Index Universal Popularity

[DHK]

It took me quite a while to understand it myself. You're not alone there.

I agree that it's outrageous for an agent to sell a product that they don't understand thoroughly. We can blame some of the MLM outfits for that - WFG comes to mind.

As far as insurance companies changing the product... well, this product has moving parts, so that needs to be disclosed. In particular caps and participation rates can change frequently - usually it's one or the other, not both. Also, there is a rising cost of insurance within the policy chassis that needs to be managed long-term. If the policy is max-funded for a few years, and then stops making premium payments and/or taking loans, you've got to manage that with the client.

My father had that experience with his VUL. Back in 2000, he had an economic setback. He cancelled 3 whole life policies (should've taken loans instead) and stopped making payments on his VUL. It wasn't until I got with MassMutual when I saw that 8 years had passed and the policy hadn't had a payment in all that time. Considering all the market turmoil, it's a wonder that it was still in force. Anyway, he had never received a call from his prior agent of record in all that time.

Since I've had this family experience, I know that if the agent of record could've cared enough to pick up the phone and call for a review, it could've been much better. But no one did.

Also, just because an illustration is created, doesn't mean that all the changes illustrated will happen automatically. Without a dedicated and skilled agent to manage these policies, the client will not have had a good experience with the policy.

 

[AndrewRoche]

Caps are never guaranteed... however, I've noticed a trend that they typically hover around that 14%. However, as the index segment expires, it can be repriced. (Notice that I call it by the proper term as a segment, and not a 'fund'.)

Funding is an ongoing contribution until retirement age. That's how I use it.

Illustrations aren't the best ways to determine "break-even" points because illustrations limit the illustrated annual interest credits. If the policy is well-structured, the break-even point should be well before 15 years... especially if there is positive volatility in the underlying index segment.

IUL does not credit interest at 7% per year, ever year, forever. It captures the upside volatility of the underlying segment, without the downside risks. Yes, there are costs of insurance and other administrative costs. But that is a separate risk that must be managed with the policy by a dedicated agent that will be around to service what they've sold.


In my opinion, IUL is best sold as a cash value accumulation vehicle for retirement income and 'infinite banking' purposes. I know there are some IULs that can be good for the death benefit focus - especially if they have a non-lapse guarantee rider - but it's best to fund an IUL at LEAST at the maximum target, if not a maximum funding of the lowest death benefit for a given premium.

If there's a death benefit focus, and little to no need for cash values, then I would probably recommend either term, non-lapse GUL, or a whole life with premium offset by policy values (dividends to pay premiums over time). That strategy isn't guaranteed, but it's another way to pay the premiums. You just cannot 'guarantee' that the policyholder will ever be done paying premiums.

In addition, the product I use has a full disability waiver of stipulated premium - whatever the premium is listed in the illustration is what is waived in the event of disability, not just costs of insurance, or a small cash premium contribution. Also, the product I use has a 10-year surrender charge schedule, rather than a 15-year like most IULs that I've seen. (I'm a fan of American National's Signature IUL.)

I am not responsible for the lack of education of other agents. But what they don't know CAN hurt them. Plus, there's plenty of information on these forums on how to properly structure an IUL.

Where some agents may get into some trouble, is if they have their IMOs doing the illustrations FOR them. If you're going to sell IUL... you need to do your own illustrations and know how the different illustration options work.

Did you have any other questions? I get the sense that there's something about IUL, or an IUL sale that you've seen, that really bothers you.

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Or perhaps a little bit about your background? Most captive agents frown on IUL because their agencies tell them that it's a ripoff for the consumer or some other stupid things.

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The problem is in the question you are asking.

IUL is a solution to a problem. ALL kinds of insurance are solutions to problems. Some people have more than one problem that can be addressed very well by the proper use of a well-structured life insurance policy.

Using IUL as an "alternative retirement plan" is a very sound strategy, AS LONG AS it is properly managed by an agent who is dedicated to ongoing service and reviews of the policy & plans with the client.

If not, it can be a disaster waiting in the wings.

