The truth about IUL bonuses and multipliers

Indexed universal life (IUL) bonus credits and multipliers have been in the spotlight for quite some time. While attractive on the surface, advisors need to consider the reality of these enhancements. That is, whether or not clients will actually receive them.

Before we get into the nuts and bolts of bonuses and multipliers, let’s take a step back in time. The year was 2015 (remember pre-COVID life?) and insurance carriers were battling it out in the endless “illustration wars.” Something had to give, so the National Association of Insurance Commissioners (NAIC) stepped in and implemented Actuarial Guideline 49 (AG 49). These new rules put limits on maximum illustrated rates and aimed to provide carriers a more uniform method for calculating crediting rates.

The result? Carriers were able to curtail guidelines by getting creative. Enter bonuses and multipliers. While AG 49 had good intentions, the illustration battles never ceased, as newly designed multipliers and bonus credits added another layer of complexity and confusion for advisors and clients alike.

Fast forward to 2020, and state regulators are now looking to tighten rules around AG 49, specifically eyeing how multipliers and bonuses are illustrated. While we wait for next steps, it’s critical that advisors understand how multipliers work and if they’re worth it.

There are three basic types of bonus methodologies:

  • FLAT RATE BONUS: Pays an additional interest rate but doesn’t really have a true guarantee; typically has a fee associated with the credit
  • ANNUAL PERCENTAGE MULTIPLIER BONUS: Pays a percentage on top of the annual index credit for a given year; if the year doesn’t have a credit, you don’t get the bonus
  • LOOKBACK BONUS: Examines actual performance over a specified period and credits additional amounts to boost performance

When considering policies with bonus credits, you need to look at the fine print to see if they’re guaranteed in the contract, or if they’re merely illustrated and dependent upon future results. You should also find out if the carrier will apply bonus interest credits to all existing policyholders—or only to new policies. After all, if your clients already own policies, they should be treated just as well as new policyholders.

Lastly, keep in mind that part of the bonus interest applies only to the unborrowed account value or surrender value—not the entire account balance.

The bottom line

It’s the advisor’s responsibility to dig below the surface and understand the intricacies of different IUL solutions. To learn more about bonuses and the most common IUL mistakes advisors make, download our special report, Avoiding the IUL Time Bomb.