North American and Midland Dumps Caps on IUL Renewals
If you didn’t see last week’s newsletter titled: New FIA Index Outperforms Both Athene and Nationwide Indexes, click on the following link to read it.
One of the reasons advisors read my newsletters is because I tell readers important things that they will NOT hear from others in the industry. This is one of those newsletters.
North American (NA) (Midland* its sister company) recently published its IUL renewal cap history. Generally speaking I’ve liked NA products that have been put out over the years and I’m shocked and saddened by the fact they have decided to dump IUL caps on existing policy holders.
*It’s my understanding that Midland dropped their renewal caps by the same percentages as NA.
NA dropped the caps on most of their measuring indexes, but this newsletter will deal solely with their annual point-to-point S&P 500 caps. To download an IUL cap renewal spreadsheet on all the NA polices, click on the following link:
By the numbers…NA, like many companies, have rolled out new versions of their IUL product every so many years. The primary IUL sold by NA since 2011 was the Builder IUL® 7. When the policy was first issued, the cap was 14%. In 2016 the renewal cap was 12.5%. At the end of 2017, NA dumped the cap to 10.5%.
-Rapid Builder IUL® 7 Inception Cap = 14% Latest Renewal Cap = 10.5%
From the NA renewal rate sheet, it appears that NA dumped the caps on ALL old (pre-2017 inception date) IUL products to 10.5% (except Rapid Builder® IUL 3 which they dropped to 9.5%).
Full disclosure problem! I understand, as should clients, that the caps on an IUL can change (up and down) and really that they should change depending on certain variables (like treasury yields). So, it’s not that an IUL company drops caps in future years that’s upsetting (although it would be if they dropped too significantly). What’s upsetting is that NA is currently issuing NEW policies (Builder IUL® 8 series which became available in January of 2017) with a 12.5% cap.
How can they offer a 12.5% cap on new policies when older policy holders are seemingly getting screwed with a 10.5% renewal cap? I’m sure they will say better policy design, but I’m sure that’s what they thought about their last new product (which they have now dumped the caps on).
Are agents who are selling the NEW NA IUL policies disclosing to potential buyers that NA dumped the renewal caps on past clients? Are they running illustrations where the cap in later years gets dumped 1%, 2%, 3% (they are not because the software won’t allow it)?
How much do caps matter?
If you bought an IUL 10 years ago, the following would be the CAGR (Compound Annual Growth Rate) over that time frame on cash in the policy.
14% cap 7.87%
13% cap 7.63%
12 % cap 7.25%
11% cap 6.81%
10.5% cap 6.56%
A company with cap integrity
I can’t officially announce it in this newsletter, but I’ve been told by industry insiders that one prominent IUL company will be taking steps in the near future to allocate significant dollars to cap renewal rates. In doing so, they will be able to keep renewal caps at or very near where they are when the policy is sold (meaning they won’t be dumping cap rates on renewals).
When that happens, I’ll let you know who it is. If you are selling IUL products now and want to work with a company that has proven to have cap integrity (published), email me at firstname.lastname@example.org and I’ll have someone get in touch with you about that company.
The bottom line is that when a prominent and well thought of IUL company dumps it’s caps on policy holders, it’s not good for the insureds, it’s not good for the agents, and it’s not good for the IUL industry. Cap dumping gives critics of IUL something to latch onto, and even if it isn’t the industry standard to dump caps, it gives the IUL industry a bad name.
Roccy DeFrancesco, JD
144 Grand Blvd
Benton Harbor, MI 49022