#412 | Prudential Momentum IUL
When Prudential released the first iteration of Index Advantage UL (IAUL) in mid-2012, it was a massive validation of the Indexed UL market. I remember some people referring to it as a “hell freezing over” moment. What most folks didn’t realize, however, was that Prudential had had IAUL sitting on the shelf for several years as an unfinished concept. Prudential had continuously delayed the launch of the product to focus on other priorities, most notably Term Life 65, the promising but ultimately forgotten Term product that was meant to revolutionize the market by offering coverage to 65 at every age. I remember going to Prudential around that same time and seeing boxes of unused Term Life 65 swag laying around on the marketing floor. Someone, somewhere in the world, is right now wearing a beat up Term Life 65 hat and a Philadelphia Eagles Super Bowl Champs 2023 tee-shirt.
As a result, Index Advantage UL was borderline obsolete the moment it came out. The Indexed UL illustration wars were already raging in 2012, with Voya and a handful of other companies cracking double-digit illustrated returns through creative crediting strategies and backtesting methodologies. Prudential engaged in exactly zero of that. Even the name, Index Advantage UL, pointed to Prudential’s intention to market the product more as a Universal Life policy with an indexed crediting strategy rather than a full-bore Indexed UL product, with all of the connotations that entailed. Prudential was, as usual, trying to play it straight.
They were rewarded with lackluster sales and a near-irrelevant position in the Indexed UL market that has persisted ever since. Part of the reason was that IAUL has never, and still doesn’t, play the illustration game de jure. The substantial part of the Indexed UL market that depends on aggressive sales of aggressively illustrated products would never have a reason to even look at the product outside of underwriting. Prudential historically hasn’t been in small-face, network marketing part of the Indexed UL market. That leaves a pretty small sliver of mid-sized transactions in the traditional BGA market for Prudential to earn with IAUL.
But the other issue with IAUL is that even though Prudential has released subsequent versions of the product since 2012, the core chassis has remained the same design that dates back to something like 2008. I covered the history of changes to IAUL in detail in #92 | Prudential IAUL 2018*, but the upshot of the story is that IAUL has always been crippled by the presence of an asset-based charge. The same is true even for the 2020 version of IAUL. Prudential just can’t seem to shake IAUL’s asset-based charge infection.
Because of decrements (lapse, deaths, etc), the impact to profitability from an asset-based charge is smaller than you’d think. But because there are no decrements on an illustration and because account value always goes up, the asset-based charge as a huge negative impact on illustrated performance. Agents and actuaries, for once, can find common ground by agreeing that asset-based charges are not optimal**. Hence, the reason why the vast majority of life policies do the reverse – they front-load charges in order to provide asset-based bonuses that enhance long-term illustrated performance.
It should come as no surprise, then, that Prudential’s new Momentum IUL finally represents a modernized approach to Indexed UL. The asset-based charge is mercifully gone and has been replaced with higher per thousand charges and a substantial 0.75% Persistency Credit after year 10, one of the highest in the industry. Momentum also sports a 10.25% Cap that is 1.25% higher than IAUL. All that – and Momentum also has substantially higher Target premiums, particularly for Option 2 designs, that bring it more in-line with where the Indexed UL market has settled in the wake of the changes to 7702 that were enacted in 2021. Finally, Momentum tilts the COI slope down in early years and up in later durations.
The net result is a product that has weaker values in early years and less marked improvements in moderately funded scenarios due to higher initial charges and higher tail mortality. But it blows the doors off of the old product at later durations and with overfunding, where asset-based performance is really all that matters and the higher policy charges essentially get washed out.
The net increase in performance in those scenarios is staggering. Illustrated IRRs are up by as much as 140bps in overfunded scenarios. Illustrated income is up, at least in the couple of cells I ran, by more than 50% and closer to 75%. It’s only taken 16 years after Prudential first decided to build an IUL and 12 years since Prudential actually got into the market for the company to decide to develop a for-real, honest-to-goodness accumulation Indexed UL product.
But I would argue that Prudential is still doing it the Prudential way. There is no silly engineered index in Momentum IUL. The 0.75% Persistency Credit applies across the board, not just to a subset of accounts for the purpose of gaming AG 49-A. The default illustration setting is withdraw to basis and then loans, not pure loans, as is common at other insurers. The gains in illustrated performance are just good, old-fashioned product structure optimization.
