Indexed Life: The Guts and the Glory

Jason Konopik, April 2006

“Indexed Life Sales Up Ninety-One Percent.” That was the title of a news release that hit the presses in March 2006. The release goes on to explain that there are now 20 carriers offering indexed life products (65 percent more than just a year ago). Industry experts expect similar growth throughout 2006 and beyond—in both premiums and the number of products being offered. This is a huge step as it seems life insurance companies finally understand what I have been saying for years—there is no better opportunity in the industry than indexed life!

I’ve been developing indexed products for almost 10 years, so I couldn’t be more excited about the future of this product segment. With the innovation in the industry today, products are becoming more and more competitive and new features are being added every month. It is just a matter of time until indexed life surpasses VUL in sales and becomes the primary vehicle to use for accumulation/income generation.

Early on, indexed life was easy to understand. All of the products looked very similar and the concept sold itself. In addition, there was minimal competition and companies could price products as conservatively as they wished. But competition brings great things, and there are now significant choices to make when an agent decides on a carrier to represent and which product to sell. Every company is looking to have the next hot product, and each is adding features that may or may not add value to clients.

While more choice leads to more opportunity, it also places the onus on the agent to ensure he or she can dissect the market, find the best product and sell it appropriately to clients. In addition to developing products, I spend a significant amount of time dissecting the products available to find their strengths and weaknesses in order to determine which products fit different sales concepts, and to determine which products will most likely perform as expected in the long-term.

When I review products, there are four main areas I focus on: 1) projected product performance, 2) unique features/product niches, 3) product integrity, and 4) compensation. I will now discuss each one of these areas and give comments on how indexed life has changed in the past 12 months.

1. Projected product performance

   One of the reasons indexed life became such a sought-after product is the illustrated values it produces. In fact, many agents illustrating indexed life for the first time simply said, “This is too good to be true!” Many of the newer indexed life products have taken steps to give the product a better chance to beat the illustrations. This is mostly due to 1) higher caps and participation rates and 2) lower internal charges. The reason for this dramatic change is simple—newer products are priced more competitively.

   In addition, illustrated values on the best performing products are now sometimes 20 percent higher than the best selling products of only a year ago, furthering the gap between indexed life and non-indexed product alternatives.

2. Unique features/product niches

   This is the area that most excites me. It gives agents tools to use in different situations with clients and enables them to use indexed life with almost any prospect. Some of the newer features available with indexed life are:

   • Competitive no-lapse guarantees
   • Long-term account value guarantees
   • Riders that waive all surrender charges without reducing commissions
   • Living benefits that allow products to be used for terminal illness, critical illness, chronic illness, long term care, nursing home expenses, etc.
   • Unique income features providing credible, tax-advantaged income streams
   • Table shaving
   • Interest crediting linked to up to five different indexes
   • Guaranteed account value bonuses
   • New indexing formulas—some good and some bad

   These are just some of the features becoming the status quo, and new products are being developed as we speak, which will add even more features, enabling agents to be more successful with their clients. Some of the most important features are the crediting mechanisms used. Analyzing the different methods can sometimes be frustrating at best. However, if given the right insight, the best structures to use with clients become obvious. When it is all said and done, the hardest thing for an agent to do is determine which of these special features truly add value to clients and which features are just smoke and mirrors.

3. Product integrity

   This topic is perhaps the most important, because without it, projected performance and product features don’t matter. I look at two issues when it comes to product integrity. First and foremost, I will not recommend a product unless I can sit down with the actuaries that developed the product and they can convince me it meets their profit targets based on how the product is currently marketed.

   With some products, insurance companies “stretch their value.” This means they develop materials and illustration techniques that potentially overstate the value in a product. Many agents would be surprised to find out what “hidden gotchas” are embedded in products that will most likely lead to a product not performing as illustrated. The only way agents can ensure they are presenting sound illustrations is to either understand how a product is developed or have access to that information through an affiliation. By definition, a home office is never going to point out the shortcomings in a product they developed.

   In addition, I look for features that are guaranteed within a product. In general, the fewer levers that can be pulled to increase profitability in the future, the more likely that a product will perform as expected. Some of the newer indexed life products are making attempts to improve the guarantees embedded in the products to avoid “trust me” scenarios.

4. Compensation

   The final question that tends to come out of an agent’s mouth, but usually the one that has the most bearing on what product gets sold, is “How am I compensated?” My opinion is that an agent needs to find a list of products that will do the best for the client and then use compensation as the equalizer. Fortunately, there are several high-compensation products that are also the best performing products.

   In addition, there are many unique compensation structures becoming available that align an agent’s interest with the interest of the insurance company and also the client. I expect that compensation structures will be the biggest movement in indexed life over the next 12 months.

   I’m sure many of you are asking, “How can I get the knowledge needed to determine the best company/product to use with my client?” Well, the answer is very simple—not very easily. The best advice I give to agents is 1) don’t always take the insurance company’s word for it, and 2) don’t do it by yourself. There are several very reputable organizations that provide you the training you need in order to take full advantage of the indexed life marketplace.

   If you haven’t sold indexed life yet, now is the time to get on board. If not, the train may just pass you by! But if you have sold indexed life in the past and continue to sell last year’s product, you are missing out on some amazing new products your competition is now using against you.