Looking For a Whole Life Policy

[Chuckles21]

Did I just miss it, or did that NWM illustration not disclose the dividend rate anywhere on there?

8% is an expensive loan...

6% is the current dividend it is based on. Do you know what SBLI's loan rate is per chance. Also I am working on a reply to your previous post, just haven't had time to put it all together.

Edit: Never mind found the loan info on their website:

• Policies Issued from October 4, 1979 to October 31, 1981 - 8.00%
• Policies Issued November 1, 1981 To Present - Variable Rate. Contact the SBLI Call Center to review the current interest rate for your specific policy.

So although variable i would guess that it is close the the 8% that they had it at before.

 

[Chuckles21]

OK, first of all, there are no "shenanigans" involved with that illustration.
I used illustration software provided directly from LFG and that has been updated within the past week, and just now.

The reason you were asked if you have ever sold PI is that your questions are ones of someone who is not educated on the product.
(Im not bashing you for that, everyone has to start somewhere; but I would be more diplomatic in your questions/statements on subjects that you are not educated on)

The multi-million dollar illustration software thats developed by the multi-billion dollar IC has the algorithims built in it to calculate how the loan is carried within the policy; if the software is showing it, its correct.
When a policy is over-loaned or over-withdrawn the software will not show the values moving forward, it will show them stopping.

So the short answer is that the software is a hell of a lot smarter than any one agent; if it shows it, it is accurate.
And if you ever have any doubts you can always call an inside sales rep at the company and have them double check.

scagnt83,

I want to first apologize for how harsh my previous posts sounded. I was not trying to imply you a liar or anything similar. I just was flabbergasted by your illustration and my emotions got the better of me. I understand that all you did was input the numbers and the software plays it out as illustrated. I do appreciate the time and effort of your responses and discussion.

Now, to give you the mechanics of it.
You are correct in your statement that there has to be adequate value backing that loan.
You are incorrect in assuming that the illustration did not have adequate backing.

You actually had no proof to base that assumption on (without replicating the illustration on your own software) without seeing what the Gross Policy Value was. The illustration you saw only shows the Net Policy Value (aka: CV or SV).


Instead of me typing a 30 minute post; I will just illustrate it for you.
(I commend you on actually being willing to look at illustrations and trying to learn from them; very few around here actually look at illustrations when they are posted.... but they will type 50 posts about the subject...)


I have attached the Policy Expense Report. It shows the Gross Policy Value (under the expense analysis its just referred to as Policy Value).

I actually usually use the Expense Report to educate most clients from; I dont shy from it like most agents.

Its important to remember that the loan interest is only 5%, I am receiving 6.5% on 80% of the policy; of course that is going to more than just the loan, but what it does is help sustain the loan.
Also, the loaned values are still receiving that credited interest rate; so the credited gains are not just from the CV/SV.


I would recommend reading the "Understanding Your Illustration" section of the pdf I have attached.

Then look at page 8, the "Policy Expense Analysis".

You have a "Policy Value", then you have a loaned value, along with your surrender charges and Surrender Value.

Go to age 80 in the Expense Analysis.
- You have a Policy Value of $1.4mill, a total Loan of $800k, and a Surrender Value of $600K (I am rounding to whole numbers)

As you can see, the loan is not more than the Policy Value.

The interest shown, is just the amount of the Loan that is interest.


The reason that the CV rises in some later years, and falls in others is because of the COI. As you can see, it varies in older age and some years are cheaper than others, while on average it increases, and increases most years; it does not always increase, and sometimes decreases.


If you compare this illustration to the last one, you will see that the CV is higher and the Distributions are higher as well.

This is because I had it set to pay annually, and take Distributions monthly. This is the most efficient way to use the policy for CV use for obvious reasons.

My issue with this illustration is that although it is possible, it is also highly improbable. I highlighted the key points of this plan on the illustration you sent me below. See their “page 4 of 19:” they are illustrating the loans charging 5% and crediting 6.5% to age 100! After age 100, it gets BETTER: the loan rate drops to 3% and they still credit 6.5% PLUS the monthly deductions (COI, expenses, etc.) are apparently only made to age 100, then stop! That’s how they can show values increasing after the last loan is taken at age 100.

