What Does AG49 Mean For You?

For over a month now, producers and carriers alike have been busy adjusting products and procedures to comply with Actuarial Guideline 49 (AG49), a new rule adopted by the NAIC in mid-June of this year. After literally years of deliberation and input, AG49 implements more “realistic” guidelines for the illustrated crediting rate assumptions used by insurers and producers to market indexed universal life (IUL) contracts. For those that haven’t been following this issue, these new guidelines go into effect as of September 1st, 2015; however, insurance carriers are already rolling out new features and crediting rate assumptions to bring themselves into compliance.

In a nutshell, this new move will require insurance carriers to cap their IUL crediting rate assumptions to approximately 7.4% and below, and also require that carriers be able to maintain established crediting rates for the life of the contract. The new rule also makes an attempt to introduce more realistic loan scenarios by implementing provisions that affect policy loan rates and that place certain restrictions on loan leverages, eliminating situations where a policy offers a lower loan rate while simultaneously illustrating higher assumed crediting rates.

Despite the industry buzz that has been swirling around AG49, many producers are still wondering what the new regulations actually mean for their practices. In an effort to clarify how AG49 will directly affect you and your business, I have included some relevant resources below for you to explore. We welcome any questions and feedback you may have on AG49, and look forward to making the transition as seamless and simple as possible for you.

“Delta I – Get Ready For Illustration Changes” by Michael Pinkans, CFA, CFP, CLU, ChFC

“Actuarial Guideline 49 – What You Need to Know” by Thomas C. Pfeifer, FSA, MAAA

“Actuarial Guideline 49 – A Closer Look” by Thomas C. Pfeifer, FSA, MAAA

2 comments on “What Does AG49 Mean For You?

  1. I’ve been in this industry long enough (38 years) to have seen a number of illustration methods and creative marketing strategies blow up. Here are a few of them: minimum deposit whole life, vanishing premium universal life and interest sensitive whole life, retired lives reserve, reverse split dollar, charitable reverse split dollar, minimum funded variable universal life insurance, jumping cash value policies, and illustrations for variable universal life and universal life that were too aggressive.

    The problem is that illustrations often showed potential results that looked so good that there was a good chance that the client would be disappointed with the actual performance 15 or 20 years later. Clients that were sold one of these concepts that didn’t perform as illustrated often lost confidence in the person who sold them the concept, the company whose product was used, and the industry as a whole. And numerous lawsuits were brought against advisers and companies, harming the industry more.

    For these reasons, I’m happy to see limits put on indexed universal life illustrations for both the illustrated rate and the leverage illustrated for policy loans. Showing 3 or 4% leverage on policy loans over 20, 30, or more years is unrealistic, especially when negative leverage can be the result in years where the S&P 500 (or other index) produces a return less than the loan rate. Negative leverage in those years couldn’t (and still can’t) be illustrated.

    Putting limits on illustrated rates and loan rate leverage is a step in the right direction. However, even with a limit of 1% difference between the illustrated rate and the loan rate, it is possible for negative leverage in some years, especially if no one is paying attention to the policy. For example, imagine a policy illustration using a loan rate of 5.5% and an illustrated rate of 6.5%. If the S&P 500 has a down year and 0% is credited to the policy, the leverage on the loan that year is a negative 5.5% instead of a positive 1%. This will lead to client disappointment if it isn’t explained to them at the time of sale. Keep in mind that many clients become more conservative in their retirement years. Leveraged loans from their policy may not match up well with that. Showing an illustration using guaranteed loans in addition to the leveraged loans would be a good practice, in my opinion; and some companies have incorporated that in their illustrations. I believe it is far better to under promise and over deliver than to over promise and under deliver.

  2. Very true ! Been in the Business 35 years!

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