Indexed Universal Life (IUL) insurance is often promoted as a flexible and high-growth product. Unfortunately, the illustrations used to project the future performance of these policies can be misleading. Many buyers trust these illustrations without understanding that they’re based on optimistic assumptions that may not reflect real-world conditions. While the insurance industry introduced AG 49 guidelines to bring more uniformity to IUL illustrations, these rules fall short of providing the full picture.
At LifeInsuranceReview.com (LIR), our experience shows that 8 out of 10 IUL policies we review either need improvement or were missold. This is largely due to a reliance on misleading illustrations and misunderstanding of AG 49. In this article, we’ll break down what AG 49 is, why it isn’t enough, and the key risks you need to watch out for before committing to an IUL policy.
What Is AG 49, and Why Was It Introduced?
AG 49 is an Actuarial Guideline introduced by the National Association of Insurance Commissioners (NAIC) to regulate how IUL illustrations are presented to consumers. The guideline was introduced in 2015 to bring consistency and transparency to the illustrations used by insurance companies, especially concerning the crediting rates and loan projections shown to policyholders.
The goal was to prevent overly aggressive illustrations that made IUL policies appear better than they could realistically perform. AG 49 sought to ensure that illustrations would be more conservative and uniform across the industry, making it easier for consumers to compare policies. However, despite its good intentions, AG 49 hasn’t fully addressed the underlying issues that lead to misleading projections.
The AG 49 Gap: What’s Missing?
While AG 49 helped regulate some aspects of IUL illustrations, there are still significant gaps that leave consumers vulnerable to misleading information. Here’s why AG 49 is not enough:
Highest Rate of Return Assumptions: Most IUL illustrations use the highest rates of return allowed, based on the historical performance of the funds or indexes the life insurance policy offers. It’s easy to see how it benefits the insurance company to use funds and indexes they help create to show better results. The reality is, we don’t know what the future holds. Relying on current offer rates and caps to project future performance of these funds that we don't know they themselves will also change too is inherently problematic. These rates are often shown as steady or increasing over time, leading policyholders to believe their policy will grow consistently. However, the reality is that market conditions are unpredictable, and returns will fluctuate. Even with AG 49 in place, illustrations often show optimistic growth projections that don’t fully account for market volatility.
Ignoring Sequence of Return Risk: IUL illustrations typically assume a constant rate of return, such as 6%, but this fails to account for the sequence of return risk—the impact of having bad years early on. If the market performs poorly in the first few years of the policy, the cash value can be significantly reduced, even if the long-term average return matches the illustration’s assumptions. AG 49 doesn’t adequately address this risk, leaving policyholders unprepared for real-world performance.
Loan Rate Projections: IUL policies often allow policyholders to take loans against the cash value, but the loan interest rates used in illustrations can be misleading. Many illustrations assume that the policy’s growth will outpace loan interest, but if the policy underperforms or the market has a downturn, loan rates can actually erode the cash value, putting the policy at risk of collapse. AG 49 tries to regulate loan projections but doesn’t account for the variability in interest rates over time.
Interest Rate Changes: Another issue with IUL illustrations is their assumption that interest rates will remain relatively stable. However, interest rates fluctuate over time, and changes in rates can affect both the cost of insurance and the policy’s returns. Even though AG 49 mandates more conservative projections, it doesn’t fully protect against the impact of fluctuating rates, leaving policyholders exposed to risks they may not anticipate.
The Danger of Optimistic Illustrations
Most IUL illustrations are designed to look attractive on paper, with projections based on optimistic assumptions about future market performance and interest rates credited to the policy cash value accumulation account. These illustrations often show the max illustrated rate projection (6-7%+) that looks good, but don't account for many uncertainties including the stock market risks, interest rates and the insurance company ability to lower caps and increase charges in later years.
In fact, this static return assumptions used are often misleading because they fail to account for market downturns and interest rate changes. Just because an illustration shows a policy growing at 6% annually doesn’t mean that will happen in the real world. Market fluctuations, poor early performance, and higher-than-expected loan rates can all lead to significant underperformance compared to what’s illustrated.
