North American Builder Plus IUL 3

[scagnt83]

I love that you believe most agents understand options are utilized to attempt to get the upside returns. Most agents I ask just think the carrier puts the money in the index & somehow with pixy dust takes away the downside

Dont forget the 50% annual bonus on those returns!!

The ones who do know, but still drink the coolaid, use that as the reason they are able to give 50% more or 100% more than what the actual index did.... with zero downside... its buying business plain and simple.

And imo its way worse than the UL issue of the 70s/80s. At least there were only 3 moving parts in those. IUL now has 7 or 8 moving parts for carriers to reduce client returns.

And at least UL usually had half decent minimum rates, like 4% or 5%. Most IUL Caps can be reduced to 2%. Many participation rates can go down to 20%.

Just a 20% adjustment to both Caps and Expenses, and taking away the non-guaranteed bonuses, would crash many IUL policies on the market right now.

 

[Tahoe Ray]

Dont forget the 50% annual bonus on those returns!!

The ones who do know, but still drink the coolaid, use that as the reason they are able to give 50% more or 100% more than what the actual index did.... with zero downside... its buying business plain and simple.

And imo its way worse than the UL issue of the 70s/80s. At least there were only 3 moving parts in those. IUL now has 7 or 8 moving parts for carriers to reduce client returns.

And at least UL usually had half decent minimum rates, like 4% or 5%. Most IUL Caps can be reduced to 2%. Many participation rates can go down to 20%.

Just a 20% adjustment to both Caps and Expenses, and taking away the non-guaranteed bonuses, would crash many IUL policies on the market right now.

oh no! You said it out loud!

There are a few posters here who could benefit from this advice. They won't believe it but unfortunately their clients will experience it.

 

[CFP83]

Volatility Control Indexes in an IUL........you are attempting to control "volatility" in a product with a 0% floor


I WANT volatility in my index which will lead to lots of 10-12% years.

When these started to become popular it was so very obvious that these manufactured/proprietary indexes were only created so that carriers could now control and manipulate "the index itself", yet again creating one more moving part of an IUL chassis.
Then here comes the "multiplier" to add one more moving part/variable that as scagnt pointed out has little to no guarantee's of even being around.

 

[Allen Trent]

Volatility Control Indexes in an IUL........you are attempting to control "volatility" in a product with a 0% floor


I WANT volatility in my index which will lead to lots of 10-12% years.

When these started to become popular it was so very obvious that these manufactured/proprietary indexes were only created so that carriers could now control and manipulate "the index itself" as yet again on more moving part of an IUL chassis.
Then here comes the "multiplier" to add one more moving part/variable that as scagnt pointed out has little to no guarantee's of even being around.

Do you think it was more a result of massively lower options budgets due to the very low fixed interest rate market that caused some of the creativity/manipulation?

 

[CFP83]

Do you think it was more a result of massively lower options budgets due to the very low fixed interest rate market that caused some of the creativity/manipulation?

No I do not. My humble opinion to your question.

I think it was greed that led carriers to manufacture these new index's in partnership with investment banks that ultimately published them. The new index's were created to illustrate well and in order to allow the carriers to control an index's returns by adjusting the index's internal moving parts.

In an environment of lower options budgets carriers could have stuck with the S&P500 and just adjusted caps.
The "new index" and it's projected returns will of course illustrate better than an S&P with lower caps.

I've not seen a sound argument for using exotic index's over utilizing the S&P500.
Most bank financed/premium financed policies you will see stay clear of these as well as IUL's with multipliers

 

[ATM]

For you agents using hybrid indexes and non-guaranteed multipliers..... how do you think the carrier can afford to pay 50%-100% more than what the index returned on a hybrid index.... when they are unable to do that on a traditional index....

The Option market for hybrid indexes is extremely illiquid. Nothing like the major indexes.

How do you think a carrier can buy options, in an illiquid market, and make 50% or 100% more than what the index actually returned?

My answer is.... they cant....

That is why the multipliers are not guaranteed, and why participation rates are not guaranteed.

They have zero intent, or ability, to keep them at that level long term.

The cost of the options on the vol control indexes is far lower than the cost for traditional indexes. The options budget buy many more options, which are used to fund the margins/par rates or higher caps.

But in the end, I think all of the indexes will perform roughly equally over any length of time. If they didn't then the free market would be wildly inefficient, and it is only slightly so.

Vol control indexes/ standard indexes, probably doesn't add up to a hill of beans when it's all said and done.

