Solutions That Leave an Impression
In the Wholesale Brokerage World
For Agent Use Only / Not for Public Distribution cn57038122010
Indexed Universal Life Insurance –
A broad discussion of
how companies generally
Design Indexed Universal
Life Insurance policies
Michael Pinkans, CFA
Senior Vice President – Zenith Marketing Group, Inc.
For Agent Use Only / Not for Public Distribution cn57038122010
What We’ll Cover
History of Indexed Universal Life (IUL)
What is Indexed Life?
Regulatory environment
Indexed Life mechanics
Company Positioning/Gotcha’s
Q&A
For Agent Use Only / Not for Public Distribution cn57038122010
History of IUL
Developed in mid-90’s as EIUL
Sales slow until 2002
– Accelerated since ‘04
– Over 30 companies
– About $500 million sales (IA’s about $25B)
Why?
– VUL below 0% returns?
– No variable licensing
– Design features – variable loans
– Declining WL dividend scales and UL crediting rates
– Companies with IA’s – easier transition
For Agent Use Only / Not for Public Distribution cn57038122010
Cautions
Producers may have migrated to IUL to avoid
securities licenses – “next best thing”
– But, IUL is closer to fixed UL, not VUL
Goal of IUL is to “beat” current assumption
UL rates by 150-200 bps long term
For Agent Use Only / Not for Public Distribution cn57038122010
Sales Applications
Anytime CASH
ACCUMULATION/DISTRIBUTION is important
– Pension Max, College Funding, Personal
Retirement, ROTH Alternative
Not as a term alternative – that’s the
UL NLG marketplace
Not useful in an ILIT
For Agent Use Only / Not for Public Distribution cn57038122010
What is Indexed Life?
Combines features & benefits of traditional UL
but uses a different crediting method for
determining interest
Interest credited is linked (in part) to movement of
a stock market index over a period of time
Potential to earn interest based on increases,
if any, in an equity index, while offering minimum
interest rate guarantees (may be 0%, 1%, 2% or
slightly higher)
Potential for higher average crediting rates than
more traditional UL
For Agent Use Only / Not for Public Distribution cn57038122010
What is Indexed Life?
So:
Potential for greater cash value & death benefit
than more traditional UL
More cash value protection against market
declines than VUL
For Agent Use Only / Not for Public Distribution cn57038122010
What is Indexed Life?
IT IS NOT…
IT IS NOT an investment in the stock market and
does not directly participate in any stock, equity or
bond investments
IT IS NOT the client buying or participating directly
in the index
IT IS NOT a policy where cash value is based upon
performance of client selected sub-accounts
(variable life)
Does NOT offer FULL Upside Potential
For Agent Use Only / Not for Public Distribution cn57038122010
What is Indexed Life?
A Middle Ground…
Traditional UL
Indexed Life
Not better… different
For Agent Use Only / Not for Public Distribution cn57038122010
VUL
Why The Time May Be
Right For IUL
Current focus on accumulation and
distribution
Pricing changes to no lapse guarantee UL
and term rates
Customers more comfortable with an index
Unattractive rates on current assumption
UL and WL
For Agent Use Only / Not for Public Distribution cn57038122010
Indexed UL Versus Indexed
Annuities
Will be differences in how contract works
Customers must understand the guarantees
in each contract
– Must stronger in annuities
• Lower caps and participation rates
For Agent Use Only / Not for Public Distribution cn57038122010
Regulatory Environment
NASD 05-50
Is an Equity Indexed Annuity a Security?
Is an Indexed Life?
– Depends in part on how the product is
positioned, presented and sold
Some B/D’s don’t allow the sale; others have
approved lists
For Agent Use Only / Not for Public Distribution cn57038122010
Regulatory Environment
Inappropriate Sales Language
Actual claims mentioned in NASD 05-50
– “What if the market goes down and you
would lose nothing? The market goes
up- you gain?”
– “A WIN/WIN Investment vehicle!”
– “Growth Potential without Market Risk.”
