The debate over regulating indexed universal life insurance interest rate assumptions looks to be nearing an end and as the dust settles it appears as though the whole life insurance coalition won.
New regulation will likely reduce maximum assumed interest rates for indexed universal life insurance to the high six percent range. This comes as a result of applying tighter restrictions on assumptions that guide the maximum allowable assumed interest rate for the indexing account.
Additionally, the new regulation will limit spreads between loan interest rates and indexed rates, requiring that the spread be no wider than 1%.
It appears as though the American Council of Life Insurers (ACLI, the leading voice for indexed favorable indexed universal life insurance regulation) blessed the proposed change. The ACLI’s original proposal was a 30-year look back capped out at 8.5%.
I maintain my original cynical view that the coalition of life insurers who originally rallied to impose tighter restrictions did it to force more favorable comparisons of their products (whole life insurance). And it does appear as though this “compromise” more heavily favors the coalition’s goals in limiting assumed interest rates on indexed universal life insurance.
But I’m not so sure there should be any celebratory clinking of glasses at this time. These new rules still allow for much higher assumed interest rates than we use when we design and propose indexed universal life insurance policies, and these products compare very favorably against whole life insurance using our much lower assumed interest rates.
So if indexed universal life insurance continues to compare favorably against whole life insurance at these newly established maximums, the whole life hacks won’t have their default argument that these products only look better because they are unregulated and allowed to assume lofty figures that go beyond reason. To be more blunt, the whole life focused carriers may have placed themselves in a seriously disadvantaged position by killing their number one argument against indexed universal life insurance.
Since these new maximums still fall well above the assumed interest rates I use when designing indexed universal life insurance proposals; I’m not planning any changes to my approach. I’ve also never projected loans with a spread as high as the newly established maximum so no changes there either. It’s interesting (and comforting to me) to see the newly established guidance, which is now much more restrictive, still allow for more optimistic assumptions than I personally would make when designing an indexed universal life insurance policy.
This isn’t over just yet. There will be a number of additional details coming to light regarding these changes, and we’ll be sure to discuss them as they become more available.
It’s also worth noting the timeline for implementation. The most significant changes will likely take effect as soon as September of this year. Additional provision will come into effect next Spring.
Brandon launched the Insurance Pro Blog in July of 2011 as a project to de-mystify the life insurance industry. A specialist in the design and application of life insurance cash accumulation features, Brandon is one of the foremost authorities on the subject of coordinating life insurance cash values in a financial plan.