10 Pay Vs. L99

[johnyblu]

Thanks BNTRS!

"I could give you a long list of reasons why I prefer Guardian to their competition in most WL cases if you're interested. Look for illustrations later today"


This would be amazing, thanks. The one thing I don't get, which the illustrations may answer, is if the reason for the difference is time value of money (as you stated) then if you put the same payments at the same time for L99 as you do for 10pay then shouldn't the numbers look the same? If they do then wouldn't you opt for a policy where if disabled they will fund a certain amount for 99 years over 10 years?[/font]

 

[Franz Kafka]

It's really not that complicated if you sit down and think about it. A common sense will tell you that a single premium paid up policy will give you the most bang for your buck. The carrier makes the least amount of profit from paid up policies so whatever kind of policy that will pay you the least amount of commission will give your client the most bang for his buck.

10 Pay is paid up in 10 years. PUAs are paid up immediately (they are like mini single premium policies). Both are good for the clients if they want maximum CV build up. The only real difference is 10 Pay is for people who got a lot of $ now. E.g. If I won a state lotto and chose lumpsum payment, I would buy me a huge 10 pay. If I chose annual payments, I would buy me a huge maximum PUA lifetime policy. Both are really a powerful stuff as far as what you can do with CV goes. JMO

 

[johnyblu]

So would there be a difference if I pay a $25K premium for 10 years with 10pay vs. $25k for 10 years with L99 (a compination of premium and PUA)? Based on what it seems like you and BNTRS are saying, it's about funding more early so in these two cases we're putting in the same amount of money for the same period.

 

[Franz Kafka]

So would there be a difference if I pay a $25K premium for 10 years with 10pay vs. $25k for 10 years with L99 (a compination of premium and PUA)? Based on what it seems like you and BNTRS are saying, it's about funding more early so in these two cases we're putting in the same amount of money for the same period.

Two are incomparable IMO because one will be "paid up" after 10 years while the other will only be partially paid-up. L99 expects you to pay $25k a year until you're 99 so the death benefit will be HUGE compared to 10 pay. Using our common sense (again) we don't have to look at the illustration to know which policy will have more CV in future - the one that has $500k DB or the one that has $2M DB.

Level maximum PUA on lifetime policy will give you the most bang if you plan to pay at least till you retire. 10 Pay will give you the most bang if you plan to pay for 10 years (or even few years less). JMO

 

[kenbill]

If you are comparing a 10-pay vs a regular whole life (no PUA, all base) with the same death benefit, 10-pay always has a much higher IRR.

However, what we are comparing here is to put in the same premium to the 10-pay and regular WL for 10 years. The regular WL is structured as minimum base + TERM + PUA. In this case, the regular WL should always have higher guaranteed CV as shown in the illustration I posted. The main reason is because of the lower expense in the PUA portion. And if you make the regular WL a paid up policy at the end of year 10 instead of using the dividend to pay the base policy, the IRR should be higher than the 10 pay. I also confirmed in the recent full disclosure report that the dividend rate is the same for the custom WL vs regular WL. So the only reasons are the expense treatment (front loaded for the 10 years) and higher amount at risk (higher DB-CV for the regular WL if not paid up).

Another thing you need to consider is that dividend is not guaranteed. Company has the flexibility to change their dividend allocation policy. I also understand it is easy to explain and sell the 10-pay policy, especially in the executive market. But if I were buying a policy for CV growth purpose for my family, I would prefer the higher guarantee and better flexibility of the regular WL.

 

[johnyblu]

I think I'm getting confused on 'paid up.' there are fees/expenses after year 10 for both 10 pay and L99 - at a certain point you no longer have to put in add'l cash since you've put in enough money to cover expenses going forward while maintaining whatever DB you chose. Going back to case above, for both 10 pay and L99 the example puts in $25k for 10 years, not a penny after year 10. The 10 pay after 10 years of $25k has no more premiums and is 'paid up.' The L99's premium is much lower than 10 pay so the majority of the $25k was PUA so at year 10 should also be 'paid up' since even in the worst case of 4% dividend you wouldn't have to put in any more money to keep policy from lapsing. So I still am having a hard time seeing what the difference is if you call it 10 pay, unless there is a different expense or dividend structure.

Thanks!
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Kenbill - what are the advantages of after 10 years changing to a 'paid up' policy over just leaving the policy in place and letting dividends pay the premium? How does that work?

 

[kenbill]

For a regular WL policy, you need to keep paying the required premium for the base portion until you die or to a certain age (99, 100 or 120 depending on the product).

For example, if the premium for the base DB amount ($100K) is $1,000 per year, you need to either pay the $1,000 from your pocket or you use the dividend generated by the CV to pay the premium or you surrender the paid up addition DB to pay the premium if the dividend is not enough.

However, if you overfund the policy with PUA in the early years and the policy has enough CV, you can ask the insurance company to make the policy a "paid-up" policy. Let's say 10 years later, your CV is $180K in the policy, the total death benefit amount is $850K. When you ask the company to make it a paid-up policy, they will look up the paid-up factor at your attained age and let's say, the factor is 4.2. So your paid-up death benefit amount = $180K * 4.2 = $756K. Once you make the policy a paid-up policy, you can't put any premium into the policy and the policy will not require any further premium to keep it in force. So from that point, your CV is $180K and your DB is $756K. The lower DB is good for CV growth because you pay less mortality cost on the amount at risk (DB-CV).

Once the policy becomes a paid up policy, all your future dividend will be used to buy paid up addition (with no expense load). That's why I say if you can keep paying the scheduled premium for 10 years and ask the company to make the policy a paid up policy, this is the most efficient way to grow the CV. On the other hand, if you can't afford the big premium for some reasons in the future, all you need to pay is the required premium for the base policy which is much lower in order to keep the policy in force. So you have a lot more flexibility.

