Indexed Universal Life Under Fire for Misleading Performance Claims

Indexed Universal Life (IUL) insurance has long been marketed as a product that combines life insurance with investment-like returns. But recent findings show that some insurers have taken marketing creativity too far, presenting performance numbers from indices that didn’t even exist at the time. Regulators are now stepping in, and the implications for both the insurance industry and consumers are significant.

The Problem: Historical Returns That Never Happened

Imagine shopping for life insurance and being shown dazzling historical returns from an index that wasn’t even around when those returns supposedly occurred. That’s exactly what state regulators uncovered during the NAIC (National Association of Insurance Commissioners) summer session.

At the center of the controversy is Actuarial Guideline 49-A (AG 49-A), a rule designed to standardize how insurers illustrate potential IUL performance. Instead of clarity, it opened the door to what regulators now call misleading “what if” scenarios.

• The issue: Companies used hypothetical backtested data to make policies look more profitable than reality.
  
  

• The impact: Consumers saw illustrations that made retirement planning look brighter than it realistically could be.
  
  

These rosy projections, even with fine print disclaimers, painted a picture that regulators argue could mislead policyholders into making life-altering financial decisions.

The Numbers Game: Marketing vs. Reality

Investigators reviewed illustrations from 13 insurance companies and found a common theme: performance data was being shown for time periods before certain indices even existed.

To put it simply:

• It’s like claiming your new restaurant has been winning awards since 1985… when it opened last week.
  
  

• The contrast between these inflated “backtested” projections and the official maximum rates created what regulators called “marketing gold” but “regulatory headaches.”
  
  

For consumers, this practice made policies look safer and more lucrative than they actually were.

The Proprietary Index Boom: Over 160 New Creations

When AG 49 and AG 49-A capped returns, insurers didn’t give up. Instead, they introduced proprietary indices — custom-built financial instruments meant to sidestep the rules.

• Current count: Over 160 proprietary indices are now circulating.
  
  

• Track record problem: Most of these indices have histories shorter than a TikTok video, making them impossible to evaluate using real-world data.
  
  

• The backtesting workaround: Carriers simulate what the index would have done if it had existed in the past.
  
  
  

Why This Matters

If securities firms attempted the same strategy, they would likely face fraud charges. In the securities world, “past performance does not guarantee future results” is a required disclaimer. In the insurance world, however, this kind of marketing has gone unchecked until now.

The Backtesting Debate: Five Years vs. Ten Years

To fix the problem, regulators are considering stricter rules for backtesting. The question is: how far back should insurers be required to simulate returns when no actual data exists?

1. Five-Year Requirement:
   
   
   

   • Easier for insurers to comply with.
     
     

   • Critics argue it still leaves room for cherry-picking favorable market cycles.
     
     
     

2. Ten-Year Requirement:
   
   
   

   • Provides a broader view of performance.
     
     

   • Makes it harder for insurers to highlight only the best-performing short-term periods.
     
     

   • Consumer advocates prefer this option because it reduces the risk of misleading data.
     
     

Think of it like showing your entire year’s worth of photos instead of just the highlights from your best vacation.

Beyond Compliance: The Real Risk to Consumers

This debate isn’t just about numbers on paper — it’s about real families planning their futures. Inflated IUL projections can create:

• False confidence: Consumers believe they’ll have more retirement income than reality will deliver.
  
  

• Financial derailment: Families may under-save or over-rely on life insurance products.
  
  

• Systemic risk: If trust in life insurance erodes, the industry as a whole could face credibility issues.
  
  

As one industry expert put it, “When illustrations promise the moon and deliver a flashlight, families get burned.”

What’s at Stake for the Insurance Industry

Regulators now face a balancing act:

• Encouraging innovation: Proprietary indices and IUL flexibility are popular selling points.
  
  

• Protecting consumers: Marketing cannot be allowed to distort reality.
  
  

The widening gap between regulatory intent and marketing creativity is at the heart of this debate. If left unchecked, it threatens not only consumer confidence but the long-term reputation of life insurance as a safe financial planning tool.

The Bottom Line: What Consumers Should Watch For

The coming months will be critical as regulators decide whether to enforce stricter backtesting standards and close the loopholes insurers have been exploiting.

For consumers, here are three key takeaways:

1. Question the illustrations. If an index shows performance before it even existed, that should raise red flags.
   
   

2. Understand backtesting. Hypothetical returns are not the same as real returns. Don’t mistake one for the other.
   
   

3. Look beyond the numbers. Ask your agent how the policy aligns with your long-term financial goals, not just the projections.
   
   

The era of “time-traveling” performance claims in IUL marketing may be ending. For insurers, it’s a wake-up call to prioritize transparency over sales flash. For consumers, the lesson is simple: if something looks too good to be historically accurate, it probably is.