For Agent Use Only / Not for Public Distribution cn57038122010
Indexed Life Mechanics
Interest Crediting
Potential to earn interest based in part on the movements
of an index such as:
Standard & Poor's 500® Composite Stock Price Index
Dow Jones Industrial Average Index
NASDAQ-100
Lehman US Aggregate
US Treasury Indexes
Hang Seng Index
Standard & Poor’s®,” " S&P®," “S&P 500®,” “Standard & Poor’s 500,” and “500” are trademarks of The McGraw-Hill Companies, Inc. and have been licensed for use by Security Life
of Denver Insurance Company. No product is sponsored, endorsed, sold or promoted by Standard & Poor’s and Standard & Poor’s makes no representation regarding the
advisability of purchasing any product.
Hang Seng Index – An index of the largest and most liquid stocks listed on the Stock Exchange of Hong Kong. It does not reflect dividends payable on the underlying stocks.
For Agent Use Only / Not for Public Distribution cn57038122010
Indexed Life Mechanics
Interest Crediting
The index is looked at on a certain date; that is the
beginning of that particular index segment period
At end of index segment period:
– if index is higher, the policy owner can earn additional
interest paid by the insurance company
– if the index stays flat or declines, cash value is still
credited with a minimum guaranteed interest rate
Index Segment Period
Jan 1
For Agent Use Only / Not for Public Distribution cn57038122010
Dec 31
Indexed Life Mechanics
Policy Blocks
Traditional UL premiums can occur at any time
– What if indexed universal life premiums come
in the middle of the index period?
Premium blocks
– Portion of account value applied to a particular
crediting period
For Agent Use Only / Not for Public Distribution cn57038122010
Indexed Life Mechanics
Interest Crediting
The values of an index vary daily & are
not predictable
Cash value growth does not reflect
dividends on the index
Cash value will likely not reflect entire
increase of index
For Agent Use Only / Not for Public Distribution cn57038122010
Indexed Life Mechanics
Indexing Methods
Point to Point (Annual Reset Crediting)
– Most common
Index Credit
May use one or a combination of the following
crediting methods to determine amounts
credited to the cash value:
– Participation rate
– Rate Spreads or Asset Fees
– Caps
For Agent Use Only / Not for Public Distribution cn57038122010
Indexed Life Mechanics
Point to Point Participation
Point to Point: time period over which index
is being measured.
Participation: percentage that determines
how much of the index’s increase is reflected
in the indexed interest
– Acts as one factor in determining a ceiling
on crediting rate of the policy
For Agent Use Only / Not for Public Distribution cn57038122010
Indexed Life Mechanics
Point to Point Participation
100% Participation
100% Participation
Index increases 12%
Client gets 12%
index interest
– Subject to any other limits
The hypothetical investment results are for illustrative purposes only and should not be deemed a representation of past or future results. This
example does not represent any specific product, nor does it reflect sales charges or other expenses that may be required for some investments.
For Agent Use Only / Not for Public Distribution cn57038122010
Indexed Life Mechanics
Point to Point Participation
100% Participation
Index decreases 1.5%
Minimum Guarantee
Client gets minimum
guarantee
The hypothetical investment results are for illustrative purposes only and should not be deemed a representation of past or future results. This
example does not represent any specific product, nor does it reflect sales charges or other expenses that may be required for some investments.
For Agent Use Only / Not for Public Distribution cn57038122010
Indexed Life Mechanics
Point to Point Participation
50% Participation
100% Participation
50% Participation
Index increases 12%
Client gets 6% index
interest
– Subject to any other limits
The hypothetical investment results are for illustrative purposes only and should not be deemed a representation of past or future results. This
example does not represent any specific product, nor does it reflect sales charges or other expenses that may be required for some investments.
For Agent Use Only / Not for Public Distribution cn57038122010
Indexed Life Mechanics Point
to Point Participation with Cap
Cap: upper limit of index increase that can
be applied to the policy
Often used in conjunction with a
participation rate
Establishes maximum amount of increase
in the index that can be factored into
index interest
For Agent Use Only / Not for Public Distribution cn57038122010
Indexed Life Mechanics Point
to Point Participation with Cap
50% Participation
50% Participation
Index increases 30%
30% increase with 50%
participation is 15%
10% Cap
10% Cap applied to 15%
Client gets 10% index
interest
– Subject to any other limits
The hypothetical investment results are for illustrative purposes only and should not be deemed a representation of past or future results. This
example does not represent any specific product, nor does it reflect sales charges or other expenses that may be required for some investments.