Given that this illustrates withdrawals happening 30 to 60 years into the future, you have to wonder how financially viable Lincoln will be at that time with practices like this! Of course, they can always limit the crediting rate down to 1%:

Please note the other areas that I highlighted, particularly how Lincoln can LIMIT the crediting rate at THEIR DISCRETION for each premium payment/SEGMENT (“page 3 of 19”). The 1% guarantee (to age 100) is very low.

Let me clarify. If the S&P index increases 11% in a given one year period, Lincoln would only credit interest up to the cap that they set at the beginning of that 1-year period (could be 6.5%, 5% or whatever). The cap can be different for each period, premium payment or segment. The cap, or maximum, can go as low as 3% for the 1-Year indexing (see Glossary for Indexed Account Interest Cap). But the minimum interest credited can be as low as 1% (guaranteed rate)—and that may happen if the index is negative OR if Lincoln’s general account can’t support anything more than 1%.


There is way to much unknown and uncertainty built into this policy for my taste. I will give you that if it would play out as illustrated it is a BEAST of a policy and cannot be touched as far as its value. The problem is that it is what are the odds of it happening, not very good in my mind.

 

[scagnt83]

scagnt83,

I want to first apologize for how harsh my previous posts sounded. I was not trying to imply you a liar or anything similar. I just was flabbergasted by your illustration and my emotions got the better of me. I understand that all you did was input the numbers and the software plays it out as illustrated. I do appreciate the time and effort of your responses and discussion.

No worries. One reason I went into the illustration explanation was that I thought you werent an agent and didnt understand that the software would not show what was not allowable for the values shown.
- - - - - - - - - - - - - - - - - -

My issue with this illustration is that although it is possible, it is also highly improbable.

they are illustrating the loans charging 5% and crediting 6.5% to age 100! After age 100, it gets BETTER: the loan rate drops to 3% and they still credit 6.5% PLUS the monthly deductions (COI, expenses, etc.) are apparently only made to age 100, then stop! That’s how they can show values increasing after the last loan is taken at age 100.

Given that this illustrates withdrawals happening 30 to 60 years into the future, you have to wonder how financially viable Lincoln will be at that time with practices like this!

And what about these practices are going to make LFG not financially viable?? They are in line with other competitors in the industry; and LFG has very sound financial ratings, a very large surplus, and their products and markets are positioned for them to be extremely viable for the long run.

They have $162 billion in assets
Take in around $20 billion in yearly deposits
They sit on around $700 mill in cash
Have around $20 billion in surplus
32nd largest asset base of any company in the US
Their total account balances rose 11%+ last year
They have been around over 100 years
Have an AA- rating from S&P (4th highest) & an A+ from A.M.Best (2nd highest)
And as I said before; their product positioning in the market is very well placed.



To question the integrity of one of the strongest carriers in the market is nothing more than a scare tactic.... it may work at the kitchen table, but in a competitive situation clients realize real quick that mother mutual is not the only responsible grown up on the block..... and in a business situation you can kiss your chances goodbye if all you are selling on is company strength.

I am not saying NWM is not strong, because they obviously are; but to say that a company as solid as LFG is not solid, based solely because of the provisions of ONE PRODUCT, a product that your company does not offer, does not allow you to offer, and does not train you on.... well, its not a very strong argument.

So lets skip the "mother mutual is the only player in the game", and look at the history and the contractual obligations.
(I used to work for NYL, now I sell all the big mutuals except NW of course, I am not against them, but they are not the only ones who are sound)

After age 100, it gets BETTER: the loan rate drops to 3% and they still credit 6.5% PLUS the monthly deductions (COI, expenses, etc.) are apparently only made to age 100, then stop! That’s how they can show values increasing after the last loan is taken at age 100.

