IUL Illustration Changes

Transcription

1 IUL Illustration Changes Frequently Asked Questions You may have heard about upcoming changes to the way Indexed UL products are illustrated. This Frequently Asked Questions document will address the questions you may have around what the changes are, how they generally affect the illustrations you create, and how they specifically affect Lincoln Indexed UL illustrations and business submission. General Information What is Actuarial Guideline 49? Actuarial Guideline 49 (AG49) is a guideline that was drafted by the National Association of Insurance Commissioners (NAIC) to devise a new set of illustration standards for IUL products. There are four main goals of this guideline: Help consumers better understand what they are buying and to increase their awareness of the potential variability in credited rates over the life of their policy; To normalize the methodology of setting a maximum illustrated rate across all carriers and provide advisors with a maximum rate that can be used to make a more direct comparison; Limit the spread between the crediting rate illustrated and the policy loan rate for participating loans; and Provide guidance to the illustration actuary. How are illustrations impacted and when will these new guidelines take effect? Illustration changes will be implemented in two stages. For policies sold on or after September 1, 2015, AG49 requires a new methodology when determining an allowable maximum illustrated rate. The maximum rate applies to required and supplemental reports and will necessitate removal of historical reports. For policies sold on or after March 1, 2016, illustrations will include narrative changes, additional disclosures, and interest credited to borrowed funds will be limited to 1% above the illustrated loan charge rate. For policies sold prior to September 1, 2015, the current method of setting the maximum illustrated rate will continue to apply for both revised new business illustrations and all future in-force illustrations. How does AG49 define the policy sold date? AG49 does not specify what date should be considered as the policy s sold date. It is up to each individual carrier to determine what date is considered sold for a new policy. This may lead to different transition dates across carriers. For details on how Lincoln defines sold date, see the Policy Sold Date section of this document. LCN Agent/Broker Use Only. Not for Use with the General Public. Page 1 of 7

2 Does AG49 affect only Lincoln or the entire industry? AG49 affects all IUL products, and therefore all carriers that offer IUL. Each carrier will have to comply with the illustration changes. Will illustration changes apply in New York? Yes. While New York has announced that it intends to develop its own IUL illustration guidelines in the future, in the interim, Lincoln will be applying the illustration changes to NY illustrations also. When will software be updated to incorporate the changes for September 1, 2015? The Lincoln DesignIt SM illustration update on August 31, 2015 will include the new maximum rates for each product. As part of the Lincoln DesignIt SM illustration update on August 10, 2015, an alert message will be placed on the input screen to inform users that there will be new maximum illustration rates taking effect as of the update on August 31, The optional Historical report will also be removed on August 10 th to line up with this version release. Does AG49 apply to marketing materials? While AG49 only applies to Illustrations, carriers will need to carefully consider the relationship between marketing materials and the AG49 compliant illustrations particularly when historical lookbacks or case studies are discussed to determine how they will partner with the new illustration maximum rates. Lincoln is currently reviewing all active marketing materials. Policy Sold Date What date will Lincoln use as the sold date? Formal applications that are signed, dated and received in Lincoln s home office in good order prior to September 1, 2015 will not be subject to the illustration guideline changes. Trial applications do not satisfy this requirement. Lincoln will systematically capture the application received date and use this date to trigger compliance with AG49 illustration changes. What if a trust still needs be set up? Applications that have been signed and dated by the insured with the owner listed as trust to be established received in the Home Office prior to September 1, 2015, but Lincoln is still awaiting a trust to be set up as part of the normal course of business, will still qualify as sold prior to September 1, LCN Agent/Broker Use Only. Not for Use with the General Public. Page 2 of 7