For Agent Use Only / Not for Public Distribution cn57038122010
Indexed Life Mechanics
Monthly Average Index
Average of index
from point "A"
through point "B“
Average Rate
Often monthly, but
can be annual over
multiple years
The hypothetical investment results are for illustrative purposes only and should not be deemed a representation of past or future results. This
example does not represent any specific product, nor does it reflect sales charges or other expenses that may be required for some investments.
For Agent Use Only / Not for Public Distribution cn57038122010
Indexed Life Mechanics
Which is better?
Question: With 12% increase in an index, is client better off with:
A lower 50% participation
rate and high 15% cap?
– 50% of 12% = 6%
15% Cap
50% Participation
A high 100% participation
rate and a lower 10% cap?
– 100% of 12% = 12%
capped @ 10%
10% Cap
100% Participation
The hypothetical investment results are for illustrative purposes only and should not be deemed a representation of past or future results. This
example does not represent any specific product, nor does it reflect sales charges or other expenses that may be required for some investments.
For Agent Use Only / Not for Public Distribution cn57038122010
Indexed Life Mechanics
Bringing it all together
Year 1 – Index increases
Hypothetical example
– 50% Participation rate
– 12% cap
– 1% minimum guarantee
–
–
–
–
Cash Value = $1,000
Index increases 20%
20% increase x 50% Part. Rate = 10%
End of year 1 Cash Value = $1,100
• Less any fees and charges
For Agent Use Only / Not for Public Distribution cn57038122010
Indexed Life Mechanics
Bringing it all together
Year 2 – Index Decreases
Hypothetical example continued
– 50% Participation rate
– 12% cap
– 1% minimum guarantee
– Cash Value = $1,100
• Ignoring any fees and charges
– Index drops 10%
– 1% minimum guarantee credited to policy
– End of year 2 Cash Value = $1,111
• Again, less any fees and charges
For Agent Use Only / Not for Public Distribution cn57038122010
Other Crediting Strategies
If not point-to-point then some form of averaging
Can be daily, monthly, or annual basis
(multiyear)
Each day, or month, or year is a factor in the
index creating value
Averaging more useful in a volatile
environment
– Overall point-to-point outperforms
For Agent Use Only / Not for Public Distribution cn57038122010
Indexed Life Mechanics
Illustrated Rate
Can be a set rate however it’s usually
determined by looking back at past history of
Index over a certain period.
– Can be confusing
• Does 8% always beat 7% illustrated
rate?
For Agent Use Only / Not for Public Distribution cn57038122010
Company
AIG American
General Life
AIG American
General Life
AIG American
General Life
Allianz Life
Aviva Life and
Annuity Co.
Aviva Life and
Annuity Co.
Aviva-Indianapolis
Life
Aviva-Indianapolis
Life
Aviva Life and
Annuity Co. of NY
Aviva Life and
Annuity Co. of NY
Policy
Platinum Provider
Ultra 500
Bankers Life
Indexed
Crediting
Rate Utilized
Guaranteed
Crediting Rate
Level DB
Current
Accum Value
Year 5
Level DB
Current CV
(net) Year 5
Level DB
Current
Accum
Value Year
30
Level DB
Current
Accum
Value Year
40
Level DB
