Balance ER and Bloomberg US Dynamic Balance II ER were available with index lock. However, the new product expands Index Lock functionality to two Excess Return indices without volatility targets – S&P 500 Futures Index ER and Blended Futures Index, which is a blend of Excess Return indices.

It’s not hard to figure out what Allianz is up to. Below is a chart showing the time value of an option an index that starts at 20% volatility and grows at a consistent 1% per month. Reducing volatility by 1% each month reduces the price of the option relative to flat volatility, but not all the way down to the index lock value. Rising volatility by 1% per month actually increases the price of the option relative to flat volatility. But no matter what, it’s a good trade for Allianz. The client is still paying for the benefit***.

Allianz also updates the Bloomberg US Dynamic Balance index to the 4^th iteration, BUDBI III ER. The initial switch from BUDBI to BUDBI II was about hedging considerations. The original BUDBI designed used tickers that were not as liquid as BUDBI II. The second switch to BUDBI II ER was about hedge price stability and illustrated performance by switching to Excess Return. They were small steps along an evolutionary process that made sense in light of Allianz’s enormous and ever-expanding notional to hedge.

But this update to BUDBI III ER is a fundamentally different shift in the concept. All previous BUDBI indices combined bonds and stocks – hence the name, Dynamic Balance – with a cash component in the event that the index needs to further control volatility. The problem with that structure, as I’ve covered in previous articles and in our sister publication (The Annuity Edge), is that long bond positions don’t work well in a rising rate environment and especially not if the yield curve is inverted. BUDBI has been a poor performer since 2022. On top of that, BUDBI’s inflexible structure has kept the index pinned down with high bond allocations and a large cash component. It’s in a very tough situation.

BUDBI III ER is meant to solve that problem by shifting to a purely cash/equity construct. Gone is the idea of dynamic balance between stocks and bonds. BUDBI III ER is more akin to the S&P 500 Daily Risk Control Excess Return series of indices which, it should be noted, have performed very well since 2022. But the larger narrative is the interesting one. They designed and built this index. They created an empire fueled by both illustrated and realized returns in this index. It is impossible to separate Allianz’s success from BUDBI. But if Allianz is so smart, if Allianz is so committed to the concept of balancing stocks and bonds, if Allianz really thought they had something special – then why did they drop it at the first sign of a problem? Shouldn’t they have had a principled approach that should have persisted throughout market cycles? Did they really believe in what they’d built?

Apparently not. It is deliciously ironic that Allianz made the switch to a zero duration, cash/equity variant just as interest rates are about to start going the other direction, which will be a boon to the traditional BUDBI indices. One of the lines from Allianz has always been that they will pivot indices when it makes sense to them, as if they can somehow time the market with different index variants. If it was that easy, wouldn’t everyone do it? Isn’t that sort of prediction what has made fools out of almost everyone throughout history? Are we about to see a return to BUDBI II ER the moment that rates consistently drop? And heck, why not just offer both? Or is that too much of an admission that Allianz doesn’t actually know everything?

Most of what is new in Life Accumulator are crediting and illustration features, but there is also a material change to the underlying charge structure. With each successive version of its Indexed UL product – its only Indexed UL product – Allianz has tinkered with policy charges. Over time, Allianz has gradually increased policy charges. Consider that the 2017 Life Pro+ had around $126,000 in policy charges for a 45 year old Preferred Male with maximum non-MEC funding, after adjusting for lower Target premiums pre-2021 and the changes to 7702. The next version, Life Pro+ Elite, clocked in at $154k by slightly reducing base per thousand charges but increasing the premium load to 8%. The higher premium load carried over into the next product, Life Pro+ Advantage, but Allianz also extended and increased the base per thousand charges, resulting in total charges of more than $165k.

The newest product, Life Accumulator, takes a slightly different tack than the last two products by increasing the base per thousand charge but changing the premium load from 8% from years 1-9 and 4% thereafter to 9% in the first year and 5% thereafter. The net result is that Life Accumulator will be more competitive in maximum funding scenarios than the outgoing Life Pro+ Advantage product. It’s a tweak to competitiveness that makes sense in today’s higher rate environment. For the first time in a long time, carriers have an incentive to emphasize overfunding – and that’s exactly what Life Accumulator does.

If these three products signal the state of the Indexed UL market, then the takeaway is that illustrated performance is still the focus. All three products are designed to illustrate better than their predecessors courtesy of new (and temporary) yield advantages being illustrated as permanent relative to portfolio products. All three products push the limits, in varying ways and to varying degrees, on illustrated performance by using gimmicks under AG 49-B that should have been closed. It’s not a good sign for Indexed UL. The illustration wars continue.

What would it look like for a company to not fight the wars and instead to go back to the fundamentals in a way that actually innovates without an illustration benefit? For that, you’d need a company so big and so diversified that it doesn’t need to fight the war. Enter Prudential and its new Momentum IUL, which we’ll cover next week.

*Companies selling Whole Life could take the same approach but they’re not doing it for the simple reason that it’s not equitable for policyholders, as discussed later in this article.

**Based on the Allianz policy I saw last week with an in-force illustration dated for June of 2024. Incidentally, it was sold in an accrued interest, “free insurance” premium financing transaction that no longer can support any illustrated income, is projected to lapse after 6 years in the Alternate Scale and maintains a 10-to-1 ratio between the loan balance and the net cash value for the remainder of the life of the policy. Just one year of a 0% interest credit will cause the policy to go into lapse pending status. I wish I could say this one is an exception, but it’s not.

***This is also true for interest rates above 0%, but the issue is that interest rates can go negative, whereas volatility can’t. Excess Return indices solve that problem.