IUL is a general account product that provides equity-market exposure with downside protection. From a risk-and-reward perspective, it sits between UL and VUL. To better understand this point, let's look at UL and VUL separately, and then come back to IUL.
For UL, shown on the left, insurance carriers invest assets in very safe fixed-income instruments, such as corporate A Bonds and US Treasuries. These assets are considered stable and hence predictable. As such, the potential range of rate of return is relatively small. Because of this stability, the rate of return is also relatively modest.
For VUL, shown on the right, insurance carriers invest assets directly in the equity market. As we all know, equities can be very volatile, typically ranging as much as -30% to +30% in a given year. Since the potential range of outcome is so big, the risk of VUL is naturally higher than UL. Because higher risk must be compensated by higher return, VUL provides higher-earning potential over a long period of time.
IUL, shown in the center, shares characteristics with both VUL and UL, in that it participates in the market’s upside gain, but with limits (a cap) on how much it can grow, along with downside protection (the floor). Specifically, it has a return range of outcome that is smaller than VUL’s but larger than UL’s. Therefore, the expected IUL return naturally also falls in between UL and VUL.
Now that you know how to think about IUL, check out how it can enhance your client's policy value.
So, the underlying assets backing the IUL policy are same as those used for UL. As the figure below shows, by taking the interest accrued from those underlying assets to buy bull-call spreads, the carrier changes the risk/return profile of IUL, potentially elevating the interest earned over time.
Bull-call spreads are made up of call options, which are publicly traded on Chicago Board of Exchange (CBOE). When a carrier buys a bull-call spread, they are generally able to transform a steady modest return into a potentially larger return.
Let’s look at this chart to further understand what drives the returns in IUL.
Using a 5% earn rate as a hypothetical example, the chart shows insurance carriers could have purchased a bull-call spread with a cap of 10.4% on April 21, 2019.
Values shown may not be used to project or predict investment results. A stated cap, floor and multiplier for an indexed account would be determined by the insurer.
Multipliers are backed by the bull-call spread, with insurance carriers determining the amount of units to buy according to the multiplier on the indexed account. For example, in the case where there is a 45% multiplier in John Hancock’s Accumulation IUL Capped Indexed Account, John Hancock purchases 1.45 units of the bull-call spread whenever a policyholder opens a Segment in this account. Keep in mind that insurance carriers that don't offer a multiplier hedge their exposures by buying just one unit of the bull-call spread.
While it’s true that retail investors can replicate an IUL investment strategy, they can’t replicate the cap John Hancock provides through its IUL products. That’s because John Hancock has a very strong general-account earn rate, as evidenced by our high fixed-account crediting rate. This strong general-account earning power enables John Hancock to buy a bull-call spread with a much higher cap. Since retail investors are unlikely to have access to the investment-class that John Hancock has — and probably lack the Company’s deep investment experience — it would be very difficult for them to replicate exactly what John Hancock can offer. But, by accessing John Hancock’s general-account investment portfolio and expertise through an IUL policy, they can enhance their policy return over time.
There are many types of multipliers in the market, some starting as early as Year 1 and some starting as late as Year 11. Some are guaranteed, and some are non-guaranteed1. Some are described in the illustration and some are not. Some will occur only if the market behaves in a certain way. Given there are so many choices, you should always consider the following when recommending an indexed account to the client:
By answering these questions, you will become more aware of how different carriers’ products are designed and be better able to recommend those that are most suitable for your clients. At John Hancock, our flagship Accumulation IUL and Protection IUL have contractually guaranteed multipliers starting from Year 11. More importantly, the application of these multipliers is simple and straightforward, and is clearly described in the contract. As such, you and your client can easily see and understand how multipliers offered with these products can enhance their interest crediting rate.
The answer is no. Higher charges do not automatically translate to inferior policy performance, provided the carrier is using them effectively and offers a way for policyholders to limit them when desired. With a lower-charge IUL, a policyholder will likely be limited to just a cap and a floor. But with a higher-charge IUL, they frequently have the advantage of a cap, a floor, and different types of multipliers. These multipliers can lead to significantly better performance over the long term for the same premium amount.
The most important things to ensure when buying an IUL policy with higher charges are:
Through knowing their policy’s charge structure and having the option to reduce charges when appropriate, policyholders can dial up and down on policy performance whenever desired and/or appropriate.
John Hancock’s IUL products provide a good example of this. Our Indexed Performance Charge funds the higher guaranteed multipliers. Additionally, the Indexed Performance Charge is associated with specific indexed accounts. Thus, the policyholder can control their policy charges by choosing an account allocation that best fits their economic outlook and risk appetite.
If policyholders anticipate only a modest increase in the US economy, they can elect not to use the Enhanced Accounts and thus avoid paying the 4.98% annualized Indexed Performance Charge. Instead, they can allocate their funds to the High Par Indexed Account, which allows them to get both the 160% participation rate and the guaranteed multiplier of 45%, while paying only 1.98% in annualized Indexed Performance Charge1. Alternatively, if policyholders think the US economy is going down in the near term, they can move all their policy value to the Fixed Account and thus earn John Hancock’s attractive fixed-account crediting rate, completely avoiding any Indexed Performance Charge.
Policyholders should always consider dollar cost averaging (DCA) when buying an IUL policy.2 Rather than having one Segment per indexed account, they should have a few or even up to 12. By having multiple Segments, they can avoid the scenario of having no interest in the entire account due to a sudden market downturn. For example, if policyholders have only one Segment and the market suddenly drops significantly on day 364, the interest they earn will likely reduce meaningfully. But, if they have multiple Segments (e.g., 12 Segments) in that account, their policy value would be at least partially shielded from such events, as the risk of the market being down meaningfully every month is small.
With IUL, a DCA strategy starts by initially moving money into the Fixed Account. Then, a fixed amount specified by the policyholder is transferred on a monthly basis from that account to the selected indexed account(s). Keep in mind that when the money is sitting on the “sidelines” before being allocated to an indexed account, it earns the Fixed Account rate. At John Hancock, policyholders can earn a very competitive rate, as we have a strong general account performance.
1. Guaranteed product features are dependent upon minimum premium requirements and the claims-paying ability of the issuer.
2. Dollar Cost Averaging (DCA) does not assure a profit or protect against loss in declining markets. Since DCA involves continuous purchases regardless of fluctuating market performance, a purchaser must be willing to continue such purchases through periods of market downturn.
The Index Account options may not be available on all products or in all jurisdictions. The Base Index Account options (Base Capped Index Account and Base High Par Index Account) are the only index account options available for new policies issued in New York, except on PIUL’18. Please consult each product’s producer guide for index account availability.