Question- you mentioned an ongoing contribution. Let's say it's a male age 50 and he's a standard class. How can you make fifteen years of contribution an attractive "infinite banking" tool? Has the client exhausted all other alternatives for saving? Why not the 7 year MEC funding? If you are doing a continual funding please tell me you have sold him a term as well for death protection. If the client couldn't be sold on the seven pay he obviously is not a candidate for any IUL...agreed?

 

[DHK]

You're assuming that all other forms of saving are superior to a well-structured permanent life insurance policy. That is a flawed assumption. Permanent life insurance is a vastly superior method of saving and accumulating wealth for retirement.

However, you mentioned age 50. When you get into older ages, the policy MUST be maximum funded, not just at maximum target premium, but over that amount.

Why not MEC funding? It all depends on how you are helping them to 'find the money' and coordinating that with their death benefit needs.

You are also assuming that if someone can't handle a 7-pay, you shouldn't sell the concept. I disagree.

I use IUL as a "Roth IRA Alternative" with middle income families. They should be making ongoing contributions for retirement anyway, right? As long as you are selling an affordable premium and structuring the policy based on their age and needs for borrowing against the policy, it's great.

 

[WinoBlues]

Its being pushed by most imo's and most agents have no clue about what they're doing.

If you read some of scagnt83's posts, you see some ideas on how to properly structure an iul.

Ditto, Tyler helped me on a couple deals that seemed off and I needed a second set of eyes.

 

[AndrewRoche]

You're assuming that all other forms of saving are superior to a well-structured permanent life insurance policy. That is a flawed assumption. Permanent life insurance is a vastly superior method of saving and accumulating wealth for retirement.

However, you mentioned age 50. When you get into older ages, the policy MUST be maximum funded, not just at maximum target premium, but over that amount.

Why not MEC funding? It all depends on how you are helping them to 'find the money' and coordinating that with their death benefit needs.

You are also assuming that if someone can't handle a 7-pay, you shouldn't sell the concept. I disagree.

I use IUL as a "Roth IRA Alternative" with middle income families. They should be making ongoing contributions for retirement anyway, right? As long as you are selling an affordable premium and structuring the policy based on their age and needs for borrowing against the policy, it's great.

Thanks for the clarification. Most people contact a life insurance agent for life insurance. When they are presented with a product like IUL they walk away thinking they are able to save and protect their family. Here's a case one of my agents sold. Male 47 pref. rate. Married 4 kids makes $160,000 a year in the tech field. 7 year funding for db and cv for retirement. Paid second year. Had stroke and can now only work part time in a different type of job. Can't pay the required premiums and is uninsurable. Family now has no life coverage and he sees mortality knocking on his door. That's why I asked if you sell the combination of term and IUL and this is one simple example of why Products like this should never be sold as just another type of insurance to the average consumer. Too many agents convince themselves they are doing right by the client because they have a product that is guaranteed when in reality they are selling the product for commission and no other reason.

 

[DHK]

Wow. A good disability waiver of COI charges and/or stipulated premiums would've greatly helped to preserve the policy in this case. It's something that I include on EVERY policy... because you just don't know what's going to happen in the future.

When comparing PLI to a 401(k), IRA, or any other savings vehicle, it's the ONLY one that can continue contributions in the event of a disability. It's a rider that assures that what you want to have happen for yourself and your family financially... will happen.

While these riders do have a cost that would affect the overall return on the policy... it's far more important that money is continued to be contributed on a regular basis. That's worth a cost in order to make the plan self-completing.

 

[AndrewRoche]

David
That's exactly what I mean. The returns are drastically decreased when you add the needed riders onto the product to make it perform like a life insurance policy. Back in the day they said life insurance must be affordable certain and without risk. The client knows that the premium is locked in and as long as they pay it they will have coverage. It's a completely different concept then "investing".
Selling IUL as an investment with a death benefit is wrong. It's a long term contract and the numbers don't lie. Significantly decreased returns on premiums paid annually as compared to a limited pay. The ability of the insurance company to change the participation or cap. The increase in the cost of insurance in twenty, twenty-five or thirty years, etc. etc.
If this product is being sold to someone who already has a life insurance then an argument can be made for the sale but you and I both know that is rarely the case.
It is a complex product and agents don't know the mechanics of how it works. Not just that it has a guarantee but how, when and why money is invested and how that influences the returns. When it's sold outside the business or estate planning model the agent and the company profit but not the client. He just nods his head because he doesn't want to admit that he doesn't understand a word that was said to them.

