Recent regulations have addressed “overly optimistic” assumed rates in indexed universal life (IUL) contracts in order to curb “abusive” illustrations. Prior to NAIC
AG 49, the maximum illustrative rate was set by the insurance
carrier and was normally based on an average look-back of 20
to 30 years. AG 49 limits the maximum illustrative rate to the
average rate based on stochastic modeling of 25-year holding
periods going back to 1950.
While the prior model could be criticized for including mostly
bullish periods by going back to the mid 80s or 90s, is it truly
realistic to go all the way back to 1950? The fact is, today’s markets are vastly different than they were mid-century.
Prior to 1980 there were no 401ks, and IRAs were in their
infancy. People’s retirement plans were mostly pension plans
managed by institutional investors. If an individual was
invested in the market directly, his access to information was
basically limited to the stock quotes he read in the paper the following day. Computer infrastructure did not accommodate high
frequency or program trading. There were no “flash crashes”
produced by technical glitches. There was no “day trading.” Individuals did not have access to online brokerage accounts where
they could instantly react to the market with $7 trades.
All that began to change in the 1980s with the introduction
of 401(k)s, expansion of IRAs and the emergence of personal
computing power. As a result, the behavior of the post-1980
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