3 What if a policy is backdated? If an application is received on September 1, 2015 or later, regardless of policy date, the new maximum illustrated rates will apply. What if I need a revised illustration for a policy sold before September 1, 2015 that was originally illustrated with a higher rate than the new maximum? As long as the application was received in good order by Lincoln prior to September 1, 2015, a revised illustration will not be subject to the new maximum rate. Please contact your wholesaler to obtain a revised illustration. What if I am showing illustrations to potential clients now and am unsure whether I will be able to get the application in to Lincoln prior to September 1, 2015? If you are not already illustrating within the new maximum rates, running a series of alternate illustrated rates now will allow you to see the impact of lower illustrated rates on the scenario you are showing the client. This will help to transition into the new AG49 illustration environment and provide a viable illustration if the application is not received in good order prior to September 1, Does the new maximum illustration rate impact in-force business? The new AG49 maximum illustration rate only applies to policies sold on or after September 1, Therefore, for all current inforce IUL policies and applications received in good order prior to September 1, 2015, the AG49 maximum illustration rate does not apply to future inforce illustrations. As noted earlier, Lincoln will systematically capture the application received date and use this date to trigger compliance with AG49. There is one product exception for Lincoln LifeReserve Indexed UL Protector that is supported by an older Administrative System which does not store this date. As a result, this product will use the new maximum rate for all inforce illustrations and any revised new business illustrations run on or after September 1, In conjunction with the recent rollout of the new Lincoln WealthAdvantage SM Indexed UL, Lincoln LifeReserve Indexed UL Protector is being withdrawn from sale, with the majority of states reaching the end of the transition period prior to September 1 st. Benchmark Index Account What is the Benchmark Index Account? As part of the methodology for determining a maximum illustration rate, AG 49 defines the Benchmark Index Account as having all of the following attributes: One year point-to-point account Tracks percentage change in the S&P 500 Index* A participation rate of 100%, A 0% floor, An annual cap. LCN Agent/Broker Use Only. Not for Use with the General Public. Page 3 of 7

4 What if a product does not offer a Benchmark Index Account? If a product does not offer a Benchmark Index Account, the illustration actuary must use actuarial judgement to convert the closest product account to a hypothetical account that meets the definition of a Benchmark Index Account. This hypothetical Benchmark Index Account is to be used in determining the maximum illustrated rate for the product. How did Lincoln determine the maximum illustration rate for index accounts with a 1% floor? A hypothetical Benchmark Index Account was created by translating the overall option budget (including the cost of the 1% Floor and current Cap) into a supportable benchmark Cap assuming a 0% Floor and incorporating historical option costs in a manner consistent with how we set our current index account rates. Will AG49 cause carriers to lower caps? It is possible some competitors may adjust caps in the coming months in response to AG49. Lincoln does not anticipate cap reductions as a result of these guideline changes. Maximum Illustration Rates What is the methodology that all carriers must use to calculate the maximum illustration rate? Using the Benchmark Index Account explained above, the new lookback methodology specifies that a 25 year lookback calculation be determined for every trading day dating back 66 years prior to the current calendar year (for 2015, this is trading days between 12/31/1949 and 12/31/1989). The average of all of these 25 year lookback rates will be the maximum illustrated rate. LCN Agent/Broker Use Only. Not for Use with the General Public. Page 4 of 7

5 What are the maximum illustrated rates for Lincoln s currently sold traditional Indexed UL products under AG49? Product AG49 Maximum Rate Lincoln WealthAdvantage SM Indexed UL - Nationwide 6.53% Lincoln LifeReserve Indexed UL Accumulator (2014)- Nationwide 7.46% Lincoln LifeReserve Indexed UL Accumulator (2014) New York 7.32% Lincoln LifeReserve Indexed UL Protector - Nationwide 7.02% Lincoln WealthPreserve SM Survivorship IUL - Nationwide Lincoln WealthPreserve SM Survivorship IUL New York TBD TBD How does the AG49 maximum rate apply to the various accounts offered under a product? No account can exceed the AG49 maximum as set by the Benchmark Index Account, regardless of historical lookbacks. A carrier may choose to apply a lower maximum rate as determined by a historical lookback on each individual account. For example, the High Participation account on Lincoln IUL Products will have a lower maximum rate than the Benchmark Index Account. Can carriers continue to offer accounts that have attributes that vary from the Benchmark Index Account? Yes. For example, accounts with a floor higher than 0%, and/or that use indexes other than the S&P 500, will continue to be allowed. However, these accounts cannot illustrate a rate higher than the Benchmark Indexed Account. Why will the optional Historical Report be removed from the illustration? AG49 dictates that products cannot be illustrated above the maximum rate. This applies to all ledgers including supplemental. Since the new maximum rates are below the experience currently shown on a Historical Report, it will be no longer allowed. How often will the maximum illustration rates be revised? Carriers will have to review maximum illustrated rates at least annually and make any updates within three months following the end of each calendar year since the historical lookback period will change each year. Non-traditional IUL Products Will AG49 affect Lincoln Treasury Indexed UL? Yes. Lincoln is still reviewing the impact of AG49 on Lincoln Treasury Indexed UL as it is a nontraditional IUL product. More information will be shared as it becomes available. LCN Agent/Broker Use Only. Not for Use with the General Public. Page 5 of 7

