Indexed Universal Life vs. Universal Life vs. VUL

[Franz Kafka]

Lets compare some of the guaranteed illustrations on a 35yo with a rating one above standard:
The two policies are a:
ON prestige max par WL
(paid up at 65, 25K/year, $871,570 DB, overfunded)
and
LFG LifeReserveUL
(pay until 65, 25K/year, $920K initial DB, overfunded)

Scagnt, I can't figure out what I'm doing wrong. I can't get the initial DB down to 920K without MECing the dang thing.

 

[scagnt83]

I thought I might stir up a discussion with that post...

First, I just re ran the numbers I posted and admittedly they do not match up exactly... I dont know what I did, but they where not off in general though...

I will run three illustrations to help illustrate my point, and they are attached to this post. I am using LFGs company issued software and it just updated the other day.

(I am not trying to promote just LFG, there are plenty of great UL insurers out there like MoO, Penn, etc. Im just using them as an example. But their product line up and features are hard to beat, I sell their products a good bit because of it)

-35 year old non smoker at a preferred rating; (LFG only has 2 ns rate classes above std. preferred is under super preferred)

-$25K/year from age 35 to age 65. And I ran it as yearly contributions, not monthly.

Individual policy designs and my logic about the policies pros and cons:

- Guaranteed Plus UL:
$800K DB
Death Benefit option: Increasing by cash value
Protection Guarantee period : Maturity
Defra Type: GPT

This policy has very strong CVs in both the early and later years, its an extension of their old GUL but it builds up more cash quicker.

To be honest Im not a huge fan of this policy if the client sees this contract as an asset class.... at least a "living" asset class. There are better ones out there.
But its really cool because you can choose a specific time period for the policy to be guaranteed; so you can turn it into a 15/20/30 year "term" type policy and beat term rates for a lot of cases over 60 or 65.
I have recently had a few policies where the target was higher than the yearly premium; LFG has "rolling targets" which means that Im double dipping in the 2nd year with my FYC %

- Life Reserve UL:
$700K DB
DB option: Max CV/2 to 1 switch
Defra type: GPT
Assured Distribution Rider (ADR) invoked at 70 to age 100

This is a great contract imo. Its not an indexed so its for the less risk adverse.
It has great cash accumulation and a guaranteed rate of 3.5%. This makes it highly competitive against "fixed" assets of other types, especially when you consider the tax status.
The free ADR rider is a wonderful feature, check out the guaranteed ADR illustration. This rider gives you a guaranteed income for a set amount of years based on your CV, you can choose 5/10/20/age 100/lifetime income. I illustrated to age 100 for the income, but just to let you know the lifetime income was $66K/year for the guaranteed and $136K/year for the current.
This policy has a free overloan protection rider that guarantees a minimum DB in the case of policy liquidation, so it doesnt create a taxable event.
For a cash accumulation oriented policy, this is a very strong one. It rivals any WL on the market these days. The guaranteed illustration is extremely strong.


Indexed UL:
$800 DB
DB option: Max CB/2 to 1 switch
Defra type: GPT
75% in indexed account
indexed account assumption of 6%

Good IUL policy. The free overloan protection rider described above is on this policy as well, its not available if you choose CVAT defra option. While you do have very low guaranteed interest rates, the upside potential is very nice. And its not realistic to assume that you will only receive 1% long term in an indexed account.
The premium load on this policy drops off after 30 years, so its great to pull income from if your looking 30+ years ahead.

ULs are great because of their flexibility. Not just in premium payment but in being able to design them in different ways to fit multiple needs.... its not a one trick pony by a long shot!

I dont tell clients that they can just "pay whenever they want". I stress to them that a consistent premium contribution is critical, and that they can skip a payment only if the have to!
But, the flexibility can work for us agents as well.
I have a friend who sold a nice size business case 4 years ago (3 WL contracts). Well, at the beginning of 09', the business was struggling and the owners couldn't continue the payments, needless to say, they didnt get their money back. They closed the business in 09', and now both have new jobs making a lot of money. If they had been sold ULs they could have made a small payment or even skipped a years payment and picked up again now that they have the income again.
Im not saying that this happens to everyone, but you guys understand my point. Life is full of variables, and income can be a biggie; UL contains a contingency for that variable.

