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Indexed Universal Life Doomed for Failure - AG49 Part 9
As we progress through our discussion on the IUL, I want to tell you about a fairly new ruling. In the Spring of 2016, the National Association of Insurance Commissioners (NAIC) deemed necessary to add a new ruling when it came to preparing illustrations. This new ruling is called Actuarial Guideline 49, or AG49.
The NAIC determined that IUL illustrations were too aggressive and could be misleading to the public. What this means is that the rate of return that agents were using on illustrations was too high and unreal. Now, why would agents do that? Because every agent out there is looking for a quick sale, and every agent is trying to scoop as much business as he/she can. So, if I am an IUL agent, all I have to do to beat my competitor is run an illustration showing a higher rate of return and I come across as a genius. My competitor can then beat my illustration by running another illustration with a higher rate of return than mine. So, the question is, where does it stop? Do we as agents keep plugging in larger and larger rates of return to win the business. What does it all mean to the consumer? Is the consumer going to attain those higher rates of return simply because we plugged them into a software that spits out illustrations? NO! That’s ludicrous! The market is going to perform how it’s going to perform, regardless of the rate of return that is plugged into the illustration software. As a matter of fact, the best-looking illustration is probably the most fictitious. Take a look at this example:
Suppose that Mr. Smith has $100,000 that he wants to put away for 20 years. He decides that he would like to purchase an IUL. He goes to see Agent Jones who runs an illustration for him showing a 4% rate of return. Mr. Smith then goes to see Agent Williams and shows him the illustration that Agent Jones ran for him. Agent Williams, who wants Mr. Smith’s business, tells Mr. Smith “…oh, I can beat that…” and runs the same illustration for Mr. Smith but shows and 8% rate of return. This is what Mr. Smith sees:
Agent Jones illustration: $100,000 @ 4% for 20 years = $219,212
Agent Williams Illustration: $100,000 @ 8% for 20 years = $466,000
Who do you think that Mr. Smith is going to give the business to? Agent Jones, who was more realistic with his illustration, or Agent Williams whose illustration was very much fictitious? You guessed it, Mr. Smith will most likely do business with Agent Williams. However, just because Agent Williams used 8% does not mean that the market is going to return 8%. So, agents can plug in any rate of return they want in order to outdo one another. So again, where does it stop; at 10%, 12%,15%... Sadly, most consumers don’t know that all an agent has to do to show a money-making illustration is to choose a high rate of return. Even more sadly is that fact that almost no one reads the disclosures which outline the risks. As a result, they think that the agent with the best illustration must have the best policy.
Most indexed life products use the Index 500 as the index of choice. The S&P 500 has about an 8% return for the last 20 years. Most experts agree that about 2% of the total return is made up of a dividend. An IUL technically buys an option on the S&P 500. What does that mean? Let me explain:
If the S&P 500 had an 8% return, the IUL would get about 6%. If you had invested directly into the S&P 500, the entire 8% would have been yours. If the market does 6%, the IUL would be credited with 4%. There is about a 2% difference. I say about 2% because it is not exactly 2%, but it is very close. This 2% makes a huge difference. Let’s revisit the earlier example with Mr. Smith. Recall that $100,000 at 8% over 20 years resulted in $466,000. Well, that same $100,000 at 6% is only $320,000. That 2% represents a difference of -$146,000. This is exactly why the NAIC had to bring in the AG49 ruling; to keep agents and brokerage firms from misleading the public with unrealistic returns.
Up until March of 2016, some agents were still showing up to 9% on their illustrations. Imagine that. This means that the market had to return 11% at the very least, before the dividend, to get credited with 9%. I doubt that agents ever mentioned that the market has NEVER obtained those returns every year, year in and year out, without missing a year. The consumer does not know this. The consumer expects this to occur since this is what he/she is being shown. Sadly, this could not be further from the truth. Illustrations showing a 9% rate of return are as fictitious as one showing 100% rate of return. Now, is it fair to the public? To allow agents to show whatever rate of return they choose. I see it as deception at its finest. This is one of the reasons why the general public is frustrated with the financial services industry. Enter AG49.
Now that the AG49 ruling is in place, illustration software is not allowed to show over 7.11%. But 7.11% means that the market must return 9.11% to be credited with 7.11% because of the dividend. Not very likely to happen. Let’s not forget that the illustration is assuming that the market will return 9.11% (to get 7.11% after the dividend subtraction) year after year, year in and year out, without missing a single year. How likely is it that the market will perform in such a manner? NOT likely at all!
AG49 is a step in the right direction to weed out those unscrupulous agents who continually run illustrations with over-projected, fictitious, deceiving returns. It is wise to know and retain this information so that you are not lost and susceptible to the traps that agents and financial advisers may try to put you in. Without this information, it’s easy to get lost and become susceptible to the unfair sales tactics being employed by many so called financial professionals. IUL has characteristics which make me believe that it will be the next big tragedy as America ages and costs rise; it could really get dreadful. DON’T build your financial future on a sand foundation. You get older every day; there will come a day when you are really old and brittle. You don’t want to see your financial structure get washed away by the financial storms. Build your financial structure on a solid foundation; build it on the rock, not on the sand.
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