 

[Allen Trent]

The cost of the options on the vol control indexes is far lower than the cost for traditional indexes. The options budget buy many more options, which are used to fund the margins/par rates or higher caps.

But in the end, I think all of the indexes will perform roughly equally over any length of time. If they didn't then the free market would be wildly inefficient, and it is only slightly so.

Vol control indexes/ standard indexes, probably doesn't add up to a hill of beans when it's all said and done.

but it could allow the carrier to illustrate a better projected outcome which attracts premium that wouldnt have otherwise came to that specific carrier. That added premium collected then allows policy fees, load fees & ART COI to be collected "for as long as policy is active". That is where I believe it may add up to a hill of beans.....more for the most creative carrier, not necessarily that the consumer will have a different size hill of beans from the index chosen

 

[scagnt83]

The cost of the options on the vol control indexes is far lower than the cost for traditional indexes. The options budget buy many more options, which are used to fund the margins/par rates or higher caps.

But in the end, I think all of the indexes will perform roughly equally over any length of time. If they didn't then the free market would be wildly inefficient, and it is only slightly so.

Vol control indexes/ standard indexes, probably doesn't add up to a hill of beans when it's all said and done.

You sound like a wholesaler giving us the company line. lol. jk

That is true.

But do you know why they are so cheap??

They are not liquid like normal options.

Owning an option is worthless if you cant sell it.

The market for VC Options is tiny... basically its just insurers.

Institutions buy them inside of structured notes sometimes.

But the buying/selling day to day are basically just insurers.

When all of them are trying to sell.... there are very few buyers to buy. Forcing them to sell at a discount, or possibly not at all, expiring worthless.

That is usually what happens when an index does great for consumers and then gets yanked like Pac Life did earlier this year. They lost a ton of money because of an illiquid options market they were not able to sell into.

What do you think happens when carriers cant sell the options at the needed price??

They lower rates moving forward or increase internal expenses. Because they still have to pay the client the amount owed... that the carrier did not receive...

Its almost like a ponzi scheme.... they must have enough new biz buying new options... to sell the existing options on the old biz... if carriers do not have enough new biz.... no liquidity, worthless options.

In my opinion, generally speaking, carriers with VC indexes are going to have the worst renewal rates in the industry. Time will tell.

If everything works out perfectly as planned, in theory the VC indexes would perform better. But that is not life, and certainly not how the market works.

 

[ATM]

The options that insurers buy for the indexed products are traded like other securities. They are simply held to maturity. So the ready market for them doesn't really matter. Only that the counter party can pay off if they are in the money.

Low vol index options are lots cheaper than something like S&P 500 or NASDAQ 100 options. Carrier can buy more.

So over time the low vol will likely return lower than S&P500 index, but the crediting to the policy will likely be about the same over time. S&P more choppy returns, Vol control more smooth.

For an insurance policy with explicit costs the smoother returns would be preferred because the volatility drain when there are 0% credits (actually negative after expenses) v. the Low Vol which theoretically should have fewer zero years.

Average returns could be equal, but effective yield will be better in the less volatile account.

Now whether or not that plays out in the real world is left to be seen. But there theory is valid.

 

[Allen Trent]

The options that insurers buy for the indexed products are traded like other securities. They are simply held to maturity. So the ready market for them doesn't really matter. Only that the counter party can pay off if they are in the money.

Low vol index options are lots cheaper than something like S&P 500 or NASDAQ 100 options. Carrier can buy more.

So over time the low vol will likely return lower than S&P500 index, but the crediting to the policy will likely be about the same over time. S&P more choppy returns, Vol control more smooth.

For an insurance policy with explicit costs the smoother returns would be preferred because the volatility drain when there are 0% credits (actually negative after expenses) v. the Low Vol which theoretically should have fewer zero years.

Average returns could be equal, but effective yield will be better in the less volatile account.

Now whether or not that plays out in the real world is left to be seen. But there theory is valid.

I want to believe you, but my mind is thinking some things that need further clarification.

1. If policy has an increasing death benefit option, how does a smoother return impact the net if they both average the same over time & COI is the same on increasing death benefit as the ART charges go up as you age

2. Wont the lower volatility index have less likely to have bigger years right after a down year of the index? IE S&P drops 30%, I take a 0% that year, but my starting point of the S&P is starting 30% lower than the year prior. A 10% up year might credit me 10%, even though the actual S&P index is still down 23% from the year prior. Dont I have potential to have better up years after big down years of the actual S&P index

100% honestly asking this as this is where my head went when reading that volatility indexes smooth returns & thus provide better net policy returns