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The Future of Indexed Universal Life Insurance Policies

Life Insurance and Annuities
by Jeff Lee
An elderly person browsing life insurance on a tablet.
An elderly person browsing life insurance on a tablet.

An indexed universal life (IUL) insurance policy is one of the most popular insurance policy products that a company can offer. When evaluating the risk, where does your insurance company stand with IUL policy offerings?

As most people in the insurance industry know, evaluating the future and preparing accordingly is vital. Here, we are going to take a look at the IUL insurance policy landscape and what experts are forecasting as we move into a new economic state.

Indexed Universal Life Insurance Policy

Here's a little refresher for you on what makes an IUL insurance policy different from other kinds of life insurance products: This is permanent life insurance, which is important for companies who are wary of taking on more risk. This is because the policyholder will have the coverage for their entire life as it builds cash value.

The cash growth is done through an equity index account. Interest is earned by tracking a group of stocks selected by the insurer. Risk assessment is an important component of balancing value for the customer without endangering the company's success through the death benefit.

On the other hand, most other kinds of insurance policies only grow their cash value through non-equity index accounts. Policyholders also have other options to pick from:

  • Term life insurance: This is one of the more common types of life insurance products, and it usually poses less risk for the insurer in the long run because it's simpler. 
  • Whole life insurance: Policies in this category still have cash value growth more reliably because they accrue an interest rate on a predetermined schedule, making it easier to manage risk.
  • Variable universal life insurance: One of the more flexible options, this choice is possibly the riskiest for both the insurer and policyholder.

Stock performance determines success for both the company and the client with index universal life insurance. For example, this could be stock market indexes like the Nasdaq-100 or the S&P 500. While stocks are up, the insurance policy would perform well for the policyholder, but insurers need to constantly check in with risk assessment.

Associated Risk

Historically, this risk has paid off for insurance companies, with it being one of the industry's most profitable sectors. "Indexed universal life (IUL) new premiums rose 29% in the fourth quarter (of 2021, compared with the prior year," according to research company LIMRA. The result was the highest annual permanent life insurance policy sales in the country since 1983.

Despite this previous success, policyholders may be wary of opting for this insurance coverage choice because of its unpredictability. For insurance companies, it's extremely important to disclose that risk; client relationships based on trust and reliability will help the business remain successful for longer, even if that company avoids a short windfall. IUL insurance policies may not be for everyone to build value, and insurers should note this to their customers.

Because the insurance company is the one that is picking the index for the policy to have cash value in, risk assessment and predictive modeling are essential for success. For example, when the index is performing well the value skyrockets past most other life insurance policies. But if we take a look at the plummeting market in 2020, indexed life insurance did not increase in policy value. This poses a threat to the insurer and especially to the policyholder.

If the policyholder gets nervous, they might surrender the policy and the cash value account. In this case, the insurer would still get the premium for the year, but the net loss would be greater than if the owner kept their policy. Also, if the market tanks, some companies offer a guaranteed rate of growth — which could be risky for the insurer.

Dodd-Frank Wall Street Reform and Consumer Protection Act

Insurance companies and those who work in the industry need to be aware of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which exempts an IUL insurance policy from similar federal regulations for stocks and options. In 2010, this act was passed to protect the economy from spiraling. Insurance agents are not stockbrokers and should explain that the policy should not be treated as an investment. This builds client trust, loyalty and satisfaction.

Average Consumption

About 52% of Americans have life insurance according to LIMRA. After the COVID-19 pandemic, more people obtained a life insurance policy, which increased mortality risk for insurers. Fewer people were interested in more flexible and riskier policies like an IUL.

Preparing for the Future

To be successful in the extremely competitive insurance trade, companies need to manage risk and prepare for the future. While it's impossible to predict the future with certainty, every insurer will know that it's important to prepare exhaustively. This is where an actuarial consultant can come into play. Predictive modeling and data analytics can help set expectations. From financial examinations to life settlements, an actuary provides outside-the-box support for insurers.

For example, Lewis & Ellis offer the following services:

  • Appraisals.
  • Projected cash flow.
  • Portfolio and life insurance management.
  • Assistance with a medical evaluation of in-force and new business policies.
  • Identify potential partners for third-party administration.
  • Identify potential purchasers for a portfolio.
  • Provide LE*SETTLEWARE™ Life Settlement Pricing Tool.

An actuarial consultant can offer a personalized way to ensure that you and your team are ready to take on the future. This could be anything from risk management to income projections and cash flow.

Are you still not sure where to start with an actuary?  Don't worry, Lewis & Ellis are here to guide you and the insurance company through the process. We have developed a suite of Windows-based actuarial software to assist our consultants and outside actuaries in efficiently and effectively completing many of their activities. Reach out to our team to get started and learn more today!



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