A Deeper Dive Into Indexed Universal Life Products
Since Indexed Universal Life’s (IUL) inception, the industry has witnessed significant growth and innovation, including many different crediting methods, index allocation options and diverse protection riders. This past summer, LIMRA surveyed IUL carriers for a more in-depth look at what is driving trends in this market.
IUL products are appealing as they allow policyholders to benefit from market-related growth from underlying stock indices, while protecting against market-related losses. With the recent market volatility and the interest rate environment, it comes as no surprise that IUL products have been gaining popularity in the life insurance industry. IUL sales have more than doubled in the last decade, now making up roughly 25 percent of the market share.
Most recently, IUL has benefited from inflation and yield curve pressures on fixed universal life (FUL) and from IRC Section 7702 changes, which allow higher premiums per dollar of death benefits. Until 2023, IUL sales only slowed twice; at the start of the global pandemic when in-person sales were halted and once prior in 2016 after Actuarial Guideline (AG) 49 went into effect.
Figure 1. Indexed Universal Life Annualized Premium Sales
Source: LIMRA’s U.S. Individual Life Insurance Sales survey and LIMRA estimates, 2013 – 2023
Historically, IUL has been an accumulation-focused product. Independent agents — primarily insurance brokers — dominate the IUL market and are responsible for the vast majority of growth over the past 10 years. They and their typically more affluent customers focus primarily on cash accumulation products. The IRC Section 7702 update reinforced this trend, igniting sales of products designed for cash value accumulation and accessibility.
However, interest rates and product innovation have begun to have an impact on sales, as well. In 2021 and through 2022, current assumption IUL sales increased significantly, as several middle market companies experienced substantial growth. Overall, IUL premium declined in 2023 as high interest rates have made short-term savings products more attractive, hindered premium finance capabilities and impacted profitability, causing carriers to shift focus to other products and reduce caps.
The burning question is whether the market can maintain growth in the current market environment. In an effort to maintain growth, product and process innovation continues as carriers respond to recent regulatory and economic trends. In response to the adoption of AG 49, volatility indexes have become a popular topic in recent years. According to LIMRA’s Indexed Universal Life Insurance Deep Dive survey, 6 in 10 of IUL carriers surveyed confirmed their company used a proprietary volatility index. These indices represent a majority of new premium for over half of the carriers in our study.
No-lapse guarantee (NLG) features have also been a hot topic in the UL space for many years, from the decline in lifetime guarantees on fixed products to the introduction of guarantees in the variable universal life market, which drove an increase in protection-focused product sales. That success, however, has not translated to the IUL space. Although many carriers offer no-lapse guarantees on their products, 7 in 10 IUL policies sold in 2022 were sold without a guarantee elected. On a premium basis, IUL with NLGs accounted for only 13 percent of sales.
The pandemic expedited the adoption of accelerated underwriting, which can partially or wholly eliminate the need for certain in-person medical exams and speed up the time between application submission to decision. There are eligibility requirements for carrier accelerated processes, and many applicants do not qualify. And in fact, our research shows that the majority of sales still flow through the traditional underwriting process. Three in 10 IUL policies are issued using accelerated underwriting, with annualized premium and face amount sales holding even smaller proportions as carriers place face-amount limits on their accelerated process eligibility.
So, while innovation continues, its impact in some cases is limited. Looking ahead, carriers agree that regulatory, market and consumer trends will certainly have an impact on IUL sales in the next few years. AG 49-B and the interest rate environment are the leading factors that companies expect to have an influence, followed by market volatility. Interest rates have already had an impact on some carriers’ sales, as rising interest rates make premium financing arrangements less appealing — although the impact so far is minimal. In a June 2023 LIMRA survey, half of IUL carriers said they do not allow premium financing, and among those that do, only three have seen a decline in premium financing that led to a decrease in first-quarter 2023 sales.
Historical levels of growth cannot continue indefinitely. History shows us that product popularity increases and wanes as other products take over as the new favorite. In fact, while the majority of carriers expect the industry to experience flat to moderate growth, they are much more likely to believe their company sales will experience a significant gain or loss. Time will tell whether IUL products can weather current conditions.
Figure 2. Participant Sentiment — Industry Versus Company IUL Sales