IUL Moves Into Era Of Volatility Control
March 3, 2015 by Cyril Tuohy, cyril.tuohy@innfeedback.com
Mark Peterson, senior vice president with American International Group (AIG) Life Brokerage, has noticed a change in how advisors use indexed universal life (IUL) policies.
Advisors used IULs primarily as a way to supplement retirement income. More recently, advisors have used the policies as a way to control volatility in retirement portfolios, he said.
“If you go back 15 years ago, to the mid to late 1990s, there was initially a lot of use of indexed universal life around supplemental retirement income,” Peterson said. “Since then there’s been a real evolution in the product.”
Peterson, who works with hundreds of AIG and independent advisors, said advisors have been experiencing success “with the next degree of volatility removal” by giving IULs more stability and potentially a more stable rate of return.
In the 1990s, none of this would have mattered much as many retirees still benefited from the “golden handshake” of a corporate defined benefit plan managed by professionals paid to secure regular income for tens of thousands of retirees.
But with companies fleeing the defined benefit retirement business and workers and managers relying on their own contributions in 401(k)s and individual retirement accounts (IRAs) to support them through retirement, volatility control is considered critical to managing the retirement portfolio’s sequence of returns.
Losing money the first year or two in retirement isn’t the same as losing the same amount 25 or 30 years into a retirement cycle.
“If you lose money early in retirement, you are in big trouble,” said Tom Hegna, an Arizona-based financial advisor. Hegna spoke with InsuranceNewsNet last year about managing the withdrawal phase of retirement.
“It’s highly unlikely that you are going to survive (financially) over a long period of time because of the order of return. That money will never, ever have a chance to grow again,” said Hegna, author of the book on retirement income titled Paychecks and Play Checks.
A $1 million retirement portfolio that drops by 10 percent in each of the first three years of retirement isn’t going to deliver nearly the same income that an identical retirement portfolio would generate if its returns were flat over each of the same three years.
Withdrawing $70,000 from a retirement portfolio with a negative 20 percent return is the equivalent of pulling out a lot more than $70,000, Peterson said.
“We’re seeing more and more people challenged by the sequencing of returns,” Peterson said in an interview with InsuranceNewsNet. “You can’t be safe in retirement with rates that are low as they are today and that means looking for more yield to get more out of the portfolio.”
In January, AIG announced the launch of Value+ (Value Plus) IUL, which is designed to make it easier for policyholders to access the cash value in the policy. Other carriers offering IUL products include Pacific Life, Penn Mutual, John Hancock, Principal Financial Group, River Source and Prudential Financial.
James A. Mallon, president, life insurance, with AIG Consumer Insurance, said in a news release that AIG developed the product after talking to life insurance advisors and producers. Value+ is paired with a volatility control fund by Merrill Lynch, the company said.
Peterson said financial advisors can use IULs as a “side fund,” a “cash value that you can draw down on” for middle income retirees and preretirees to help them through volatile periods that strike early on in a retirement cycle.
“It’s marrying the sequencing of the returns to the life insurance policy and we’re promoting this on an active basis,” he said. “We’ve seen advisors use this as a concept.”
Advisors use IULs in different ways. Some prefer looking at IULs as an asset class. Others prefer talking up the tax advantages of IULs or the product’s flexibility.
Despite recent controversy swirling around IUL illustration scenarios, the latest edition of Wink’s Sales & Market Report reports robust sales of IUL. Annual indexed life premium reached $1.06 billion at the end of the third quarter, according to Wink’s.
Indexed life premium reached $1.35 billion in 2013, a drop from $1.8 billion in 2012. IUL life premium hit $973 million in 2011, Wink’s data show.
IUL sales as a percent of universal life (UL) and IUL sales combined increased from 14 percent in 2010 to 31 percent during the first nine months of 2013, according to the Milliman UL and IUL 2013 survey.