That and, of course, a new portfolio supporting the product. But I think it’s a fair argument that if any of the new crop of IUL products deserves a new portfolio, it’s Momentum IUL. The existing IAUL product wasn’t really an accumulation product. Prudential doesn’t have a legacy in this space like Allianz or North American or Lincoln, all of which owe a legacy of debt to their in-force policyholders. That’s not really the case for Momentum IUL. It is a truly new product – and it makes sense that Prudential is using a new portfolio to support it.
Even still, Momentum IUL isn’t sniffing anything close to the performance that we see in more aggressive products, most notably Allianz Life Accumulator. For a 45 year old Preferred male and maximum non-MEC funding, Momentum IUL peaks out at around 6.3% illustrated IRR. Allianz is just below 7%. At age 100, the difference is about 32% in terms of actual illustrated value. Not trivial. Momentum is competitive, to be sure, but Prudential would have to lean heavily on engineered indices to catch Allianz.
Will Prudential get more sales with Momentum than it did with IAUL? Without a doubt. Accumulation IUL has been a gaping hole in the Prudential portfolio for over a decade and Momentum IUL fills it perfectly. Had Prudential gone further to compete with the most aggressive IUL writers, it would have been unnecessary and out of character. Unlike Allianz, Prudential actually has a full life insurance product portfolio and hasn’t staked the entire future of its US life business on a single product. Momentum IUL gives producers an option to sell Prudential when they’re selling accumulation IUL. It didn’t need to do anything more than that.
However, Momentum IUL has one completely unique, completely differentiating feature that is a first in both the Indexed UL and Fixed Indexed Annuity markets – a 6-month point-to-point crediting strategy.
First, we should start by saying that there is no mechanical reason why 6-month crediting strategies haven’t been done in the past. Similarly, there is no mechanical magic for the standard 1-year crediting strategies that we see everywhere in FIA and IUL products. The order of operations for policy transactions is still the same – premiums in, charges out, whatever is left over earns interest. That process repeats every month. The longer you delay the interest credit, the more of a gap there is between the initial AV and the AV just before the credit is applied. Indexed UL products generally solve that problem by crediting indexed interest to the average Account Value in the crediting term. Voila. Using that same methodology would apply to a 2-month crediting strategy as much as it would to a 10-year crediting strategy.
But there is a regulatory reason why shorter crediting strategies haven’t been tried in Indexed UL. Fixed life insurance and annuity products are protected from being classified as securities by the Harkin Amendment to Dodd-Frank. However, the SEC still uses Rule 151 as the guideline for determining whether the product actually is an indexed contract. One of the safe-harbor provisions is that the product can’t credit index-linked interest more than once per year. But the catch is that Rule 151 specifies the product in question as an “annuity” – not, crucially, a life insurance policy.
There are two ways to interpret the specificity in Rule 151. One reasonable perspective might be that the SEC didn’t broaden the language in 151 because it specifically intended to leave life insurance out of the discussion. Another perspective, however, is that the SEC isn’t even entirely aware the indexed life insurance policies exist because the market for IUL is a tiny fraction of the market for FIAs. As a result, it didn’t even occur to them to roll life insurance into the discussion but if they did know about IULs, they probably would have. The indexed crediting mechanics for the two products are functionally identical. Whatever logic that would have brought indexed annuities under the SEC jurisdiction surely would have brought indexed life insurance under it as well.
It’s the classic debate about the letter versus the spirit of the law. The Harkin Amendment is another interesting data point because it doesn’t specifically cover annuities but, instead, creates a safe harbor for any life insurance or annuity product that satisfies the applicable Standard Non-Forfeiture Law. In my opinion, most companies have generally taken the stance that they’d rather be safe than sorry when it comes to this issue and they follow the 12 month stipulation. But Prudential has decided to push the boundary further than anyone else to deliver the 6 Month crediting strategy in Momentum IUL.
Intuitively, the appeal of the 6 Month (6M) strategy is that offers a chance for the policyholder to lock in a mid-year gain. The perfect example is the back half of 2021 into the first half of 2022. Take a look at what would have happened if the client had selected a 6M crediting strategy versus a traditional 1 year (1Y) crediting strategy:
With two consecutive 6M strategies, the client would have logged a gain on 12/1/2021 that hit the cap on the 6M strategy and then had a 0% for the 2nd 6M term. In a 1 year strategy, the client would have had a goose egg. That, in a nutshell, is the advantage of a 6M structure encapsulated in a year not so long ago.