IRR
Current
Accum
Year 40
Current
Level
Death
Benefit
Year 40
IRR
Current
Current
Increasing Increasin
DB Year
g DB
40
Year 40
6.58%
2.00%
29,615
21,365
532,336
1,080,831
5.50%
1,091,640
808,510
4.35%
Elite Index UL 2004
7.16%
1.00%
29,692
21,442
585,902
1,242,034
6.04%
1,254,454
931,768
4.92%
AIG Elite Global IUL
10.20%
2.50%
N/R
N/R
N/R
N/R
N/R
N/R
N/R
N/R
GenDex II
9.29%*
2.00%
28,842
16,942
905,789
2,355,893
8.42%
2,379,452
1,615,965
7.03%
Lifetime Builder
7.95%
2.00%
29,890
21,424
663,387
1,568,884
6.92%
1,600,261
1,023,348
5.29%
Advantage Builder
7.55%
2.00%
37,271
28,334
695,181
1,565,613
6.91%
1,596,925
1,209,242
5.93%
Vista Advantage
7.55%
2.00%
37,271
28,334
695,181
1,565,613
6.91%
1,596,925
1,209,242
5.93%
Vista Lifetime
7.95%
2.00%
29,890
21,424
663,387
1,568,884
6.92%
1,600,261
1,023,348
5.29%
Lifetime Builder
7.95%
2.00%
29,890
21,527
663,387
1,568,884
6.92%
1,600,261
0
N/A
Empire Solution UL
7.55%
2.00%
37,271
28,334
695,181
1,565,613
6.91%
1,596,925
1,209,242
5.93%
Innovative Life EIUL
3.12%
3.00%
31,706
22,926
262,058
430,105
1.68%
421,732
0
N/A
4.80%
2.00%
31,500
21,249
406,988
777,014
4.19%
784,785
320,693
0.32%
7.36%
3.00%
30,175
30,175
528,351
1,143,688
5.72%
1,155,125
653,464
3.48%
Life Insurance
SecurePlus Paragon
Company of the SW
9.70%
2.50%
29,143
22,786
777,193
1,992,938
7.81%
2,012,867
819,313
4.41%
Lincoln Benefit Life
Ultra Index
8.00%
2.00%
36,721
27,726
717,528
1,603,322
7.00%
1,619,356
1,038,777
5.35%
Lincoln National
Life
Lincoln
LifeElements(sm) IUL
1.00% up to
8.00% attained age 100;
3.00% thereafter.
30,249
23,976
613,732
1,353,431
6.36%
1,366,966
966,408
5.06%
XL-DB
8.40%
3.00%
35,092
27,782
758,182
1,858,951
7.55%
1,877,541
1,091,632
5.54%
XL-CV
8.40%
3.00%
30,712
21,179
712,541
1,748,393
7.33%
1,765,876
875,934
4.67%
XL-EC
8.4
Conseco Life
ING "Security Life
of Denver"
Midland National
Life
Midland National
Life
Midland National
Life
Asset Builder Plus
100% EIAV
Indexed Strategic
Accumulator UL
For Agent Use Only / Not for Public Distribution cn57038122010
12/31 Published Date
S&P 500 Historical Performance
Date
S&P 500 Value
Change
Value %
Change
Date
S&P 500 Value
Change
Value %
Change
12/31/97
970.43
+31.0%
12/31/84
167.25
12/31/85
211.25
+26.3%
12/31/98
1229.23
+26.7%
12/31/86
242.17
+14.6%
12/31/99
1469.25
+19.5%
12/31/87
247.08
+2.0%
12/31/00
1320.28
-10.1%
12/31/88
277.72
+12.4%
12/31/01
1144.89
-13.0%
12/31/89
353.40
+27.3%
12/31/02
879.82
-23.4%
12/31/90
330.22
-6.6%
12/31/03
1111.92
+26.4%
12/31/91
417.09
+26.3%
12/31/04
1211.92
+9.0%
12/31/92
435.71
+4.5%
12/31/05
1248
+3.0%
12/31/93
466.45
+7.1%
12/31/06
1408
+12.8%
12/31/94
459.27
+1.5%
12/31/07
1485
+5.5%
12/31/95
615.93
+34.1%
12/31/08
903
-33.8%
12/31/96
740.74
+20.3%
12/31/09
1115
+23.5%
Past performance is not indicative of future performance.
For Agent Use Only / Not for Public Distribution cn57038122010
Special Features - IUL
Variable or Synthetic Loan
Loan amount does not reduce the Indexed Account values
Allows all indexed dollars to Participate in
Performance of S&P 500
– Allows the opportunity for the S&P 500
to outperform the VLR being charged.
(Loan interest is charged annually.)