An efficiently designed accumulation oriented UL can be considered an asset..... so can a WL for that matter though.... so I will just say an efficiently and properly designed CV oriented PI contract can be considered an asset.

I stress to clients that a life insurance policy is a contract... in other words its a contractual asset. An individual stock certificate is a contract. A bond certificate is a contract. A real estate deed is a contract. PI is the same as the rest of them in the fact that it is a contractual asset, and it can be properly positioned inside a personal or business portfolio as such if you know what your doing.

DB is great, and its a valuable and important part of the product and your estate, but the cash accumulation on a tax free basis just cant be ignored.

Familiarizing yourself with designing the different carriers contracts through their illustration software is key to selling permanent insurance when high premiums are involved and the client is CV oriented.
I dont shop cases such as this example through many carriers usually. I have a top 3 whos products I know very well and are the most competitive in my opinion.

And all of you WL junkies out there dont get me wrong, Im a huge fan of it, even own a good bit of it myself, but I also own an IUL...

 

[scagnt83]

Looking at those numbers....I would ask why fund $25k/year to an IUL? West Coast Life guaranteed for life at preferred NS for a $920k death benefit is $5,130/year paid to age 65, which would leave $20k left over. Over 30 years, that's $600k, and the guaranteed CV is only $600-700k? Doesn't make much sense if you ask me. I would rather keep my $20k and invest it somewhere else if I'm 35 years old. Then I have a $920k death benefit AND $600k cash, instead of a $920k death benefit with $0 cash when I die. Same with the WL scenario, assuming the age you posted is correct.

Because 1% in an indexed fund over 30 years is not realistic. And neither is the 1% in the fixed rate. I ran the indexed illustration at 6%, but i would bet most people wont argue that 5% is a very realistic number for the indexed accounts... am I right? just my opinion...

Compare the "traditional" ReserveUL I attached above and compare it to an overfunded WL of your choice. Neither will be shabby, but you cant say the UL doesn't compete.


And it would make sense for a 35 year old to do this if they where making enough money. Its a bit inflated for most 35 year olds to afford, but still.... its the example I presented.... lol
Compare $5K/year, or $10K/year, or even $3K/year. The illustrations are no different, just smaller numbers.

I see your point that you can get the same death benefit for a smaller premium. I can design these polices for a premium of similar amount with the same DB. For that matter there are about 15 different ways or more to design a UL policy and its finding the right combo for the needs of your client.

But these are "overfunded" polices for people looking to maximize the tax deferred cash accumulation and the tax free cash distribution aspect of the contract. While the DB plays a vital role in fulfilling the needs of the client, the CV does as well. They have a retirement fund that pays their loved ones more than they have accumulated if they die.... how could something like that not have place in a persons retirement portfolio??

I would argue that a UL or IUL is a valid place to accumulate retirement assets outside of the traditional methods. It can serve as a mid risk asset. But this is assuming your a well diversified individual.
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I have been disappointed to see the major mutual's total fear of IUL. This is a product that can be dynamite for the baby-boomer marketplace. We all know that at older ages it's impossible to have good IRR's on whole life. With IUL though you can get some pretty impressive accumulations of cash.

In speaking with other agents who do major life insurance business....it seems there is a hesistancy about IUL because there is no renewal stream compared to whole life.

I agree. Its a shame that indexed is a dirty word at the mutuals.
The funny thing is that most captive mutual agents are selling EIAs on a brokerage basis.... even though they arent supposed to. So the mutuals are loosing money! lol.
I have seen 10 year old indexed contracts that performed at 6.5% and 7%, thats hard to argue with considering your basis is guaranteed.

I have a feeling that they will come around eventually. There are more and more annuity dollars going to EIAs and on a much smaller scale IULs. They cant ignore the growing trend forever. They are hurting just as much as everyone else. Only they dont have publicly traded stock that shows it...
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In speaking with other agents who do major life insurance business....it seems there is a hesistancy about IUL because there is no renewal stream compared to whole life.