This is pretty standard in the industry, they cut you a break after age 100.... perks of old age I guess.... LOTS of companies do this.... kind of like a pay to 100 WL....... guess what??.... premiums dont extend beyond 100 either....

I would be willing to bet that NWM's UL drops some of the expenses after age 100

Of course, they can always limit the crediting rate down to 1%:[/COLOR]

The cap, or maximum, can go as low as 3% for the 1-Year indexing .

But the minimum interest credited can be as low as 1% (guaranteed rate)—and that may happen if the index is negative OR if Lincoln’s general account can’t support anything more than 1%.

That is incorrect.


First, the yearly p2p is the most common indexing method, so we will use the 3% guaranteed minimum cap as an example.


If the index is negative, yes, the indexed portion will receive the 1% guarantee.

If the index is positive for that segment, the lowest the cap can be at is 3%; this is not dependent on the ICs GA, this is contractually guaranteed.

The 1% statement says that the "credited rate may not be less than 1%", but that doesnt mean that it cant/wont be more depending on index performance.

So again, the companies GA has nothing to do with the 3% guaranteed minimum cap.

Please note the other areas that I highlighted, particularly how Lincoln can LIMIT the crediting rate at THEIR DISCRETION

Would you like me to go to your posted illustration and highlight where it says that dividends are not guaranteed and are declared at THEIR DISCRETION


We can play scare tactics all day long, but lets look at historical evidence.

First, I am not saying that NWM does not have a strong track record of paying dividends; I am not questioning that.

But so does LFG. Not only do they have very strong renewal rates for their traditional UL, but their IUL has always had very strong cap histories (it has never been anywhere near the guaranteed minimum); their cap has averaged 11% for the yearly P2P.


Also, companies have a rhyme and a reason to caps with indexed policies. Before they ever release the product they know what economic conditions will affect the policy and where.
This is how they are able to run historical charts for the product.

Judging from a 40 year historical, the average credited interest rate will be around 6.5% (depending on crediting methods chosen) (hence the reason I run it at that).
That is not just a 40 year average, but a composite of 10 year segments.



IUL and WL are different products, both with their flaws and both with their advantages.
WL gives you more guarantees, I do not deny that.
But IUL is not guaranteeless, and for people looking for a savings vehicle, the idea of principle protection and the ability to still benefit from the market is an attractive one.


Also, one reason the distributions were so strong in the IUL is because ULs can choose GPT testing instead of CVAT, which is what WL uses.
Its a more efficient testing option for taking distributions.
- - - - - - - - - - - - - - - - - -

 

[Chuckles21]

And what about these practices are going to make LFG not financially viable?? ....etc.

I was not saying that Lincoln is not a strong company. Let's just leave it at that.

This is pretty standard in the industry, they cut you a break after age 100.... perks of old age I guess.... LOTS of companies do this.... kind of like a pay to 100 WL....... guess what??.... premiums dont extend beyond 100 either....

I would be willing to bet that NWM's UL drops some of the expenses after age 100

That's understandable, I was merely commenting on the idea that you could borrow almost endlessly from a policy and still have it's values grow.

That is incorrect.

First, the yearly p2p is the most common indexing method, so we will use the 3% guaranteed minimum cap as an example.

If the index is negative, yes, the indexed portion will receive the 1% guarantee.

If the index is positive for that segment, the lowest the cap can be at is 3%; this is not dependent on the ICs GA, this is contractually guaranteed.

The 1% statement says that the "credited rate may not be less than 1%", but that doesnt mean that it cant/wont be more depending on index performance.

So again, the companies GA has nothing to do with the 3% guaranteed minimum cap.

My statement is not incorrect. The individual IUL policies are not invested in the actual index. From Lincoln's own website:

"This policy does not participate in any stock, bond or equity investments; and the S&P 500 Index offered does not reflect any dividends paid by any stock, bond or equity investments underlying the Index."

It is not the exclusion of dividends (that in recent years are rising as a percentage of corporate earnings) that is inappropriate but rather the failure to discuss the implications. The public may have heard that
returns from stock investments have averaged 10%, say, over history, but these anecdotal comments normally include reinvestment of dividends.