Heavily marketed by some carriers
– More loans = more cash value accumulation
– Easy to out-illustrate the competition
For Agent Use Only / Not for Public Distribution cn57038122010
Sales Applications
Anytime cash accumulation and/or distribution
is important
Premium financing
Minimum premium to solve for 0 cash – risky
– Should really overfund contract
– Have a longer time horizon
– Be willing to give up some guarantees for
upside potential
– Absolutely want some guarantees though
For Agent Use Only / Not for Public Distribution cn57038122010
Target Customers
Generally under age 65
Longer term time horizon
Moderate risk tolerance
– Willing to assume more than UL risk but
less than VUL risk
Moderate to heavy funding capability
For Agent Use Only / Not for Public Distribution cn57038122010
Competitive Landscape
Performance Drivers
Illustrated/Indexed Rate
– Over 9% currently
Loan structure
Crediting strategies
– Caps
– Participation Rates
– Multiple Indices
Guaranteed Rates
Unique Features/Benefits/Riders
For Agent Use Only / Not for Public Distribution cn57038122010
Common Questions
If the participation rate is 100% and the cap
is 12% and the index returns 25% didn’t the
insurance company make a lot more money?
– No, the insurance company matches
assets & liabilities and buys options on
the index (buying an option providing for a
possible 12% payout). The seller of the
option made the excess return. The
insurance company made its expected
return on investment – nothing more.
For Agent Use Only / Not for Public Distribution cn57038122010
Common Questions
Is a variable/synthetic loan bad?
– No, but it must be disclosed to the
customer with the pros/cons.
• Pros – customer bought into the indexing strategy when
buying policy. Strategy may still make sense. Monies
stay in indexed account. Will out illustrate any other
option and probably even variable life.
• Cons – Illustration always shows a “positive” spread.
Actual cost of loan could be illustrated rate minus
guaranteed credited rate in any given year. 8%?
For Agent Use Only / Not for Public Distribution cn57038122010
Common Questions
There’s too many moving parts to IUL. It seems like
the issuing company always has an “out” by changing
caps, participation rates, etc. Isn’t it too confusing?
– Since IUL is a universal life contract, there is
disclosure on minimums, guarantees, etc. on the
illustration. In fact there is more disclosure than a
contract like whole life. In every product line
(except perhaps for no lapse guarantee UL and no
dividend WL), the insurance company has levers to
change based on experience.
For Agent Use Only / Not for Public Distribution cn57038122010
Common Questions
Which index is best to use?
– It really depends on how the customer will
think the market will act…
• Linear-up point-to-point better
• Volatile market averaging better
– Averaging will generally credit something
– Point-to-Point strategies generally better
2/3rds of the time
For Agent Use Only / Not for Public Distribution cn57038122010
Common Questions
Why aren’t the caps and participation rates the same
for a company’s IA’s and IUL contract?
– Generally, caps and participation rates will be
higher for IUL than for IAs because:
– The guarantees are stronger on IAs (i.e. 3% on
90%) – less money to buy options
– The investment horizon for IULs is longer
allowing lower cost option buying
• A few more percent of premium available to buy
options with IUL contracts
For Bramco
Agent Use
UseOnly
Only.
/ Not for Public Distribution cn57038122010
Common Questions
Isn’t IUL the perfect product – no downside risk
but upside market participation?
– No, IUL is an additive product but doesn’t
replace UL or VUL. It’s in between. Base
guarantees lower than UL and less upside
potential than VUL. This contract should
never be compared to VUL – really only fixed
UL as the performance will never match the
unlimited upside potential of VUL.
For Agent Use Only / Not for Public Distribution cn57038122010
Common Questions
Does the producer/customer really
understand all the moving parts of IUL and
the positioning of the contract?
– Probably not. That’s why there’s such an
opportunity for our firms – provide the
unbiased advice and sell the best contract.
