Just as the dust has started to settle from Phase 1 of Actuarial Guideline XLIX—better known as AG 49—more changes are coming with Phase 2, effective March 1, 2016.

Originally, AG 49 was adopted to provide more uniformity and consistency within the illustrations used to promote the sale of indexed universal life (IUL). To accomplish this goal, carriers were required to utilize a uniform method of determining permissible IUL crediting rates, which involved a 25-year look back at the historical performance of the S&P 500. If other indices were included in the carrier(s) IUL policies, then illustrated rates for those could not exceed the rates derived from the 25-year historical calculation. Known as Phase 1, this requirement became effective on September 1, 2015.

Phase 2 of AG 49 will limit the maximum spread between the rates of interest to be illustrated in the IUL, and the loan rate, to no greater than 100 basis points (1 percent). This requirement was adopted to ensure clients would not be presented with illustrations that may project unrealistic arbitrage between variable (also referred to as “select”) loans and illustrated rates of return on IUL given illustrations. During the accumulation phase of the policy, carriers may use the IUL crediting rate derived by the historical performance formula, but once an income stream begins, they must use a crediting rate no higher than 1 percent above the policy loan rate.

Another semi-new feature is the alternative ledger column. Many carriers who have not used it in the past will now have to include it. This purpose of the column is to illustrate values based on the carrier’s fixed rate or based on the guaranteed rate of return, with current charges, including the loans, as shown in other columns. Illustrated-rate percentage and loan-rate percentage must be the same to further demonstrate potential variability, thus helping the client achieve a better understanding of the IUL product potential.

Additional disclosures will be required on top of the basic illustration ledger. These disclosures will now include a table of historical index changes over the latest 20-year period, side by side with the corresponding hypothetical IUL credited interest rate for the index account within the illustration.

Sound confusing? Help your clients understand IUL illustrations are not a promise for the future, but merely a “snapshot” of a specific scenario. Additionally, AG 49 illustration requirements impact only how the IUL products are illustrated, not how the specific product performs over time. Thus, making annual reviews more important than ever when keeping clients informed as their policies progress.

For tips on how to help your clients gain a better understanding of their IUL policies, call the CreativeOne life team at 800.992.2642 so they can keep you informed of the latest updates to AG 49!