The problem is that index premiums are not being invested in the S &P 500. One investment portfolio I reviewed contained 96% fixed income instruments. The sellers of index UL claim they are able to provide such high returns, with typically high % guarantees, by buying various stock options to cover the larger returns. Color me skeptical.Even if companies have actually designed hedging formulas, such exotic strategies are notoriously inaccurate. The bust of sub-prime lending practices being the most recent example of how financial wizards are able to outsmart themselves.

So yes the general account backing these policies has a very big deal to do with what is credited to the policy. All these premiums are going into a IUL general account and based on it's return we get what the policy is credited. Just because they put a maximum cap on a policy does not mean the policy gets that maximum number.

This means the insurance company can credit whatever they want above the very modest guarantees. In addition, because most index UL's allow the insurance company to increase cost-of-insurance
at any time, a higher crediting rate may not mean anything at all,
because it can be offset by higher COIs.

Would you like me to go to your posted illustration and highlight where it says that dividends are not guaranteed and are declared at THEIR DISCRETION

We can play scare tactics all day long, but lets look at historical evidence.

First, I am not saying that NWM does not have a strong track record of paying dividends; I am not questioning that.

But so does LFG. Not only do they have very strong renewal rates for their traditional UL, but their IUL has always had very strong cap histories (it has never been anywhere near the guaranteed minimum); their cap has averaged 11% for the yearly P2P.

Also, companies have a rhyme and a reason to caps with indexed policies. Before they ever release the product they know what economic conditions will affect the policy and where.
This is how they are able to run historical charts for the product.

Judging from a 40 year historical, the average credited interest rate will be around 6.5% (depending on crediting methods chosen) (hence the reason I run it at that).
That is not just a 40 year average, but a composite of 10 year segments.

I agree NML's permanent policy dividends are not guaranteed, but they have paid one without missing a year since 1872. The first IUL policies were issued in 1997... not much history to base them off of is there.

You are also assuming that this policy will get a straight 6.5% return year over year for the next 80 some years. You and I both know that this is unrealistic and having lower returns in a few key years, especially ones when we are taking loans out will drastically effect the policies performance. I said it before and I'll say it again, there is way to much risk in this policy for my taste.

IUL and WL are different products, both with their flaws and both with their advantages.
WL gives you more guarantees, I do not deny that.
But IUL is not guaranteeless, and for people looking for a savings vehicle, the idea of principle protection and the ability to still benefit from the market is an attractive one.


Also, one reason the distributions were so strong in the IUL is because ULs can choose GPT testing instead of CVAT, which is what WL uses.
Its a more efficient testing option for taking distributions.

But the policies are not actually invested in the market.

Fair enough on the last point.

 

[scagnt83]

Another testament to LFGs financial strength is their dominance in the COLI/BOLI market.

They are one of the top COLI/BOLI carriers out there.
Multi-billion dollar companies are contributing hundreds of millions per year to these policies.... they dont seem to be questioning the long term solvency of LFG; and I am sure that plenty of them have done their own separate due diligence in looking into the financials...

So why should an individual client be worried, if fortune 50 companies with virtually unlimited resources are not worried???
- - - - - - - - - - - - - - - - - -

My statement is not incorrect. The individual IUL policies are not invested in the actual index. From Lincoln's own website:

I never said that it directly participates... this is not in question, and this is not a bad thing... this is an advantage of IUL, not a disadvantage.

And LFG very clearly discloses that it does not participate directly..... so do I!


. All these premiums are going into a IUL general account and based on it's return we get what the policy is credited. Just because they put a maximum cap on a policy does not mean the policy gets that maximum number.

Yes, the premiums do go into the GA.
Yes, the GAs performance can affect the caps...but that is all; if the cap is 9% and the S&P is up 12%, then the IC cant just arbitrarily say you only get 1%.... they have to give you the 9% since the S&P met it or beat it... you do understand this; correct?