For Agent Use Only / Not for Public Distribution cn57038122010
Male, 45, Pref. NS
$1,000,000 Premium Solve to Endow; Pay All Years
Rank
Company
1
Lincoln Benefit Life
Product
Ultra Index
Annual
Premium
$5,964
Assumed
Rate
8.00%
Cash Value
Year 10
$53,701
Cash Value Cash Value Target
Year 20
Year 30
Premium Notes
$153,357
$317,976
$9,170
2
North American
Builder IUL ***
$6,075
8.61%
$15,195
$105,079
$242,243
$15,770
1
3
North American
Builder IUL ****
$6,126
8.61%
$15,983
$107,812
$249,838
$15,770
2
4
Aviva Life & Annuity
Advantage Builder II
$6,137
9.00%
$41,131
$132,924
$270,966
$7,850
5
American General
$6,402
6.93%
$28,194
$135,203
$269,827
$9,720
6
North American
$6,609
8.61%
$17,910
$107,576
$244,341
$8,410
1
7
North American
$6,660
8.61%
$18,695
$110,302
$251,917
$8,410
2
8
Aviva Life & Annuity of NY
Elite Index UL
Guarantee Builder IUL
***
Guarantee Builder IUL
****
Empire Solution II *
$6,993
7.95%
$52,272
$156,955
$304,792
$7,850
9
ING Security Life of Denver
ING IUL-CV ** ^
$8,787
7.94%
$42,435
$144,307
$303,679
$18,000
8.25%
$35,208
$147,902
$307,831
8.00%
$77,702
$202,028
$368,910
10
11
American National
Lincoln Financial
$9,010 for 4
Indexed Universal Life years; $7,238
thereafter
LifeReserve Indexed
$9,876
UL
Notes: 1 - endow at age 120
2 - endow at age 100
3 - endow at age 121
For Agent Use Only / Not for Public Distribution cn57038122010
3
2
$11,100
2
Sample Carriers
AIG Elite Global Plus IUL
Accounts – Interest based on the best-performing two out of
three international indices based on a
5-year, or 1-year point-to-point term (75%/25%).
– S&P 500
– Dow Jones EURO STOXX 50
– Hang Seng
Fixed loans available
Illustrates 20 year look back, 55% participation, no cap
Sweeps annually
3% annual guarantee
Marketing – Foreign participation
Customer doesn’t know performance until after the 5th year
if 5-year selected
For Agent Use Only / Not for Public Distribution cn57038122010
Sample Carriers
ANICO
Accounts
– S&P 500
Fixed & variable loans available
Illustrates at 8.25%
Sweeps 1st of every month
2.5% annual guarantee
Marketing – CI rider; competes against
“sizzle” contracts
For Agent Use Only / Not for Public Distribution cn57038122010
Sample Carriers
Lincoln Benefit Life – Ultra Index
Account
– One year point-to-point based on S&P 500
– Swept 15th every month
– 100% participation rate guaranteed
Fixed loans only
0% annual guarantee but 2% guarantee on surrender or death
Illustrates at 8% (also provides avg of S&P 500 over 30 years,
15 years, plus highest and lowest one year change
Overloan protection
Marketing – strong fixed account (close to current assumption
UL); full surrender charge adjustment rider
For Agent Use Only / Not for Public Distribution cn57038122010
Sample Carriers
Lincoln LifeReserve Indexed UL
Part of Mass Affluent Product Line
– Disability Rider
– ABR for terminal and chronic illness
Accounts
– One year point-to-point
– One year monthly cap
– One year monthly average
Fixed and Variable loans available
Illustrates at 8%
Overloan protection
Sweeps quarterly
1% annual guarantee
9 year surrender
Marketing – a package sale for mass affluent
For Agent Use Only / Not for Public Distribution cn57038122010
Sample Carriers
ING – Indexed Universal Life
S&P 500 - annual point-to-point
Swept monthly on 28th
Illustrated rate 7.83% (20 year look back; 10% cap)
3% annual guarantee
Fixed loans
Adjustable Term Rider (ATR)
Marketing – can build higher early cash value –
no surrender charges in any year; refund of sales
charges in the first 3 years (current basis); hypo
projections – 15 high and 15 low years, premium
financing.
For Agent Use Only / Not for Public Distribution cn57038122010
Summary
Remember
This is not a variable product
Your client is not invested in the market
or the index
The index is merely a tool used as a component
in the calculation of the interest rate credited to
the policy
Educate your clients about Indexed Life products
For Agent Use Only / Not for Public Distribution cn57038122010
Indexed Universal Life Insurance
Questions & Answers
For Agent Use Only / Not for Public Distribution cn57038122010