Mutual of Omaha is expanding its reach in the universal life insurance market with the debut of its first indexed product, coming at a time when such policies are surging in popularity and more insurers are pushing to get in on the action.
Indexed universal life sales hit their highest-ever annual total in 2015, notching $1.86 billion in premiums, according to research firm Wink Inc.
Indexed UL was also the primary driver of overall UL sales growth for the year, representing 55% of new UL premiums and 21% of all new individual life insurance premiums, according to Limra, an industry group.
“Our introduction of indexed universal life is intended to increase our overall sales and not shut us out of what is now the largest part of the UL market,” said Joe Kenny, vice president and actuary at Mutual of Omaha.
Mutual of Omaha has two other universal life insurance products, a current-assumption policy and no-lapse-guarantee policy, Mr. Kenny said.
IUL insurance contracts have a sales pitch similar to that of fixed indexed annuities. Contracts are tied to a market index, and allow investors to grow cash value based on the performance of the index, with certain limitations to the upside via features such as caps and participation rates. There's also an element of downside protection — interest credited to the contract can't be less than zero, even if the index were negative.
Mutual of Omaha's new product, called Income Advantage Indexed Universal Life, is pegged to the S&P 500. It has three interest-crediting options: 100% participation in the index, up to a cap of 11.5% (meaning an investor participates 100% in the index growth, up to an index return of 11.5%); 140% participation, with a cap of 8.5%; and 65% participation with an unlimited cap to the upside. Investors may also allocate to combinations of these.
Insurers can change caps and participation rates on in-force IUL business, meaning policyholders would generally earn less of a return. Voya Financial, Pacific Life Insurance Co., National Life Group and North American Co.
recently lowered their rates, for example.
The product also has a Guaranteed Refund Option (GRO) rider attached that would allow policyholders to surrender their contract at the fifteenth contract anniversary and get back 50% of their aggregate premiums paid; investors could surrender the contract between the 20- and 25-year anniversaries for a 100% return of premiums.
It's a popular feature in Mutual of Omaha's existing UL products, and is meant for “a backstop or peace of mind” for investors especially skittish about the market, Mr. Kenny said. (If a string of poor market years led to 0% credited interest, the cost of insurance and contract expenses would deteriorate cash value, for example.)
The rider is unique to the IUL market, said Barry Flagg, president and founder of Veralytic Inc., a life insurance research and ratings provider. “Does it give some people comfort? If it does, it's a value to them,” Mr. Flagg said.
The product also allows for early access to a portion of the death benefit if the investor is diagnosed as chronically or terminally ill.
IUL GROWTH
IUL growth is due to a number of factors, one of which is investors' lack of appetite for other types of UL product. Investors' wariness of the market in the wake of the most recent financial crisis has led them to shy away from variable universal life, for example, according to Mr. Flagg.
Variable universal life sales declined 3% in 2015, and only accounted for 7% of total life sales, according to Limra. It's a similar trend to what's occurring in the annuity market, with variable annuity sales lagging and
those of indexed annuities gaining steam.
Further, insurers use current interest rates to provide contract illustrations — the “principal sales tool” for life insurance products — on UL policies, Mr. Flagg said. Those illustrations are less appealing to investors in the current low-rate environment, which conversely make IUL illustrations look better in their eyes, he added.
Mutual of Omaha is crediting 3.05% today on its current-assumption UL product.
“It's a hard sell with such a low accumulation rate,” Mr. Kenny said.
However, the firm is currently illustrating a 6.69% maximum rate on its IUL product. New rules that went into effect this month — known as Actuarial Guideline 49 (AG 49 for short) —
seek to standardize and lower the maximum illustrated rates on IUL policies.
Further, more insurers have been piling into the IUL market, due partly to the more profitable nature of the IUL market, Mr. Flagg said. The cost of insurance and expenses in IUL policies are typically “materially” higher than other UL products when compared on a company-specific basis, even though overhead, commissions and distribution costs are similar, he said.
Seth Harlow, Mutual of Omaha's UL product performance director, said that IUL products are generally more expensive, although calculations of insurance costs and expenses vary widely from company to company.
However, investors are typically drawn to the higher earnings assumptions in IUL versus UL policies, without regard for the higher contract costs, Mr. Flagg said.
