IUL illustrations and Actuarial Guideline 49

Actuarial Guideline 49 (AG 49) is a rule from the National Association of Insurance Commissioners that caps the index-credited return an insurer may show in a sales illustration for an indexed universal life (IUL) policy. It narrows the gap between the best-looking illustration and what the policy's options can plausibly earn, but it governs only the projection. It does not limit what the policy actually credits, and the projected column remains an estimate, not a promise.

Why a guideline was needed

An policy illustration shows how a policy might perform year by year if the insurer's current assumptions hold. For an IUL, the single most influential assumption is the crediting rate: the percentage the account earns each year based on an index such as the S&P 500, after the policy's cap, participation rate and floor are applied. Before AG 49, insurers had wide latitude in choosing that rate, and illustrations from different companies could show very different results for similar products. Regulators were also concerned about illustrations that combined high assumed rates with loans that appeared to cost almost nothing, a pattern that made policies look like tax-free retirement engines.

What AG 49 does

The NAIC adopted AG 49 in 2015 through its Life Actuarial Task Force. According to a Society of Actuaries newsletter history of the guideline, it set guardrails around the maximum illustrated rate of index credits and introduced a standard reference point called the Benchmark Index Account. In plain terms, the guideline works like this:

• A reference account sets the ceiling. The maximum illustrated rate is tied to what a standardized index account would have credited over a long historical lookback, not to the insurer's most recent good years.
• The option budget matters. The rate an insurer shows has to be supportable by what it actually spends on the options that produce index credits and by the earnings of the general account backing the policy, rather than by a number picked to look attractive.
• Loans are restricted. The guideline limits the "arbitrage" between the interest charged on a policy loan and the rate credited to the loaned portion of the account. This is the feature behind many sales pitches about borrowing from the policy. See life insurance policy loans: how they work and what they risk.
• A disciplined scale. The illustrated scale, sometimes called the disciplined current scale, must be consistent with the insurer's real investment and hedging practices.

The result in practice was lower maximum illustrated rates for many products than some earlier illustrations had shown.

AG 49-A: bonuses and multipliers (2020)

Insurers responded to AG 49 by adding product features such as fixed bonuses and multipliers. These could make an illustration look better than the benchmark allowed. The SOA history notes that the 2020 amendment, AG 49-A, addressed those features and removed the ability to show returns from multipliers and bonuses that exceed their cost. An illustration for a product with a bonus can therefore no longer outrun a similar product without one purely because of the bonus.

The 2023 update

The same SOA article reports that a further revision, effective May 1, 2023, addressed volatility-controlled indices. Under that change, the maximum illustrated leverage (the extra return that comes from cheaper options) is tied to the benchmark account. Illustrated rates must fall in proportion when an index's option budget is lower than the benchmark's. This closed a route by which low-cost index options could generate high illustrated rates.

What AG 49 does not do

It is easy to over-read the guideline. Keep these limits in mind:

1. It limits projections, not performance. The policy may credit more or less than illustrated in any year. The floor is typically 0%, but caps and participation rates can usually be changed by the insurer within the contract's stated limits.
2. It does not cap charges. cost of insurance charges, premium loads and other fees and charges inside permanent life insurance are not directly constrained. Higher charges can still erode the account while the illustration shows a respectable rate. See universal life cost-of-insurance increases and what to do for what happens when the insurer raises them.
3. It does not make the policy suitable. A properly capped illustration can still be the wrong product for a buyer who cannot pay premiums for decades.
4. It does not bind every sale equally. It applies to illustrations of IUL products by insurers subject to the NAIC framework as adopted by each state. Check with your state insurance department if you want to know how your state has implemented it.

How to use this when you are shown an IUL illustration

1. Ask for the guaranteed column and the current assumption column side by side. The guaranteed column assumes minimum crediting and maximum charges.
2. Ask what illustrated rate is being used and whether it is the maximum allowed. A rate at the maximum is the ceiling, not a typical outcome.
3. Ask whether the illustration includes a loan strategy, and what loan rate and credited rate on loaned amounts it assumes.
4. Ask for a sensitivity test: the same policy at a lower illustrated rate, such as 2 or 3 points below the maximum, to see whether the plan still works.
5. Ask for an in-force illustration each year after you buy, and read it. See how to request and read an in-force illustration.
6. Compare how the values change if premiums are paid for 10 years instead of until retirement.

The general reading skills are in how to read a life insurance illustration and guaranteed vs non-guaranteed values in a policy illustration.

A hypothetical example

Say two illustrations are shown to the same 40-year-old for similar $500,000 IUL policies. Illustration A uses a 6.5% crediting rate; Illustration B uses 5%. Both assume the same premium and a retirement loan stream starting at 65. Illustration A shows a comfortable income that never lapses. Illustration B shows the policy running out of cash value at 88. The only difference is the assumed rate. The point is that the retirement income is almost entirely a function of an assumption, so asking for the lower-rate version is the most useful single step. These figures are made up for illustration and are not market data.

Key takeaways

• AG 49, adopted by the NAIC in 2015, caps the index credit an insurer may illustrate for IUL policies and restricts loan-arbitrage assumptions.
• AG 49-A (2020) and a May 1, 2023 revision closed loopholes for bonuses, multipliers and volatility-controlled indices, according to the Society of Actuaries.
• The guideline limits what a sales illustration can show, not what the policy credits or what the insurer charges.
• Ask for a lower-rate scenario and the guaranteed column; if the plan only works at the maximum rate, treat it as fragile.