I can assure you it is not the client

A few weeks back I had the opportunity to give a talk on Equity Indexed UL (EIUL) products to a group of producers.  We covered many of the things that we have discussed in past Rants: the need to set client expectations appropriately regarding rates of return, the need to question the sustainability of product designs and the emphasis on treating each case as its own unique entity rather than simply falling back on one favorite product.

A few days after that presentation, I was contacted by a producer wanting help evaluating some older EIUL contracts written about ten years ago.  These were two policies taken out at the same time on a husband and wife.  Things became a little confusing when one of the in force ledgers was run with an interest rate below 4% and the other over 6.5%.  The products were identical in every way with this one exception.  The question, of course, was why?

The answer was complicated.  Turns out the ledger with the higher rate was just plain wrong!  Now that the first question was out of the way, the next was why these EIUL contracts were being illustrated at such a low rate?  If you remember the EIUL Rants you will recall that the carriers are the ones pulling the levers on these contracts through the management of one of the contract features.  These days it is usually the annually declared cap rate, but the participation rate is also used.  These contracts were old, uncapped contracts that had been issued with a 90% participation rate.  When I contacted the home office and asked about the history of the participation rate I came to find out that it had dipped from the high of 90% to a low of 30% over the years, and that this was the reason for the subpar performance historically as well as the current low crediting rate.

File this one under questioning the sustainability of the contract design.  The fact that this was an uncapped product made it fairly unprofitable for the carrier over time.  The result, along with some bad years for the S&P, combined to make this product a really poor performer in the long run.  Now, I have no idea what the initial assumption was at the time of sale, and the good news is that we uncovered all of this when we did, as we can reposition the client with barely a hiccup in their planned premium.  However, the best time to discover all of this was really years ago, when the participation rate was yo-yoing up and down and the crediting rate was lagging far behind projections.

The moral of this cautionary tale?  A simple one: even in a product with all of the downside protection of an EIUL, the client is still exposed to some risk in the form of the policy under performing versus projections.  The annual review process remains a critical component of successfully working with EIUL's as a result.  Oh, and if the contract terms appear to be too good to be true at the time of sale, they probably are.   

This should not be news to any of us.