The implementation of AG 49A has increased the initial attractiveness of VUL products offering IUL sub-account options. VUL is not subject to AG 49A; hence, it permits the carrier to maintain these IUL strategies within the VUL chassis free from actuarial guideline constraint. As the leading broker-dealer for VUL, we have taken a keen interest in this space and its developments. However exciting it may be, we need to first issue a pressing warning to all point-of-sale and wholesale professionals along with the BGA community. Every great offer you hear generally comes with a “restrictions apply” message, and this is no different.
It is important to remember that any time you have exposure or investment in the carrier’s general account, several aspects can be subject to change. That is with almost any parameter in the life insurance contract such as COI, charges, riders, cap-rates, participation rates, persistency bonuses, etc. Carriers are under a substantial amount of stress with the current environment pertaining to their general accounts. We must remember this also applies to the fixed account sub-account options along with any IUL sub-account option within a VUL product.
I have two separate, very specific warnings to give. The first being that if this is a guaranteed no-lapse VUL product, these IUL sub-account options should not be considered and certainly not recommended at time of sale. This would be a Lincoln VUL ONE, Prudential VUL Protector, AIG Platinum Choice VUL II, or Securian VUL Defender type of lifetime no-lapse design (minimum premium for maximum death benefit). The customer is assuming substantial cost for the no-lapse guarantees already with these products, and it takes care of the downside risk of the cash value. It makes no logical sense to utilize the IUL sub-accounts until or unless the customer decides to take income to limit sequence of return risk on withdrawals in the later years of the policy. That would be the only instance. If the customer is insistent on utilizing an IUL sub-account, reference the below.
The second warning applies to the accumulation product design and sale. The name of the game here is disclosure. As the trusted insurance professional, you absolutely must inform the writing agent, along with the customer if given the opportunity, that investment within these IUL styles of accounts come with restrictions from the carrier that can be altered at any time. First being that you will be locked into the strategy for at least one year in most cases, which is the length of most “segment maturities” for the strategies with no option to exit prior. The second being that you may be subject to restrictions on withdrawal even after the segment matures. For instance, with one carrier’s IUL sub-account option, a customer is restricted to 25% per year transfer out of the account, meaning that it will take a total of four years to fully exit the strategy. As the insurance professional, it is up to you to become familiar with the restrictions of the product you are marketing and to disclose that to the writing agent and customer.
To summarize, for no-lapse guaranteed VUL sales, these IUL sub-account options should not be considered at time of sale. For accumulation sales, you need to become familiar with the applicable restrictions on the product you are marketing and disclose those restrictions. This is for all our protection, and as we say at The Leaders Group, “Doing the Right Thing is Always the Right ThingTM.” And this is certainly the right thing to do.
Contact Charles Arnold at The Leaders Group for more information.