index change vs index including dividend

[Nir Melamoud]

Hey,

in this link (https://www.hcplive.com/view/dahle-5-reasons-not-to-buy-iul-insurance) , I see that they say something about index change does not include dividend , what does that mean ?
does it mean that if I look at the S&M 500 history earning, for example at S&P 500 Index - 90 Year Historical Chart

2016 show annual change of 9.54% (assume the cap is 10%) does that number include the dividends from all those stocks, so if the total dividends was 2% (just as example) does that mean that in IUL Iwould have received as if the index did 7.54% ?
(ignore the fees for a min)

thanks

 

[scagnt83]

More important question for your situation. Why is your agent not answering these questions???

Either you didnt ask... which means you dont trust them to answer correctly...

Or you did ask and they didnt know or didnt provide an answer you trust...

Both scenarios are a serious issue for you. Your agent should be acting as an advisor during this process. If they dont know the answer, they can and should find it out.

If you dont feel that they are answering questions accurately or giving advice that is in your best interest... that is a serious issue. Not only could you wind up wasting thousands of dollars on a policy that is not designed correctly (just because its a good company/product doesnt mean its designed correctly and could certainly still have a terrible outcome). But even if you get a properly designed IUL thats a solid product... you wont fully trust it because you dont trust the "expert" who designed it...

Food for thought.

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To cover your question. That is a false equivocation.

Of course a S&P 500 index does not include dividends... because its designed not to include dividends.

A S&P 500 Total Return Index does include dividends. There are index products out there that utilize total return indexes. But it doesnt really matter if they do or not. Indexed insurance products are not designed to capture the entire gain of any index, only part of it. They are not meant to be compared to investing directly in a S&P 500 Index, or a S&P 500 Total Return Index.

So if the index used includes dividends or doesnt is a completely moot point in the world of IULs. The carrier is setting a Cap/Spread/Participation Rate based on what they expect the return to be... so they are essentially setting a max return they will allow based on historical models and costs of them investing in that index.


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The S&P 500 is an "Index" created by Standard & Poors. The basic core S&P 500 Index does not include Dividends. There are many different variations of the core S&P 500 Index... including the "Total Return S&P 500 Index" which includes dividends. But the basic S&P 500 index does not include dividends.

 

[Nir Melamoud]

thanks for the prompt response, I did not ask the agent yet, will meet him soon, trying to understand as much as I can before the meet.

the reason I care about the index, is because (mainly wrongly) Im trying to understand how an IUL policy will behave in real life, as the illustration of 6% or 6.4% every year means nothing, if I could for example get my hand on a real IUl policy from 30 years ago (of course IUL does not exist so long ago) and see how it actually did (with all the ups and down) and how it affect the fees etc and compare it to the original illustration, it will give me some picture, of course past performance is no indication to the future , still its a good picture to have.

since I cant have it, I was thinking to look the index past and see how it behave , but I do not know what numbers to look at the one in the link I put it, or I need to find ones without the dividend - that's why I asked.

 

[scagnt83]

thanks for the prompt response, I did not ask the agent yet, will meet him soon, trying to understand as much as I can before the meet.

the reason I care about the index, is because (mainly wrongly) Im trying to understand how an IUL policy will behave in real life, as the illustration of 6% or 6.4% every year means nothing, if I could for example get my hand on a real IUl policy from 30 years ago (of course IUL does not exist so long ago) and see how it actually did (with all the ups and down) and how it affect the fees etc and compare it to the original illustration, it will give me some picture, of course past performance is no indication to the future , still its a good picture to have.

since I cant have it, I was thinking to look the index past and see how it behave , but I do not know what numbers to look at the one in the link I put it, or I need to find ones without the dividend - that's why I asked.

Its not wrong to try and understand how it will look with a real life variable return scenario. In a way, the carrier is trying to show you a "levelized" version of that. But we all know that does not come out the same as a variable return scenario.

There are a few different ways to go about this.

- Index Life hasnt been around for 30 years. But its been around for close to 20 years now if not over. I have 10+ year old IUL clients whos experiences Im able to share with perspective clients. (obviously Im not sharing their actual statements or anything)


- Some carriers allow the agent to illustrate a variable return. They can literally choose, year by year, what credited return to show. So the agent possibly could do this for you on the illustration.


- The illustration will have detailed info about historical performance of the index. Take the time to read it and review the numbers. It will show what the historical performance would have been had the product been in existence then. But remember... that is based on Current Caps ... not the Guaranteed numbers.


- Some carriers publish their "renewal rates", meaning the rate Caps/Spreads/etc renew at in subsequent years. So you can see exactly how much they dropped Caps over the years and how far off expectations became since those policies were bought.

Renewals of Caps/Spreads/etc are what make or break an IUL policy over a 20 year period. Internal Costs staying reasonable is what makes or breaks an IUL over a 30-50 year period. That is why those "Guaranteed Expenses" are extremely important to consider.

Also be careful when considering carriers that have a habit of issuing new IUL products on a consistent basis. Often, this is a sign that they use "teaser rates" to lure in clients and then they drop Caps a couple years later once they are locked in. To keep new biz rolling in... they create a "new IUL product" with higher Caps than what existing clients are getting... and keep repeating that process over and over again. North American/Midland is an example of that. They have issued around 4 new IUL products over the past 8 or 9 years (going from memory on that). Every time they issue a new IUL line... they drop Caps on the previous line... like clockwork. But on the flip side, take Penn Mutual; they have 1 IUL and have had 1 IUL, and both new and old clients get the same Caps. Much more in line with the clients best interest and not the carriers best interest.


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When evaluating expenses. Look at the current expenses as a % of the Cash Value. That makes it easy to judge the effect of Guaranteed Expense rates if they ever were put in place.

