Stock Selloff Hits Life Insurers’ Fastest-Growing Product

These policies are complex and expensive. millions of Americans who now own them saw those ideal conditions reversed in 2022, exposing the policies’ high fees and complexity. The insider joke about indexed universal-life policies It is necessary to have an actuary, an attorney, and possibly even an engineer to understand the product’s workings.

The policies combine a tax-deferred savings element with a death benefit. These policies are different from the earlier universal-life policy generation, which was tied to bond rates. Indexed universal-life policies instead typically track the stock market, often the S&P 500, with caps on upside gains and protections against losses. Some insurance companies offer multipliers to increase their earnings, which can be an added cost.

Despite the market downturn, indexed universal-life sales rose 33% year-over–year in the first half 2022. Limra reported that sales rose 2% in the 3rd quarter. However, Indexed Universal Life was the only product to see positive growth during the quarter. This is due to the pandemic. spurt in life insurance sales ebbed and inflation hurt consumers’ budgets. 

Limra’s researchers anticipate a minor decline in IUL sales in 2023, citing market volatilityInflation and a possible recession. Life insurers face serious challenges. Sales of indexed universal-life policies delivered $3.4 billion in new annualized premiums in 2021, Limra’s latest available figures show.

While policyholders managed to avoid stock market losses this year however, they still have to pay high fees and charges. Some financial advisors and consultants say that the fees are more obvious because there have been no market gains.

“If I knew what I know now, I wouldn’t go for an IUL,” said

Kwesi Ntiforo

A Boston hospital doctor aged 50 has purchased three of the policies, totaling $5.5million in death benefit. “Great, if the market crashes, my policy won’t crash. But the flip side is that the fees are high.”

He purchased the policies for their savings compounding and has been disappointed. Rebel Rock Wealth is an Orlando-based firm that helps people decide whether they should cancel their policies or transfer their savings to something else.

Rebel Rock founder

Lesley Batson

said it worries her that consumers “are pitched market-like returns without the risk. It appears to them to be a win-win-win option,” when it isn’t because of the fees cutting into their return. She calculated that for one of Dr. Ntiforo’s IULs, from October 2021 to October 2022 his expenses tallied $5,980 of the $14,786 premium he paid during this period for the nine-year-old, $1 million policy.

One other concern for critics is that insurers generally retain the contractual rights to modify the upside cap subject to limits set by regulators. They can also raise costs per contract terms.

IULs are a good option for those with a lot of resources. There are also lower-cost options with higher crediting rates. Some advisers believe IULs work well for people with more money. Many people with high incomes load their savings to the maximum extent allowed by federal tax law. to take advantage of the tax-deferral. 

The state regulators of a standards-setting organisation are looking at tighter consumer material rules, which could have a negative impact on sales next year. They are focused on a proliferation of “volatility-controlled” indexes that track a shifting mix of stocks, options, futures or other assets, rather than traditional indexes such as the S&P 500. Regulators are concerned that these hypothetical projections of savings growth using these indices may be too optimistic and could lead to unrealistic consumer expectations. 

Under previous rule-tightening, projections tied to the S&P 500 can currently show up to 6.2% annual growth. Some insurers have been using 7.5% for volatility-controlled projections, according to insurance brokerage Valmark Financial Group. This number would decrease to approximately 6% per annum under a rule that awaits final approval from the standards group, The National Association of Insurance Commissioners.

Projected returns matter to many buyers because they count on the policy’s accrued savings to help pay rising death-benefit charges; those go up with a person’s age. A buyer may be left with an insurable bill if a projection is flawed.

Larry Rybka

Valmark’s chief executive, hopes the lower volatility-controlled return projections, combined with rising interest rates, will end a common practice of borrowing money to buy IULs. Because of the risks involved, Valmark does not approve such loans. The idea behind this is that the savings could be used to repay the loan. Volatility-controlled IULs are the vehicle of choice for many agents, Mr. Rybka said.

At Leslie Scism, write leslie.scism@wsj.com