How do these things do in various markets?
By Bill Boersma
If I hear another agent tell an IUL policy owner that their policy is doing better than originally projected, I might scream. Of course, I haven’t reviewed every Index Universal Life (IUL) policy in force so I can’t say there aren’t any, but I’m seeing this over and over with the cases that hit my desk, and it’s not true.
The reason the cases are on my desk is because most of my business is now in the litigation and expert witness area focused on premium financed life insurance policies. The reason there is so much pending litigation is because so many of the them aren’t panning out, and not because lending rates are increasing, but because the projected policy cash value isn’t materializing.
The Market
I think everyone can agree that the stock market has been on fire for some time now. As of this morning my homework tells me the 5, 10 & 15 year S&P 500 return averages are 14.36%, 13.31% and 13.81% respectively* . These are returns that are definitively above the assumptions built into IUL policies over the same periods. If that’s so, then it would make sense that the policies are doing better.
But there’s more to it than this. For a file I’m buried in now, the original sales ledger assumed an 8.1% crediting rate that is now 4.18%. One of the policies had a 17% cap rate that now has a 6.5% cap rate. You think that could make a difference? You betcha! Who cares what the market is doing if it’s only tangentially related to how the policy is doing.
Let’s get a little more nuanced. Let’s assume a policy has a cash value in policy year 10 equal to the projected cash value on the original ledger. We can assume the stellar market returns have made up for the reducing caps to date. However, what do you see if you put the in-force ledger next to the sales ledger moving forward? You see Armageddon is what you see. The projected cash value is generally much lower than the initially illustrated commercial loan payback from cash value withdrawals and/or loans doesn’t work anymore.
Context
Let’s put this into context. You’re 25 years old and doing your retirement planning and for some reason plan on a 12% return indefinitely (if you think that’s not analogous to IUL crediting then I have a surprise for you). During the first 10 years we’ll assume the market “only” did 10%, but you were able to put more away than you expected so you’re still on target and actually have a little more than modeled ($200,000 vs. $196,545). You’re doing “better than projected”. We’ll assume you’ve recalibrated your assumptions to a 10% return from then to age 65. At retirement you now have $5,299,000 rather than the originally projected $8,591,000. How “better than projected” do you feel like your doing?
Back to the case at hand, the market has been pretty good during the period since the policy was put in force in 2014 until the end of year cash value in 2023 per the in-force ledger I have in front of me. The S&P 500 return was 11.05%, and 9.05% without dividends*. However, at age 70 the original ledger projected $37,927,000 of cash value and the in-force ledger now projects $23,514,000. Whoa! The original ledger showed a $29,623,000 loan pay back the next year. Don’t think that’s going to happen when the cash value is over $6 million less.
Stock Market Forecasts
Remember, this is all in a good market. We all know that past performance is not indicative of future returns, but I spent some time poking around the internet this morning, looking for predictions. To be clear, I’m not an analyst or even a financial planner; I’m an insurance guy. That being said, while there are always opinions all over the board, there are some interesting consistencies. For example, quite a few organizations are looking at the next decade as a time of under performance for large US equities. Check out this table.**
| Fidelity | 5.7% | 20 years |
| JP Morgan | 6.7% | 10-15 years |
| Black Rock | 6.2% | 10 years |
| Vanguard | 2.8%-4.8% | 10 years |
| Schwab | 6% | 10 years |
| Research Affiliates | 3.4% | 10 years |
| Morning Star | 5.6% | 10 years |
Source: https://www.morningstar.com/portfolios/experts-forecast-stock-bond-returns-2025-edition
That’s not very exciting. Some even predict bonds will do better than stocks.
Interest Rate Markets
What about the interest rate market? Many forecasts for fed funds, mortgage and SOFR rates have them going up meaningfully after coming down for a few years. It’s not uncommon to see projections in the late 20s and early to mid 30s at higher rates than they topped out at recently.
For insurance carrier portfolio rates, that will be beneficial, but carrier portfolio rates won’t be as directly affected as the lending rates for the premium financing.
What About the Regs?
Another famous line I hear from too many agents is a version of “The ridiculous regs in place don’t let us illustrate these policies realistically. Our assumptions are throttled.” Well, those ridiculous regulations were put in force to limit the ridiculous assumptions that where wildly unrealistic. But what makes up these ridiculous governors? They are based on historical S&P 500 returns, so that’s pretty straight forward. They are also based on the current cap rates on the products, so I don’t see how that’s ridiculous. They’re based on the yield of the carrier portfolio, which is what it is. So which ones are ridiculous? Is the stock market going to do way better? Are caps going to go way up? Are yields going to significantly increase?
Sorry, but for those who truly understand how IUL, the markets, carrier portfolios and AG49 works, you’ll come to the conclusion that the ridiculously low allowed crediting assumptions are actually quite aggressive and have relatively little chance of panning out as rosy as they project.
Assuredly, there will be many who will dismiss what I have to say, but I’d be careful. I have a weird habit of being right when it comes to this stuff. Not because I’m a better seer, but because I understand it better than most and don’t have an incentive for it to look better than it really is.
* www.DQYDJ.com
** https://www.morningstar.com/portfolios/experts-forecast-stock-bond-returns-2025-edition
Securities offered through Valmark Securities, Inc. Member FINRA, SIPC. Investment Advisory Services offered through Valmark Advisers, Inc. a SEC Registered Investment Advisor. OC Consulting Group and its affiliates are separate entities from Valmark Securities, Inc. and Valmark Advisers, Inc.
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