Why Capital Split Dollar ?
Understanding the impact of Actuarial Guideline 49 (AG49) on IUL
This paper is an overview of the National Association of Insurance Commissioner’s (NAIC) regulatory
impact on Indexed Universal Life Insurance (IUL) illustrations by Actuarial Guideline 49 (AG49),
implemented on September 1, 2015, and the recent update AG49-A, implemented on December 14,
Universal life insurance (UL) is an open format product where the premiums, cash values and death
benefit can be adjusted independently of each other. Indexed Universal Life Insurance (IUL) provides
additional cash value investment alternatives. Both UL and IUL cash values are mostly invested in bond
funds within the General Account. The additional dimension of IUL is the ability to use the earnings from
the General Account to purchase “call options” on the S&P-500 expressed as “indexed segments”. The
index segment is a point-to-point period of time from 1-year up to 5-years. The segment has a Floor
which limits market loss, and a Cap that limits any gains (Collar). For example, a 1-year index may have a
Floor of 0.0% and a Cap of 9.25%. If the S&P 500 has a loss at the end of the index segment year, the
index segment experiences no investment loss because of the “zero” Floor. Conversely, gains are
credited 100% up to the policy Cap, in this example 9.25%. In addition, some IUL products offer
multipliers which are applied to the annual credited returns. There are also higher caps purchased with
annual account fees. There are other enhancements that have the potential of increasing the overall
index return. All come at a cost.
The potential upside of market driven IUL products created a disparity with between IUL and whole life
products. These Whole life products are exclusively invested in the low yielding General Account,
consisting of bonds, mortgages, real estate and common stocks. Because of this disparity in returns, the
NAIC issued AG49 to handicap IUL illustrations by limiting the index crediting rate assumptions
substantially below historical index averages. Then the NAIC issued AG49-A which prohibits illustrating
the potential returns from index enhancement features like multipliers and high Cap accounts.
Interestingly, this does not actually limit actual returns. The handicapping of IUL illustrations is an
attempt to make all life insurance products look similar (level the playing field), but the fact is they are
very different in potential overall performance. But unfortunately, the advisors are unable to
demonstrate the difference prospectively.
The unintended consequences of the NAIC handicapping IUL illustrations is that it also handicaps the
ability to compare product performance, realistically estimating premium costs, projecting potential
problems in the future, and reasonably forecasting retirement income taken from the policy cash values.
There is no solution available at this time.