Understanding IUL Mechanics

[scagnt83]

I don't like Option B DB policies that are designed for them to switch to Option A in the future for one reason:

Who is going to remember to do that?

An illustration is not a letter of instruction to the insurance company. It has to be requested.

I agree it is an added risk that must be remembered.

But what other solution is there?

If you want the policy maxed out for CV, with the lowest internal expenses possible. You must use GPT with Opt2.

CVAT creates higher internal expenses. Even when using Opt1.

GPT with Opt1 does not allow the full Guideline Premium to be paid.

Unfortunately, its the most efficient UL design.

There are one or two carriers that now have an "optimal" DB option, that automatically switches from 2 to 1 when the time is optimal (premiums stop).

 

[scagnt83]

yeah I think my main concern when I look at IUL design is that there could be too much riding on illustrated/ assumed COI and crediting rates. It sounds like if you design the policy for the least possibly death benefit, this provided for the largest margin of error/ protection?

I’m also guessing this pays the least commission and probably isn’t often designed this way for that reason?

Yes, funding up to the MEC limit with the lowest DB possible for the premium paid, gives the most margin of error.

And yes, that design pays the lowest commission possible on the given premium.

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The biggest risk for IUL is something that I dont think has been mentioned yet.

Cap renewal.

Caps/Spreads/etc all change from year to year. Most IUL carriers drop Caps after a few years once they release a new product for new sales... the old products see Caps get cut.... therefore severely reducing future returns. I have seen carriers cut Caps by 4% after just 3 years.

This is by far the biggest risk to IUL. And why most will never match the sales illustration over the long term.

Second are expenses. Current expenses are not an issue if the policy is max funded. But Current expenses are not guaranteed. Carriers can increase them in future years. Some carriers have contracts them to triple the internal expenses, at will.

 

[De-risked]

I don't like Option B DB policies that are designed for them to switch to Option A in the future for one reason:

Who is going to remember to do that?

An illustration is not a letter of instruction to the insurance company. It has to be requested.

Good point. Set a calendar reminder for decades down the road lol

 

[De-risked]

Yes, funding up to the MEC limit with the lowest DB possible for the premium paid, gives the most margin of error.

And yes, that design pays the lowest commission possible on the given premium.

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The biggest risk for IUL is something that I dont think has been mentioned yet.

Cap renewal.

Caps/Spreads/etc all change from year to year. Most IUL carriers drop Caps after a few years once they release a new product for new sales... the old products see Caps get cut.... therefore severely reducing future returns. I have seen carriers cut Caps by 4% after just 3 years.

This is by far the biggest risk to IUL. And why most will never match the sales illustration over the long term.

Second are expenses. Current expenses are not an issue if the policy is max funded. But Current expenses are not guaranteed. Carriers can increase them in future years. Some carriers have contracts them to triple the internal expenses, at will.

Hmmm that’s interesting. The contracts I write for standard WL aren’t open to that kind of risk, which I like.

are there any carriers that don’t do what you describe or that will stick to certain ranges of guaranteed cap rates or expenses?

 

[scagnt83]

Hmmm that’s interesting. The contracts I write for standard WL aren’t open to that kind of risk, which I like.

are there any carriers that don’t do what you describe or that will stick to certain ranges of guaranteed cap rates or expenses?

Yes. It is a major difference between WL and IUL/UL.
WL gives guarantees that IUL does not.

There is the risk that dividends cease on WL. Which has happened to a few over the years. But the big 3-4 have always been strong. But if that happens, they are still guaranteed to never lapse.

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Penn Mutual and Columbus Life both use a "portfolio rate" for their IUL Caps. Meaning in-force policies get the same Cap as new policies. They are my "go to" carriers for IUL usually.

Those two also have the lowest maximum expenses on the market, that I know of.

They both have indexing options that allow for a 2% floor. And most have a minimum 4% Cap. The policy is not going to be what you want at those rates, but its better than what most provide.

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I personally like Guardian as a "middle ground" between WL and IUL. They offer the Index Rider on their WL. You can allocate whatever % you want to the S&P 500 indexing.

It has a 4% annual floor, and a 10.5% annual Cap. Plus the guarantees of WL.

It wont beat an IUL in an illustration comparison. But its a strong option that clients seem to like.