True, its not as high as WL is sometimes, but at least its not nothing....

 

[dgoldenz]

I understand your analysis, but what happens to your numbers if the COI is raised to the maximum amount and they skip one payment, or two payments, etc? That's the problem with UL. You have assumed a 6% interest rate over 30 years....well, going by history, we can assume a 6-8% interest rate elsewhere too, and that money would not be able to be impacted by COI charges within a life insurance policy. If that person using their UL policy for income dies, the income stream is eliminated and the death benefit is paid out. If they had the money in a separate account, they would still have the money to leave behind to a spouse/kids/etc, plus the death benefit paid out for the life insurance. Everyone has their own opinion, but if you ask me, insurance is for insurance and investments are for investments.

 

[scagnt83]

I understand your analysis, but what happens to your numbers if the COI is raised to the maximum amount and they skip one payment, or two payments, etc? That's the problem with UL. You have assumed a 6% interest rate over 30 years....well, going by history, we can assume a 6-8% interest rate elsewhere too, and that money would not be able to be impacted by COI charges within a life insurance policy. If that person using their UL policy for income dies, the income stream is eliminated and the death benefit is paid out. If they had the money in a separate account, they would still have the money to leave behind to a spouse/kids/etc, plus the death benefit paid out for the life insurance. Everyone has their own opinion, but if you ask me, insurance is for insurance and investments are for investments.

I assumed 6% for the IUL. Not the traditional UL; there is a big difference in those two assumptions.
And when using LI as an asset, you usually have other PI policies in place for when you draw your income, so that you have the DB that your estate needs.

And the COI isnt usually a big issue when a policy is overfunded. Its usually a very small fraction of the CV increase.
Ive attached the expense analysis of the reserveUL I attached in the post above.

After 60 years the COI falls off to zero.
The most expensive year is age 91, with a COI of $28,188... but that is for a DB of over 6 million!!
Would you pay $28K to get 6 million back??

I know that someone will say "but that expense analysis uses current assumptions.." and you would be right, it does. But even if the COI is double, its still a very small amount of the CV increase...

But Im not trying to cram permanent insurance down your throat as a tax deferred savings vehicle. If you are comfortable with buy term and invest the difference go for it. Term has a place in almost everyones LI portfolio.

But I can take a conservative IUL policy thats overfunded and show you how the net CV competes with the average 401K or IRA invested in mutual funds, Especially when you deduct the money for the term insurance...
And my whole point is that IUL is not in the same risk class as mutual funds. So your taking less risk, which is why it makes a great low risk asset. Even though it can compete with mutual fund returns (especially if its qualified money), its not in the same class.

My philosophy isnt "dont contribute to other investments" its, contribute to multiple types of investment vehicles

Your assumption seemed to be that the client just has one retirement savings vehicle.
Being well diversified does not mean just inside your 401K IRA or brokerage portfolio, that is part of it, you obviously dont want 100% of your 401K to be in just one fund; but diversification means that you are utilizing multiple investment vehicles as well, and PI is a method to accomplish that.

 

[scagnt83]

Everyone has their own opinion, but if you ask me, insurance is for insurance and investments are for investments.

Again, I totally respect your opinion. And I always stress that what your comfortable with is usually the best option.

But us in the LI field we tend to box the term "insurance" in as a very defined and often inflexible item.

Think about the term for a second... "insurance" "insuring"....

Is having a guaranteed tax free cash account that grows higher than inflation not "insuring" against the risk of not having sufficient retirement assets?
Is having guaranteed returns associated with your contributions not "insuring" your portfolio against the risk of loss in securities related investments?

It might not be for the guy making 40K/year, people on that level usually are barely making their 401K match! lol.
But for the person who goes up to the match in their 401K, also has an IRA or brokerage account, it makes a powerful way to diversify and hedge risk.
And for the person maxing out their 401K, it can make for a very competitive alternative for the amount above the match.