This means the insurance company can credit whatever they want above the very modest guarantees. In addition, because most index UL's allow the insurance company to increase cost-of-insurance
at any time, a higher crediting rate may not mean anything at all,
because it can be offset by higher COIs.

The expense analysis I showed had maximum COI charges

I agree NML's permanent policy dividends are not guaranteed, but they have paid one without missing a year since 1872. The first IUL policies were issued in 1997... not much history to base them off of is there.

But there are economic factors to base historical models off of. There are also 100+ years of dividend history and rate renewals; LFG has always been strong when renewing rates on accumulation oriented products.


Also; the same economic conditions that would cause LFG to take the policy to the guaranteed minimums would be the same economic conditions that would cause NWM to not pay a dividend.

You are also assuming that this policy will get a straight 6.5% return year over year for the next 80 some years. You and I both know that this is unrealistic and having lower returns in a few key years,

Yes, but it will receive returns higher than 6.5% too.... thats why its called an average.
But I will admit that WL or UL will be more consistent in its returns.

especially ones when we are taking loans out will drastically effect the policies performance.

In NDR (non direct recognition) policies that is not true. The loaned $ will still receive credited interest rate gains; so it is not drastic by any means.

Also, this goes back to my comment about the high interest rate with NWM.

You might shrug that off, but if retirement income is the name of the game; its not about how much you build up, its about how much you are able to take out!

A loan does severely affect a NWM policy because the loan is not a wash or close to it. Also, (correct me if I am wrong please) NWM does not offer NDR.

But because of the GPT option, wash or near wash loans, and NDR; loans do not adversely affect the IUL (or other IULs & ULs that have similar provisions) like they do the NWM WL.
Thats why you were surprised about how much I was able to distribute from the policy.
.

____________________________________________________

 

[Chuckles21]

Again, I will agree that they are a strong company.

I never said that it directly participates... this is not in question, and this is not a bad thing... this is an advantage of IUL, not a disadvantage.

And LFG very clearly discloses that it does not participate directly..... so do I!

Fair enough.

Yes, the premiums do go into the GA.
Yes, the GAs performance can affect the caps...but that is all; if the cap is 9% and the S&P is up 12%, then the IC cant just arbitrarily say you only get 1%.... they have to give you the 9% since the S&P met it or beat it... you do understand this; correct?

Yes, I do understand this.

Also; the same economic conditions that would cause LFG to take the policy to the guaranteed minimums would be the same economic conditions that would cause NWM to not pay a dividend.

No, LFG can at any time declare that the IUL's have a cap of the guaranteed minimum of 3%. Nothing in the contract says they have to base this cap on economic conditions. They can just as easily limit it due to bad exposure from these policies. NML doesn't need to pay dividends but being a mutual company after expenses and reserves that is where the rest of our profits go. So for us not to declare a dividend we would essentially have to make no money. In 2010 we paid out a total of $4.4 billion in dividends, LFG paid $43 million. I think it is safe to say that we will pay a dividend.

Yes, but it will receive returns higher than 6.5% too.... thats why its called an average.
But I will admit that WL or UL will be more consistent in its returns.

Agree, but averages can be very deceiving.

In NDR (non direct recognition) policies that is not true. The loaned $ will still receive credited interest rate gains; so it is not drastic by any means.

Also, this goes back to my comment about the high interest rate with NWM.

You might shrug that off, but if retirement income is the name of the game; its not about how much you build up, its about how much you are able to take out!

A loan does severely affect a NWM policy because the loan is not a wash or close to it. Also, (correct me if I am wrong please) NWM does not offer NDR. correct

But because of the GPT option, wash or near wash loans, and NDR; loans do not adversely affect the IUL (or other IULs & ULs that have similar provisions) like they do the NWM WL.
Thats why you were surprised about how much I was able to distribute from the policy.

You are partially correct here. I will agree that a loan on a NML policy will affect it more than a LFG IUL, but to say that it doesn't drastically affect it is short sighted. If you have a few years of 1% returns and the loan is costing 5% it will result in the policies cash value being eaten up. This can effect the long term viability of this product.

