There’s been a lot of chatter lately (particularly from whole life producers) about the effectiveness of AG 49. Most of the talk is centered around the question: Are IUL max illustrated rates still too high?
As an actuary who’s designed life insurance products, I can answer: No. IUL illustrated rates are a good representation of potential product performance. Let me show you why.
First, a disclaimer: Like any financial or insurance product, future projections are just that – projections. Obviously, we can’t know what the future holds for the market, caps or any other features.
But with this in mind, let’s look at a few reasons IUL max illustrated rates do a good job projecting potential future experience.
Let me offer up two examples that drive this point home.
First, let’s look at index experience since IUL was introduced back in 1997. I looked at the average index returns for a hypothetical index with a floor of 0% and a cap of 12.5%. Here are the results from several 10-year periods (taken at 3-years intervals):
Do those numbers look familiar? They’re pretty close to today’s max illustrated rates on many products. If future performance mirrors past performance, max illustrated rates are right where they should be.
The second example deals with the outlier in the chart above. Let’s look at 2000-2009, the “lost decade” of investing. The market, on average, returned -1% a year. An index with a floor of 0% and a cap of 12.5% credited an average of 5.3%. As you can see, a devastating period in the market did not have a devastating effect on indexing. So even if future markets underperform, max illustrated rates are still within a reasonable range.
The bottom line? Projections for indexing vary greatly from projections for the market or other strategies, and today’s rates are in line with experts’ reasonable assumptions about the future.
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