 

[DHK]

You make it sound as if the insurance company's total intention is on screwing the client by making changes arbitrarily.

One reason I like ANICO is that all of their materials are available to the public, even though it's meant for agents only.

Here's ANICO's IUL (previous product, not their current "signature" IUL) rate & cap history from September 2010 to current. It sure doesn't LOOK like they're drastically changing their cap rate to screw over policyholders. They lowered the cap to 13% in 2011, but raised it back up in 2012. Looks like they got less greedy? Or is there an actual methodology in place that explains changing cap rates? Just like oil companies get 'less greedy' when the price of gasoline goes down?

http://img.anicoweb.com/cs/groups/public/@anpub/@img/@content/documents/webcontent/im_rh_iul.pdf

IUL is a hybrid product between insurance and investment strategies. However, depending on how it is designed and structured will show how it is intended to be used. I lean more on the side of an insurance structure - that I want the waiver of premium riders - because it insures that the plan is self-completing.

However, just like buying a home, it takes a while before it reaches it's "break-even" point where cash values are projected to exceed premiums paid. Just like when buying a home, it takes a while before equity exceeds the costs and payments made.

However, unlike buying a home, interest can be credited according to the volatility of the underlying index. You can get market upside without the downside risk. Even real estate has volatility that can affect one's equity and values at any given time. Life insurance is not affected in such a way.

What I like about IUL compared to WL... is the first 3 years. In a base WL policy (paid to age 100 and no additional PUA riders), there is little to no cash values in the first 3 years. Yes, you and I both know that those premiums are paying for their death benefits up front... but reviewing that with the client is a little tougher. That's one reason why WL policies often have these PUA riders so you can show SOME cash values.

In a target premium only IUL policy (comparing apples to apples here) there is an ACCOUNT value working for the client... even if there's no SURRENDER value to access. This makes the client feel better that there is SOMETHING working for them and makes them want to continue to fund the plan.

So, while we're talking about 'absolutes' and 'right and wrong' ways to talk about life insurance... let's not forget the human behavior equation in everything too. People WANT to see their capital working for them. It's encouraging... especially when they can take care of future savings AND insure for today at the same time, with the same dollars.


Now, I myself, put together a personalized 3-page disclosure page about Indexed Universal Life. Here's a couple of excerpts:

Insurance Death Benefits:
On occasion, the concern is brought up that “the face amount is paid to your
beneficiaries and the insurance company keeps your cash values”. This is too simplistic of a view and ignores how life insurance contracts are constructed.

Death Benefits = “Net Amount At Risk” + Cash Values – Any Outstanding Loans.

“Maximum Protection Now” Turning Into “Tax-Free Retirement” Later:
Most people need the greatest amount of insurance while they are younger. Then, as they age, they don’t need as much insurance for the purpose of long-term income protection. The purpose of the life insurance becomes the tax-efficient distribution of retirement income.

The following changes were put into your life insurance policy illustration (found inside your policy) in order to minimize policy charges and maximize cash value accumulation as you age and maximize cash value accumulation:

- Term life insurance rider expires by age: _____

(Note: the term life insurance rider should be eligible to convert into additional coverage to enhance your long-term plan. Ask your agent and review over time.)
- Reduce the permanent death benefit to: at age _____
- Reduce the permanent death benefit to: at age _____
- Reduce the permanent death benefit to: at age _____

- Increasing Death Benefit (Option B) switch to Level Death Benefit (Option A) by age: _____

Please note: The insurance company will NOT make these changes for you.
It just takes a simple phone call (or a form to complete) from you. Ask your agent (if it isn’t me) for help in this area.