It would be great if Momentum IUL offered a 10.25% Cap on the 1 Year strategy and simply divided that number by 2 for the 6 Month strategy, but that ain’t how it works. In the options market, there is no such thing as an advantage that doesn’t come with an offsetting cost. Shorter tenor options are, pound for pound, more expensive than longer tenor options. As a result, the Cap for the 6M is way less than half of the 1Y. In Momentum IUL, the 6M currently offers a 4.75% Cap. Hitting two consecutive 4.75% Caps results in a total compounded index credit over a year of 9.73%, more than 50bps lower than the maximum 10.25% credit in the 1 year strategy. That’s the cost of having the benefit of the mid-year lock.
Is the cost worth the benefit? To get at this question, I used S&P 500 data from 1997 and sliced it into 6 month and 1 year terms. I applied the current Caps from the 6M and 1Y strategies in Momentum IUL to each trading day’s 1Y returns. In other words, all of the returns below are 1 year equivalents, but the 6M strategies are represented as 2 consecutive 6M credits. The end date of the segment is at the bottom of the graph below. Take a look.
The cost of the 6M strategy versus the 1Y is represented by the lower maximum credit, which you can clearly see at the top of the graph. However, that “cost” doesn’t show up every year because not every year hits the Cap for the 1Y anyway. The cost is essentially offset by the years where the two consecutive 6M strategies yield a return in excess of what would have been credited in the 1Y bucket. So here’s the big question – which on performed better over the term? It’s not as close as you might think. The 1Y has an average return of 6.63%. The 6M strategy? Just 6.03%.
The reason why is pretty simple. About 22% of the time, the 6M strategy outperforms the 1Y strategy over the year and the average outperformance is 2.8%, but the 1Y strategy outperforms 78% of the time with an average margin of 1.9%. If you do a weighted average calculation, you come up with the 60bps average differential. It is absolutely true that a 6M strategy can deliver positive returns in scenarios where the 1Y delivers a goose egg. But it’s also true that the average benefit of more crediting terms isn’t worth the average cost of lower total upside potential.
This raises an interesting question – why? And it’s a question that doesn’t just apply to Momentum IUL. Prudential decided to go shorter than the traditional 1Y crediting strategy, but there was a time when virtually every carrier was going longer. As I’ve written many times before, the difference between any fixed insurance product and any indexed insurance product is an options strategy. Option pricing dynamics have direct effects on what life insurers offer to their policyholders and how insurance agents position the relative benefits of crediting strategies, including the basic choice of indexed crediting over fixed crediting. Since AG 49, we’ve taken crediting term structure for granted. One year crediting is the default choice. But is that the right approach? We’ll tackle that next week.
Momentum IUL is Prudential’s first legitimate foray into accumulation IUL and my sense is that it signals a broader push at the company for increasing its distribution footprint. Prudential has long been a stalwart in the BGA and Producer Group channels but the empire was built on the sinking sands of Guaranteed UL and Term. Prudential has been able to successfully transition away from guaranteed products and towards other lines, particularly Variable UL and Private Placement. Both of those lines trend towards higher net worth clients.
With Momentum IUL, Prudential now has the ability to go down-market towards the growing part of the independent channel, the network/multi-level marketing space. A few years ago, I thought it was a near-certainty that Prudential would follow many of its publicly traded peers in exiting retail life insurance. I made that comment to some friends and one of them told me, presciently, that I’d underestimated Prudential’s commitment to the space. With FlexGuard IVUL, the new Custom Premier and now Momentum IUL, the evidence is mounting that they were right.
*A quick funny story about this article. I distinctly remember writing #92 because I did it while sitting in the back of my father-in-law’s Tahoe as he drove the family to and from Augusta for the Masters. It’s the one and only time that I’ve been and it was a heck of a day to go. We watched the Par 3 tournament and I was standing on the front row of the green of the hole where Tony Finau hit a hole in 1 and then broke his ankle as he jumped to celebrate. A few minutes later, we happened to turn around to and watch a couple hundred yards away as Jack Nicklaus’s grandson sunk a hole in one and the crowd went nuts. We were still greenside when Niklaus, Tom Watson and Gary Player came through on the way to Watson winning the tournament and Gary Player chatted it up us as the other guys putted. It was an incredible day. And when I got back to the car, the draft of the article was gone and I had to rewrite the whole thing from scratch on the way home.
**In reality, asset-based charges make a lot of sense because fixed life insurance products have asset-based capital requirements that should be covered by asset-based charges. Another option is for carriers to simply take it out of the rates, which is what most do. The commentary here is really more about asset-based charges to cover things beyond capital, such as distribution expenses and overhead. That’s where it becomes a problem.