 

[De-risked]

Yes. It is a major difference between WL and IUL/UL.
WL gives guarantees that IUL does not.

There is the risk that dividends cease on WL. Which has happened to a few over the years. But the big 3-4 have always been strong. But if that happens, they are still guaranteed to never lapse.

---

Penn Mutual and Columbus Life both use a "portfolio rate" for their IUL Caps. Meaning in-force policies get the same Cap as new policies. They are my "go to" carriers for IUL usually.

Those two also have the lowest maximum expenses on the market, that I know of.

They both have indexing options that allow for a 2% floor. And most have a minimum 4% Cap. The policy is not going to be what you want at those rates, but its better than what most provide.

---

I personally like Guardian as a "middle ground" between WL and IUL. They offer the Index Rider on their WL. You can allocate whatever % you want to the S&P 500 indexing.

It has a 4% annual floor, and a 10.5% annual Cap. Plus the guarantees of WL.

It wont beat an IUL in an illustration comparison. But it’s a strong option that clients seem to like.

yeah I had heard about that offering from guardian. I’m not appointed with them but may take a look.
And yes, exactly, you could have a whole life policy that doesn’t perform as expected, but it’ll never lapse if premium is paid.

 

[DHK]

I agree it is an added risk that must be remembered.

But what other solution is there?

If you want the policy maxed out for CV, with the lowest internal expenses possible. You must use GPT with Opt2.

CVAT creates higher internal expenses. Even when using Opt1.

GPT with Opt1 does not allow the full Guideline Premium to be paid.

Unfortunately, its the most efficient UL design.

There are one or two carriers that now have an "optimal" DB option, that automatically switches from 2 to 1 when the time is optimal (premiums stop).

Of course, it will all depend on the purpose of the policy. If they want to collateralize the policy sooner than later, it's just one of the additional policy management risks.

But if the primary purpose is later... then I'd just go with DB Option A and remove one more variable from the assumptions. Plus, there's enhanced commission compared to DB Option B, but the real reason is that there is one less thing for the agent OR the policyholder to remember doing further down the line.

 

[PrivClientSG]

Thank you for the tip. Most of my clients purchase whole life policies for cash accumulation purposes. My main concern is that whatever I write is viable long term. With traditional whole life this isn’t nearly as much of a concern.

Would the advice you provided be in line with what I described above? We all know the horror stories of people whose IUL’s implode when they’re 85 because the COI exceeds the cash value of the policy. I know this is almost certainly due to poor policy design resting on a foundation of unrealistic expected crediting rates. Does Max funding to the MEC limit help to minimize or eliminate this risk?

You will never be embarrassed, have egg on your face, etc., if you sell WL insurance. It just has to be the right product, the right fit, the best and most appropriate product, etc, for that specific client, need, etc. With WL, you have a product that is based upon a series of guarantees -- death benefit, cash value, and premium, just to start with. Period. Nothing to dispute or debate. You transfer all risks to the life insurance company. In any other life insurance product -- other than WL -- you are giving up guarantees. Sometimes one, sometimes many. In addition, you are giving up the opportunity to shift risk to the insurance company. You are taking on risk, the insured/owner that is. This is self-managing certain risks. Now, in some cases this is the appropriate, right product, etc.

Case by case basis. All the best!

 

[PrivClientSG]

We all know the horror stories of people whose IUL’s implode when they’re 85 because the COI exceeds the cash value of the policy. I know this is almost certainly due to poor policy design resting on a foundation of unrealistic expected crediting rates. Does Max funding to the MEC limit help to minimize or eliminate this risk?

Proper, adequate, poor, etc., funding is just one problem with UL chassis products. Yes, the COI. People tend to look it after the fact, when they have a problem now. It should have been looked at, this point in time, should have been looked at 5 years ago, if not 10, or more. Yes, poor policy design is another contributory factor. Crediting rates is another. They fluctuate. They are not stagnant and linear/fixed.

Max funding can solve these issues -- but it's not guaranteed to do so. Run an illustration with max funding, and look at the guaranteed side of the illustration. See what happens then. Realistic or not, doesn't matter. It's a reference point. All the best!

 

[Sheryl J Moore]

I do not endorse any company or product. I am a national expert on life insurance and annuities. If you would like to understand IUL better, please feel free to give me a call at (515) ANN-UITY.