For example: If at age 70, Current Expenses are 0.50% of the CV. And Guaranteed Expenses at age 70 are 2x the cost of Current. That means the Guaranteed will take a full 1% of the CV at age 70.

You can also compare that cost to the expected annual gain at that age.

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Generally speaking, in my opinion, an IUL needs to be sustainable (not lapse) down to the 4% range. If it shows a lapse at 5% or above, run away. Its either a costly product or not designed to be maxed out. This is assuming you are purchasing for cash accumulation as one of your main goals and you are not purchasing a GIUL.

There is a "midpoint" column on the illustration that will show a reduced rate. But I would ask to see 4% and 4.5% specifically if they are not shown.

 

[Allen Trent]

thanks for the prompt response, I did not ask the agent yet, will meet him soon, trying to understand as much as I can before the meet.

the reason I care about the index, is because (mainly wrongly) Im trying to understand how an IUL policy will behave in real life, as the illustration of 6% or 6.4% every year means nothing, if I could for example get my hand on a real IUl policy from 30 years ago (of course IUL does not exist so long ago) and see how it actually did (with all the ups and down) and how it affect the fees etc and compare it to the original illustration, it will give me some picture, of course past performance is no indication to the future , still its a good picture to have.

since I cant have it, I was thinking to look the index past and see how it behave , but I do not know what numbers to look at the one in the link I put it, or I need to find ones without the dividend - that's why I asked.

You really can't look at the S&P actual index because absolutely none of your money or the insurance companies money is going into the index. Instead, the insurance carrier is investing their funds in bonds, commercial mortgages, etc. Further, the insurance carrier really isn't the one entirely setting the cap or participation rate. I say this because they are buying options from investment banks that sell options of the given index. So, if the carrier 10 years ago had 100k to invest in their general funds of bonds & mortgages, they knew they needed to put 94k in their general fund to know it would get back to 100k in 1 year to guarantee the 0% . But today, that carrier is looking at govt treasuries at 1% & bonds & mortgages making a return of say 4.5%. so, they know they need to have 95,500 set aside to get back to 100k. So 10 years ago, they had 6k to go buy index options & today only 4500. This means they have to buy lower cap rate index options from the investment banks, not to mention index options prices can also get costlier depending on volatility of the market

So, as much or more of what you will be credited will have to do with the bonds & mortgages the carrier can invest their general funds into than how the index performs. If the index changes 20% & they only credit you 8%, they didn't get the other 12%. There was no other 12% made by anyone as none of the money was actually invested in the index.

Because none of the money is actually invested in the 500 companies of the S&P, obviously those 500 companies won't be issuing stock dividends to you either or to the insurance company because neither has invested their money in the 500 companies

At the core of your decision, you must first have a legitimate need to buy life insurance & pay the fees for that insurance. Otherwise, you have little to no need to use a costly life insurance policy to get to savings component of an IUL.

Apples & oranges to compare a real stock market investment of an index fund to an insurance instrument that credits interest based on changes in the index by using options "bets on where the index will go". If the index change is positive, the carrier excercises it & credits you the positive change. If the index change was 0 or negative, they let it expire worthless & wasted the money they paid to purchase the option.

The carrier is making their money on the insurance component of the policy of fees & from the returns on their general fund, not the index crediting aspect of changes in the index or "market"

 

[Nir Melamoud]

Im sorry but I do not understand your point
1. I understand how the insurance company get the money , but I fail to see why this is relevant to me (apart from education)
2. I of course implement the caps to calculate what I will get , so of course I'm not comparing s&p earning of 30% to what the cap will give me (10%)
3. I do have good reasons to get life insurance.


4. maybe my question was not clear , here is what Im asking - if I'm in 2016 and at the end of the year the index did 9.54% (as we see in the above table) and the cap is 10% , how much the insurance company will credit me ? 9.54% minus fees) or some other number like 7.54% -fees (because the 9.54% in the abvove table , in 2016 was including dividends that the various stocks gave, and of course in IUl I do not get it


Does anyone know the answer to the above question (4) |?

 

[Allen Trent]

Im sorry but I do not understand your point
1. I understand how the insurance company get the money , but I fail to see why this is relevant to me (apart from education)
2. I of course implement the caps to calculate what I will get , so of course I'm not comparing s&p earning of 30% to what the cap will give me (10%)
3. I do have good reasons to get life insurance.


4. maybe my question was not clear , here is what Im asking - if I'm in 2016 and at the end of the year the index did 9.54% (as we see in the above table) and the cap is 10% , how much the insurance company will credit me ? 9.54% minus fees) or some other number like 7.54% -fees (because the 9.54% in the abvove table , in 2016 was including dividends that the various stocks gave, and of course in IUl I do not get it


Does anyone know the answer to the above question (4) |?

They would credit 9.54% in your example.

However, it won't be 9.54% of your premiums. Load fees & costs will be deducted from your premiums & cash value. The 9.54% credited in your example will be credited to the cash value amount showing at the beginning point of the index comparison.

 

[Nir Melamoud]

IC, thanks
so it I had 100k at the beginning of the year , at the end of the year I will have 109.54K - 6000 (made up fees) = 103.54k right ?

 

[Allen Trent]

IC, thanks
so it I had 100k at the beginning of the year , at the end of the year I will have 109.54K - 6000 (made up fees) = 103.54k right ?

Correct. And if that year had been a negative or 0 year, you policy would still have the 6000 deducted. So, while you cannot have any losses due to negative index years, you can have years of negative cash value due to policy fees or surrender charges

 

[Nir Melamoud]

So the Dividend (the video is talking about) is not part of the 9.54% in the link right?