I just don't trust a product that sounds to good to be true. The money in this policy is either in your hands or the companies. Once this policy starts to take out loans you are taking that money away from the company. Yet they still credit this money like it is still in the account and just keep giving you more money. You cannot have your cake and eat it to. The long term feasibility of this just is not there in my opinion. Once the company would start to have bad exposures with this line it can lead to very bad places.

 

[dgoldenz]

Time for a nap. I'll check back around page 37 or so.

 

[stevew7]

I've included an NML proposed illustration for comparison. Short term you are better off with SBLI, but long term it isn't a comparison. What I have done is greatly overfund a policy for 10 years and then take it paid up. This is essentially what a 10 pay policy is.

Hi Chuckles21,

Thanks for taking the time to provide a NWML illustration. I agree that it sounds like you did all the right things - minimize the face whole policy, blend with term, and overfund it with PUAs. However, the illustration says the policy becomes a MEC in year 16.

From my understanding, this is what I need to avoid, otherwise I'd be subject to taxes and an IRS penalty if I tried to take a loan from the policy after year 16 since it becomes a MEC.

Do you have a way of re-running the illustration, keeping the policy out of MEC status? Then it would be a fairer comparison against the vanilla SBLI 10 pay I posted earlier.

 

[Chuckles21]

Hi Chuckles21,

Thanks for taking the time to provide a NWML illustration. I agree that it sounds like you did all the right things - minimize the face whole policy, blend with term, and overfund it with PUAs. However, the illustration says the policy becomes a MEC in year 16.

From my understanding, this is what I need to avoid, otherwise I'd be subject to taxes and an IRS penalty if I tried to take a loan from the policy after year 16 since it becomes a MEC.

Do you have a way of re-running the illustration, keeping the policy out of MEC status? Then it would be a fairer comparison against the vanilla SBLI 10 pay I posted earlier.

Steve,

You are absolutely correct in saying that you want to avoid a MEC at all costs. I can see where you are confused that this policy becomes one. The reason that the last few pages of the illustration says that it MEC's at policy year 16 is that those pages are assuming you would continue putting in that full $15,914/yr for the entire life of the contract, to your age 121. If you were to do this then yes the contract would MEC.

What I have illustrated in stopping premiums after 10 years and taking the policy paid up does not make it MEC. The reason for the confusion is that in running illustrations taking a policy paid up is an option not something that automatically happens. So NML does not want to mislead and make you think that overfunding to this degree is possible over the lifetime of the contract.

Let me know if you need any further clarification, but just know that the beginning illustration pages are what are important in this case.

 

[scagnt83]

Steve,

You are absolutely correct in saying that you want to avoid a MEC at all costs. I can see where you are confused that this policy becomes one. The reason that the last few pages of the illustration says that it MEC's at policy year 16 is that those pages are assuming you would continue putting in that full $15,914/yr for the entire life of the contract, to your age 121. If you were to do this then yes the contract would MEC.

What I have illustrated in stopping premiums after 10 years and taking the policy paid up does not make it MEC. The reason for the confusion is that in running illustrations taking a policy paid up is an option not something that automatically happens. So NML does not want to mislead and make you think that overfunding to this degree is possible over the lifetime of the contract.

Let me know if you need any further clarification, but just know that the beginning illustration pages are what are important in this case.

Chuckles is correct, the policy was not a MEC; notice the section that was under said "for home office use only"; this means its not a section for the clients projections.

If it was a MEC it would have shown that on the actual spread sheet, and there would have been disclaimers on the bottom of the spreadsheets.


I would also second your words of caution about "mom & pop insurance company thats only really been sold in one state and whos name I cant and dont care to remember.."

I dont care what the ratings are, they dont even have over $250mill in assets.... that means not even $150mill in surplus..... they arent even a tenth as strong as NWM or LFG when it comes to claims paying ability... no way in hell I would sell that company for cash accumulation... especially for larger premiums