Even Max Blended Designs Carry Risk
Some IUL policies are sold using a max blended design, which incorporates renewable term insurance to lower overall costs and maximize the cash value potential. While this strategy can make the illustration look more attractive by reducing costs, it doesn’t eliminate the risks associated with loan rate assumptions for income withdrawals later and many other inherent risk factors.
Even with a max blended policy design, you must remember that illustrations are not reality. The strategy might help reduce insurance costs, but the actual performance still depends on market returns and interest rates, which are unpredictable. Policyholders must be critical of the assumptions used in the illustration, as even the best designs are subject to the same risks as other IUL policies.
Why You Should Request an IRR (Internal Rate of Return) Report
One of the best ways to get a clearer understanding of your IUL policy’s potential performance is to request an Internal Rate of Return (IRR) report. While this report is optional, it’s a powerful tool that gives you a more realistic view of how your policy will perform, taking into account fees, the cost of insurance, and market fluctuations.
The IRR report goes beyond the basic illustration by showing the true return you can expect on your policy. It factors in the timing of cash flows, policy expenses, and market volatility, giving you a clearer understanding of whether the policy is likely to meet your long-term financial goals. This report can also highlight potential pitfalls in the illustration, such as overly optimistic growth assumptions or unrealistic loan projections. Some of the AG 49 Gap can made up from using the IRR report to compare with other investment options to see if the policy does indeed provide a better investment value and option. The AG 49 Gap is real and why IUL illustrations misleading to just rely on them entirely. That's why LIR exists: to stand on the side of the consumer and empower you to explore, compare, and verify what you are being sold or what you already have.
The Reality of IUL Policies: 8 Out of 10 Need Improvement
Our findings at LIR show that 8 out of 10 IUL policies we review either need improvement or were missold. The primary reason is that consumers often rely too heavily on the illustrations presented during the sales process, believing them to be a reliable indicator of future performance. Unfortunately, most illustrations are based on optimistic scenarios that fail to account for the real risks involved.
Summary: Be Critical of Illustrations & Understand the AG 49 Gap
While AG 49 guidelines were introduced to help standardize IUL illustrations, they don’t go far enough in addressing the real-world risks associated with these policies. The AG 49 gap leaves room for misleading projections, especially when it comes to loan projections, and market volatility.
If you’re considering an IUL policy, don’t just rely on the illustration presented to you. Request an IRR report, and critically assess the assumptions in the illustration. At LIR, we help consumers understand the true potential of their policies and make informed decisions. Schedule a professional life insurance review today to ensure your policy is designed to meet your financial goals and protect you from unexpected risks.
AG 49 Gap - Why IUL Illustrations Misleading FAQs:
What is AG 49, and how does it impact IUL illustrations? AG 49 is an Actuarial Guideline created to regulate how Indexed Universal Life (IUL) policies are illustrated to ensure more uniformity and transparency. It limits the crediting rates that can be shown in projections, but it does not fully eliminate the possibility of misleading assumptions about future performance.
Why are IUL illustrations often misleading? IUL illustrations often rely on optimistic rate of return assumptions, using historical data that may not be indicative of future market conditions. These projections can create unrealistic expectations, particularly when they fail to account for market volatility and sequence of return risk.
What is sequence of return risk, and why is it important in IUL policies? Sequence of return risk refers to the possibility that poor market performance early in the policy’s life can significantly reduce its cash value. This risk is not typically reflected in IUL illustrations, which often assume a constant growth rate, leading to a misleading projection of the policy's long-term performance.
How do loan rates affect IUL performance? Loan rates can negatively impact the policy if the interest rate on loans taken out against the cash value is higher than the policy's actual growth rate. If the market underperforms or interest rates rise, these loans can erode the cash value, putting the policy at risk.
Why should I request an Internal Rate of Return (IRR) report? An IRR report provides a clearer picture of your policy's actual performance by considering all fees, costs, and potential market fluctuations. It's an essential tool for evaluating whether your IUL policy will meet your long-term goals and for identifying any pitfalls in the illustration presented to you.