 

[BNTRS]

Ok, here's my issue, when I look at Guardian's whole life products in this comparison it goes like this:

Male, 35, 25k/year in the limited pay product produced the following:

DB: 1,488,890

Guaranteed Cash Value at age 66 $853,774

Assumed Cash Value: at 66 $1,833,336

Now alternatively I could use their paid up at age 121 product and reduce pay-up the policy in the 31st year and I get the following

DB: $2,485,030

Guaranteed Cash @ 66: $1,072,983

Assumed @ 66: $1,761,777

This is not overfunded at all. I ran it this way originally because Guardian will not illustrate PUAs in the guaranteed column, even if they are scheduled for payment. We could overfund the policy and drop the death benefit. It would create a lower death benefit and higher assumed cash values. It would increase guaranteed cash value but will not show in the illustration.

 

[scagnt83]

Ok, here's my issue, when I look at Guardian's whole life products in this comparison it goes like this:

Male, 35, 25k/year in the limited pay product produced the following:

DB: 1,488,890

Guaranteed Cash Value at age 66 $853,774

Assumed Cash Value: at 66 $1,833,336

Now alternatively I could use their paid up at age 121 product and reduce pay-up the policy in the 31st year and I get the following

DB: $2,485,030

Guaranteed Cash @ 66: $1,072,983

Assumed @ 66: $1,761,777

This is not overfunded at all. I ran it this way originally because Guardian will not illustrate PUAs in the guaranteed column, even if they are scheduled for payment. We could overfund the policy and drop the death benefit. It would create a lower death benefit and higher assumed cash values. It would increase guaranteed cash value but will not show in the illustration.

Those are very strong numbers.... higher than ONs...

Could you post those illustrations please? Id like to see them.
What does it look like for a 50 year old for 15 years? ...just out of curiosity

Admittedly im not as knowledgeable of Guardians product line as some others, I should be though... (i do know that their 401K is top notch!)
I run most of my WL policies through ON & Mass. But I do know that Guardian has good contracts.

I admit that WL is a great product, again, im not knocking it. And the younger you are the better it is.
Im just a fan of the flexibility of UL.

 

[Franz Kafka]

- Life Reserve UL:
$700K DB
DB option: Max CV/2 to 1 switch
Defra type: GPT
Assured Distribution Rider (ADR) invoked at 70 to age 100

This is a great contract imo. Its not an indexed so its for the less risk adverse.
It has great cash accumulation and a guaranteed rate of 3.5%. This makes it highly competitive against "fixed" assets of other types, especially when you consider the tax status.
The free ADR rider is a wonderful feature, check out the guaranteed ADR illustration. This rider gives you a guaranteed income for a set amount of years based on your CV, you can choose 5/10/20/age 100/lifetime income. I illustrated to age 100 for the income, but just to let you know the lifetime income was $66K/year for the guaranteed and $136K/year for the current.
This policy has a free overloan protection rider that guarantees a minimum DB in the case of policy liquidation, so it doesnt create a taxable event.
For a cash accumulation oriented policy, this is a very strong one. It rivals any WL on the market these days. The guaranteed illustration is extremely strong.

Thanks. Got it illustrated just the way you described. It's a nice product but looks like ADR payments are less than what you would get from period certain SPIA with the guaranteed $950K. I really like the early GCV. I'd sell it without the income rider.

 

[scagnt83]

Thanks. Got it illustrated just the way you described. It's a nice product but looks like ADR payments are less than what you would get from period certain SPIA with the guaranteed $950K. I really like the early GCV. I'd sell it without the income rider.

Good. There are so many variables when illustrating a UL you cant really just say a premium and DB.
I look at the ADR as a nice free feature. Just because you attach the rider to the policy doesnt mean that you have to use it, you can still take the $950 at that point... or just take distributions in an amount that you dictate.
Its just nice to know that its there and an option, and since its free its no harm no foul.

You bring up a good point that I havent even made yet; the early cash values.
The nice thing about using PI as an asset is that it has no age restrictions, so you can use it whenever, but if you dont have a decent amount built up, obviously you cant use it. This is another nice feature of ULs. You can get 95 cents per dollar of premium in the first year CV with a UL policy.