6 How will AG49 affect the indexed accounts in Lincoln AssetEdge VUL (2015)? AG49 is specific to fixed products that have performance tied to an external index. Variable products are not subject to AG49. However, for consistency across Lincoln s indexed account offerings, Lincoln AssetEdge VUL (2015) will follow the indexed account maximum illustrated rate requirements. The maximum illustrated rate for Lincoln AssetEdge VUL (2015), including the Exec version will be 6.53%. Illustration Actuary Guidance How does AG49 provide guidance to the illustration actuary? The illustration actuary is currently required to certify that illustrated rates are supportable as required by the NAIC Illustration Model regulation. AG49 provides a limit on the earned interest rate assumed in those tests for IUL products. If an insurer hedges the index-based interest, this limit is 145% of the earned rate of assets supporting the policy. If the insurer does not hedge the index-based interest, this limit is 100% of the earned rate of those assets. In either case, the limitation on the earned rate used in illustration actuary testing does not directly impact the maximum illustrated rate allowed. The maximum illustrated rate can be higher than 145% of the earned rate on assets supporting the policy, so long as illustration testing can be passed with the limitation on the earned rate assumption. Phase 2 Changes (effective March 1, 2016): Indexed Loan Spread What is the impact of AG49 on participating (or indexed) loans? All loaned monies will only be able to be illustrated no more than 1% above the illustrated loan charged rate. This applies to variable loan charged rates as well as guaranteed charged rates. For example, with a 5% loan charge rate, the highest credited rate on loaned values will be 6%, even if non-loaned values are credited at a higher rate in the illustration. Additional Disclosures What are the additional disclosures that will be added? AG49 requires additional disclosures including an alternate scale ledger and a table showing historical index performance over the past 20 years. The alternate scale will be shown alongside the current and guaranteed ledgers and will use the current fixed account credited rate and policy charges from the current scale. If a loan is illustrated, the alternate scale will have a credited rate on loaned values no greater than the lesser of the fixed account credited rate or the illustrated loan charge rate. LCN Agent/Broker Use Only. Not for Use with the General Public. Page 6 of 7

7 2015 Lincoln National Corporation LincolnFinancial.com Lincoln Financial Group is the marketing name for Lincoln National Corporation and its affiliates. Affiliates are separately responsible for their own financial and contractual obligations. LCN *The S&P 500 Index is a product of S&P Dow Jones Indices LLC ( SPDJI ), and has been licensed for use by The Lincoln National Life Insurance Company and Lincoln Life & Annuity Company of New York. Standard & Poor s, S&P and S&P 500 are registered trademarks of Standard & Poor s Financial Services LLC ( S&P ); Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC ( Dow Jones ); and these trademarks have been licensed for use by SPDJI and sublicensed for certain purposes by The Lincoln National Life Insurance Company and Lincoln Life & Annuity Company of New York. The Lincoln National Life Insurance Company and Lincoln Life & Annuity Company of New York s Product(s) are not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones, S&P, their respective affiliates, and none of such parties make any representation regarding the advisability of investing in such product nor do they have any liability for any errors, omissions, or interruptions of the S&P Index. Variable products are sold by prospectus. Consider the investment objectives, risks, charges, and expenses of the variable product and its underlying investment options. Insurance policies are issued by The Lincoln National Life Insurance Company, Fort Wayne, IN and offered through broker/dealers with an effective selling agreement. The Lincoln National Life Insurance Company is not authorized, nor does it solicit business in the state of New York. Contractual obligations are backed by the claims-paying ability of The Lincoln National Life Insurance Company. Insurance policies sold in the state of New York are issued by Lincoln Life & Annuity Company of New York, Syracuse, NY. Contractual obligations are backed by the claimspaying ability of Lincoln Life & Annuity Company of New York. Products and features subject to state availability. Lincoln Financial Group is the marketing name for Lincoln National Corporation and its affiliates. Affiliates are separately responsible for their own financial and contractual obligations. LCN Agent/Broker Use Only. Not for Use with the General Public. Page 7 of 7