Early Cancellation / Lapse / Surrender note: If you should decide to cancel your policy in the early years, you may get little to nothing back. There is a surrender schedule that is in place that is outlined inside your policy that generally lasts for 10-15 years. See policy for details.

Cancelling / Lapsing / Surrendering Policy with Outstanding Loans: If you have a policy with an outstanding loan against it, and you are considering surrendering your policy, please consult with the insurance company and your agent about any possible tax consequences of surrendering your policy. You should also consult with a tax advisor in your state.

The tax advantages of life insurance are only good as the policy stays in-force. If you cancel / lapse / surrender the policy, you may owe taxes upon the distribution or on any gains that you have earned in the policy.

Rate of Return Expectations:
Fixed Indexed Universal Life has been misrepresented by many amateur agents as to what it is and what it can do. Unfortunately, this means that insurance company illustrations have to “tone down” the true power of this product.

The table below is an example of the power of this product:
S&P 500 (not including dividends)Indexed Universal Life
S&P 500 Up 10%, you get 7% S&P 500 Down… you lose nothing

$100,000 + 10% $100,000 + 7%
$110,000 - 10% $107,000 - 0%
$ 99,000 +10% $107,000 + 7%
$108,900 +10% $114,490 + 7%
$119,790 - 10% $122,504 - 0%
$107,811 $122,504

(As I write this, the average cap on any given year’s earnings is currently about 14%!)

No financial product can guarantee a given return every year for an extended
period of time… even though that’s the insurance company illustrates it. Because of this, regulators have required insurance companies and agents that sell these products to lower the maximum illustrated rates and potential on these products.

Why? Because amateur agents say “you can get 7% per year”… and that is not how these work.

To help “temper expectations” from policyholders who may be buying from these agents, regulations require that illustrations are limited to project a certain rate over a given period of time.

- When the market goes up, you can get a large portion of upside, subject to a
cap. Cap rates can also change from year to year.

- When the market goes down, you lose nothing due to market fluctuations.

Policy Costs: These policies still have costs to maintain the death benefit as well, so it is possible to “lose money” on these policies… just not due to stock market fluctuations.

This additional disclosure is not binding to the insurance company who issued your policy and is provided as additional reference information to help policyholders understand and make informed decisions regarding their policy with or without the assistance of an agent.

 

[pfg1]

Great info. I too have seen with IUL what the OP said. Many companies pushing it as the be all end all, everyone needs one regardless. They sell the pie in the sky, and never actually explain the pro's and con's of this type product. Many sell the max illustrated rate - which is now lower thankfully.
I feel its a good product for the right folks, and yes... it took me quite a bit of time to truly understand as well. Some great info and people on this site helped me out alot.

My only real issue with IUL, the guarantees are weak - so there is no real way to know what it will do. We can look at historicals, but the product has not been out long enough to get a real idea of how it will look long term. We don't have anyone that has paid in for 25yrs, then quit premiums and drew "income" for 20-30yrs, like it is often sold.

I'm not saying it won't work. I believe that if it IS overfunded and NOT over illustrated, it probably will. I illutstrate at 6%. The client just needs to know that there is an element of risk with IUL, that is not present with WL. They also need to know what happens if they don't overfund.

I personally prefer WL (especially with infinite banking type policies), but do use IUL with clients where its a good fit. I do use WOP riders also, much of the time.

 

[DHK]

Agreed. Earnings are not guaranteed in this product. I do believe that we'll still see stock market volatility for quite some time, even if we don't see it growing.

If the market shrinks down to 10,000 on the Dow, principal is still protected (aside from COI). If it bounces between 10,000 and 15,000 for years... the IUL will certainly gain, while mutual funds will continue to lose.

The main downside with IUL... are the 0% years. Get enough of those and you won't have enough compounding going on to make it work better than a WL - which has consistent interest and a great track record of dividends.

One day, I'll have to check out Guardian's Indexed Whole Life. That 4% floor sure looks attractive compared to 0%.