Kelly Halverson Discusses the 7 Critical Red Flags in Accumulation IUL Portfolio Management

Indexed Universal Life insurance policies have surged in popularity to accumulate wealth on a tax-advantaged basis while providing life insurance protection. However, the complexities of IUL portfolio management can lead to costly decisions that undermine the long-term benefits of these policies. With the growing competition in the IUL market, many carriers are using strategies that may seem attractive on the surface but can harm policyholders in the long run.

As a financial professional, it’s essential to identify these potential red flags in how carriers manage their IUL portfolios. This guide will walk you through the seven most critical red flags, providing insight into how they might affect your clients. The next time you speak with an IUL wholesaler, use this checklist to make sure your carrier isn’t making any of these costly decisions.

1. Inconsistent cap rates

One of the key selling points of an IUL policy is the opportunity to earn market-linked returns with downside protection through cap rates. However, many carriers offer more attractive cap rates to new clients while leaving in-force policyholders with lower rates. This inconsistency in cap rates can significantly affect the growth potential of a policy’s cash value.

Why it matters: Lower cap rates for existing clients mean that their policies earn less in a strong market compared to newer policies with higher caps. Over time, this disparity can erode the value of an IUL policy, leaving policyholders feeling they’ve been shortchanged.

What to ask: Is the carrier supporting cap rate parity between new and existing clients? If not, what justification is being given?

2. Misaligned fund selections

Some carriers push policyholders toward volatility-managed funds via a default index option rather than a standard S&P 500 index fund. While volatility-managed funds can help stabilize returns, they often are managed to a lower option cost than the benchmark S&P 500 account. The gap between the costs of these funds and their S&P 500 index options can create added revenue for carriers at the expense of the policyholder.

Why it matters: The insurer profits from the difference in option costs, while the policyholder expects performance similar to the S&P strategy.

What to ask: Are you defaulted into volatility-managed funds, and if so, how do the underlying option costs compare to a standard S&P 500 index fund? Is there transparency about fund performance?

3. Cap rate disparities

Some IUL carriers engage in delinking their portfolios, where they separate the investment management of new and existing policies. As a result, in-force policyholders are left tied to older, less favorable cap rates, while new clients benefit from more attractive terms. Even in a high-interest-rate environment that would support higher cap rates, carriers often keep in-force policies underperforming by not adjusting their cap rates upward, all while offering more competitive rates to new policyholders.

Why it matters: When a carrier delinks their portfolio, existing clients are stuck with lower cap rates that don’t reflect the current market conditions. This creates a disparity in growth potential, where long-term policyholders miss out on the benefits of a rising interest rate environment while new clients take advantage of it. Over time, this practice erodes the value of the in-force policies, leaving existing clients at a significant disadvantage.

What to ask: Has the carrier delinked its portfolio management strategy, resulting in lower cap rates for in-force policies compared to new ones? Why aren’t existing clients benefiting from current market conditions, especially with interest rates staying high?

4. Benchmark index manipulation

Some carriers manipulate benchmark index participation rates—changing how the index account is interpreted in light of IUL illustration regulations. For example, they may adjust the participation level from 100% to 105% or higher, avoiding the moniker of a benchmark index account. However, this tactic appears to be used in order to allow a higher illustrated rate, typically for the volatility managed funds, than what can be offered when it has a true S&P 500 benchmark index account with a cap and a 100% participation rate.

Why it matters: While an increase in participation rate may sound like a good thing, it can be used solely to inflate the illustrated rate that can be shown in an illustration, typically for the volatility managed funds.

What to ask: Has the participation level of your S&P index account been altered? Are there accompanying changes, such as lowered cap rates, that could diminish the benefits of this adjustment?

5. Loan arbitrage structure abuse

Participating loans are a common feature in IUL policies, allowing policyholders to borrow against the policy’s cash value while still earning interest on the loaned amount. However, some carriers are using synthetic loan arbitrage structures that exceed the 50-basis point limit set by AG49B. These structures distort the illustrated income that policyholders might expect. This creates an overly optimistic picture of potential outcomes that are dependent on loan arbitrage to achieve exceedingly high levels of distributions in retirement.

Why it matters: Misleading illustrations can cause policyholders to make decisions based on inaccurate projections, particularly when it comes to retirement income planning. If loan arbitrage structures are abused, the policyholder may face lower-than-expected returns and diminished financial standing in retirement.

What to ask: Is your IUL carrier adhering to AG49B’s 50 bps limit on loan arbitrage structures? Are the income projections based on realistic assumptions? Does your IUL carrier have a large AV bonus, or a bonus only paid on loaned values that increases the illustrated loan arbitrage well above the 50 bps limit?

6. Aggressive investment strategies

To support higher yields on IUL policies, some carriers invest assets in riskier financial products such as collateralized loan obligations. While these investments may offer higher returns in the short term, they also carry greater risk, especially in times of economic uncertainty.

Why it matters: Riskier investments can lead to greater volatility in the company’s investment returns and added risk to their financial stability and capital position. This could negatively affect the financial strength of your carrier and ultimately the security of the IUL policy.

What to ask: Is your carrier investing in large positions of higher-risk assets such as CLOs? If so, what measures are in place to protect policies from the associated risks?

7. Offshoring liabilities to enhance earnings

Some carriers move liabilities to offshore jurisdictions such as Bermuda or the Cayman Islands to improve their financial standing, enhance yields and reduce capital requirements. While this can benefit the insurer’s bottom line, it may create concerns about transparency and policy stability for policyholders.

Why it matters: While offshore structuring can result in lower capital requirements for the carrier, it raises questions about the long-term stability of the policy. Policyholders need to be aware of how these moves might affect the overall risk profile of their policy.

What to Ask: Is your carrier using offshore jurisdictions for their portfolio? How does this affect the risk and return profile of IUL policies?

By understanding these seven red flags in accumulation IUL portfolio management, you can make more informed decisions about the policies you recommend to your clients. Be sure to ask your IUL wholesaler the tough questions to ensure that your client’s policy stays competitive and aligns with their long-term financial goals.

Find out more about what makes Ameritas’ IUL competitive in the article Which IUL Would Your Client Rather Have?

Kelly Halverson
Senior Vice President, Chief Actuary and Underwriting, Individual

The information presented here is not intended as tax or other legal advice. For application of this information to your client’s situation, your clients should consult an attorney.