Regarding the dividend allocation, here is the direct quote from the Guardian actuary.

Dividend Substitution and Pegging
Guardian’s current practice is to pay a dividend that is higher than the basic dividend formula amount when certain conditions apply. The practice is called Substitution if it applies in the first three policy years and Pegging if it applies thereafter. The intent is to add an extra degree of stability to policies. These adjustments apply to basic policy dividends only and do not apply to dividends on paid-up additions. This practice is not guaranteed as it is approved each year by the Board of Directors.

Substitution: In an environment of a declining dividend scale, Substitution smoothes performance for the second and third policy years by eliminating dividend reductions that would otherwise occur. For policies illustrated in 2010, the basic non-loaned policy dividend that will be paid at the end of policy years two and three will not be less than the basic dividend amount illustrated at the time the policy was issued. Substitution does not affect the dividends on paid-up additions.

Pegging: Beginning with the non-loaned basic dividend paid at the end of policy year four, Guardian currently employs a strategy called Pegging. Pegging allows for a smoother transition from year to year in a declining dividend scale environment. Pegging does not guarantee that the dividend will increase from year to year, but does “soften” the decline in the dividend that would otherwise occur if only the dividend formula was used.

 

[BNTRS]

Kenbill, again sorry, I feel bad because you said such nice things about me but no you're wrong.

The regular WL is structured as minimum base + TERM + PUA. In this case, the regular WL should always have higher guaranteed CV as shown in the illustration I posted. The main reason is because of the lower expense in the PUA portion. And if you make the regular WL a paid up policy at the end of year 10 instead of using the dividend to pay the base policy, the IRR should be higher than the 10 pay

You can term blend and overfund with PUAs the 10 pay as well. I'm not sure what the bolded, italicised, and underlined part means, but the PUA expense loading is the same for both products. The 10 pay will still have a higher cash value because it's a high cash value product. Additionally guaranteed cash values are going to be higher on the 10 pay.

But if I were buying a policy for CV growth purpose for my family, I would prefer the higher guarantee and better flexibility of the regular WL.

It's not that simple, as Franz pointed out above, and as I've mentioned before if you have the cash, or are worried primarily about cash value rather than death benefit, the 10 pay will win the cash value fight. The only exception here is smaller policies where we are trying to get better risk classes. I've sold a few longer pay product to people who were looking for cash value but also didn't have the cash flow to achieve the DB required to get prefered plus rates in a 10 pay, so we used a different product.

Another thing you need to consider is that dividend is not guaranteed. Company has the flexibility to change their dividend allocation policy.

Yes, but since we are comparing product to product and not company to company a change in dividend rate has the same effect accross the board.

You've mentioned in a few posts that after 10 years you can reduce pay up the policy or use dividends to pay the premium. I don't know of a company right now that is illustrating a pay to age 65 or above with dividends capable of paying premiums after only 10 years, historically this has taken more like 20 plus years to occurr. There could be a premium offset performed after 10 years, this surrenders cash value in the policy to pay the premium, this would be the option used in a longer pay policy to stop payment requirements after only 10 years if not reduce pay up-ing the policy.

Once the policy becomes a paid up policy, all your future dividend will be used to buy paid up addition (with no expense load).

I know of no company where this is the practice and as such Guardian is definitely not one of them. In fact, AM Best always brings this up as a positive point for all of the major mutual insurance companies (collecting an expense load on dividends used for PUAs as a way of recapturing what they are paying out).

The copy and paste that you've labled as Guardian's policy for dividend allocation has nothing to do with how dividends are distributed to different policy holders. That's is a blurb on two practices that Guardian current uses to prevent changes dividends paid to inforce policies when dividend rates decline, substitution a practice of looking at the dividend rate paid for the past 2 years and if the currently declared dividend rate is lower they use the highest rate declared in either 2 preceeding years (they only do this during the first 3 years of the contract), and pegging essentially a practice of using a rolling average of dividend rates and if the current year declared rate is lower, they use the average rate instead. Again as noted above this applies only to base policy dividends, not those earned by Paid Up Additions. Nonetheless, it's a great feature offered at Guardian that prevents declines in anticipated cash values when dividend rates decrease in a given year, which are some of the many reasons I prefer Guardian to its competition.

Now, here are some numbers...

Notice 10 pay wins

 

[kenbill]

I think one of the reasons is because the total DB face amount is higher for the L99 policy.

Another reason I want to mention is insurance companies have different blending rules for the 10-pay vs regular WL policies. For example, the maximum blending ratio for NYL's custom WL is 5:1, while the regular WL does not have this limitation. So if the base policy DB amount is the same and the total DB amount is similar, then the 10-pay version has better CV. However, if the regular WL policy is structured using the maximum blending ratio, its CV growth should be better than the 10-pay. For the L99 product, the maximum blending ratio is 9:1. The highest blending ratio in the market is Northwestern Mutual's Estate CompLife product with minimum $1,000 base face amount.

Both designs are very good for different purposes. I just prefer the regular WL for its flexibility.

Regarding dividend PUA, here is the link for an actual NYL policy with statements from different years. The PUA purchased by dividend is better than the PUA by additional premiums.
http://r0k.us/insurance/vp/vl_st01.html

I also personally owned an NWM Estate CompLife policy, in section 6.1 purchase of additions; charges, only the scheduled additional premium and unscheduled additional premium is subject to an expense load, guaranteed no more than 9% for the first 20 policy years.

 

[johnyblu]

Thanks again, this has been very helpful