IUL Questions

[DHK]

First, I'm sorry. It was an incomplete sentence.

Let's try again: There is NO "increasing costs of insurance" in a UL policy as compared to a WL policy. The costs of insurance is the same.

However, a WL policy has a guaranteed fixed premium and fixed interest rates with only the dividends that may vary from year to year because they are not guaranteed.

But because a UL policy has flexible premiums and varying rates of return - remember that UL policy is "unbundled" - which is why it requires more disclosure about how it works, compared to a WL.

There, is that better?

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As far as figuring out what the Government is going to tax or not... I don't have a crystal ball.

All we can do as advisors is determine what's going on today, rather than being in a panic about "what might happen next".

So far, the last time the taxation of life insurance has been affected was in the 80's. With the recent comments of raiding 529 plans, you could be right. Congress also somewhat recently changed how section 162 plans worked. So yeah, they may affect it in the future going forward.

Here's what I do know: every plan that was previously sold under the old rules... were grandfathered under the old rules.

So, maybe instead of restraining the idea... it should be expanded to help everyone we know to get policies in time before Congress decides to do something against this and help people prepare for the time when they do.

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LMAO. If you truly believe this, you have no business marketing any form of UL to any consumer. As for "increased disclosure", combine that with "no increasing cost of insurance" and you have the basis for virtually every civil lawsuit ever successfully prosecuted against nearly every major insurance company offering UL products since their inception in the 1970s.

IUL (which is what this thread is about) is about capturing the upside of the market without the downside risk. Markets go up and markets go down. The advantage with an IUL (or a FIA for that matter) is that you still have 100% of your money working for you while the market goes back up!

But it's NOT "whole life for half the premium" as it was sold back in the 80's.

You are absolutely correct. Problem is, very little individual UL is ever sold with a max funded premium -- because the average insurance consumer is unable to afford that. The most common exception is UL sold to corporations to backstop nonqualified deferred compensation plans. Those folks can generally afford the required premiums.

Then agents that don't recommend a max funded premium should be hung out and shot.

When a UL policy is issued with less than max funding and unrealistic interest crediting assumptions, the policy is set up to eventually fail. The annually increasing COI -- yes, the annual COI is based on ART rates, despite what DHK wants consumers to believe with his "increased disclosure" -- will eventually exceed the planned premium less all the monthly deductions for COI, admin charges, contract charges, no-lapse guarantees, riders (such as Waiver of Monthly Deductions -- important for self-employeds and those in high risk occupations, such as law enforcement, firefighting, and certain construction trades, to name a few, more than most others).

Uh... ever see how the markets work? Ever see how an IUL works? This thread is about IUL... not traditional UL.

Again, IUL is about capturing upside market volatility without the downside risk. According to current IUL regulations (that are soon to change) there is a maximum annual crediting that can be illustrated (making an average return an actual return) which is stupid. Remember: current cap rates are around 14% and markets continue to be volatile - both negatively and positively. When markets increase, you can capture a decent upside up to the caps. When markets are negative - no risk to principal - other than the costs of insurance.

Now, SOMEONE is going to say - "what about the maximum charges and no returns illustration?" Let's get back to the real world. When in the history of the stock market have we ever had a lengthy period of time where markets were completely flat with absolutely no return?

Here's what I personally think: I think markets will be "bobbing" up and down for a while during the new economy of baby boomer retirement. Well, if you're actually in the market, that's a bad thing. With fixed indexed products, it's a great situation to be in.

So the idea that there will be NO returns for a long time... is malarkey. Even if it happened, if you review your policies with your clients, you can re-allocate to the fixed insurance bucket and earn SOME return.

The absolute KEY to making these permanent policies work... are annual reviews with your clients.

ProducersWeb - Life - Life insurance as an income product

Take a look at the comments. You'll see my personally written IUL disclosure.

All of this discussion concerning the CV of UL or WL policies originates with the idea that the cash value is a source of "income", and the need to amass lots of CV to accomplish the deed. I'm not saying this is impossible, because it certainly is possible, what I'm saying is that "Bank On Yourself" and its variations on a name, is not what life insurance was intended to do. It is simply what is currently permitted under the Internal Revenue Code.

[...]

If you don't believe Congress can't tighten the noose once again, then continue to drink the Kool-Aid. That's all I'm saying. Calling "borrowed" money "income" is not "increased disclosure" -- it's subterfuge.

So... life insurance isn't intended to be a cash reserve in the event of emergency or opportunity?

Life insurance is like a swiss army knife. It can do lots of things exceptionally well.

My personal caveat... is that there needs to be a (perceived) need for a death benefit. If there's no need for a death benefit... why buy life insurance?

Someone in another thread said that it doesn't have to be there in all cases... but so far, I have to disagree, unless we're talking about a high income person who has maximized all his other IRS regulated plans.

The reason I feel that way is due to policy costs. Saving money in a brokerage account or even in a 401(k) has less cost than life insurance. It can take 10-15 years to "break even" in a life insurance contract, but much sooner with other forms of investing.

So, for me, to take advantage of all the benefits available in a life insurance contract, there needs to be a need for death benefit, and THEN the other benefits come into play.

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Oh, by the way, your use of the word "income" is incomplete.

When taking a loan from a life insurance policy, is it "income"? According to the English dictionary it is.

But is it "income subject to taxation"? No. It's a LOAN.

Is taking out a personal loan of any kind "income"? No. I don't know of ANY LOAN that is counted as "taxable income" or "income to be counted in the social security calculation".

This loan transaction is not reported in any way to the IRS or anywhere else.

Compare this to a reverse mortgage. Is that income reported? No... but it is considered a source of "tax-free income".


However, ever wonder why the IRS requires the reporting of balances in a Roth IRA? There is no official answer, and really, no reason for it either.

However, I personally think that it *could* be used as a future factor in determining a needs basis for social security eligibility. Those who have assets in IRA, Roth IRA, and 401(k) plans will be seen as "wealthy" and those who don't... will be eligible for social security in one form or another.

Life insurance has no such reporting requirements to the IRS every year. Only upon the lapse, surrender, or cancellation and there is a gain in the policy - or outstanding loans which may cause a 'phantom income tax' on the outstanding loan - which makes it similar to an outstanding 401(k) loan when one leaves their job - except there's no 10% penalty and you can go past the $50,000 maximum loan amount.

 

[scagnt83]

I'm sure you have. And that's fine. Except that what you refer to as "max funding" is, in reality, "overfunding".

When you use WL as it is intended by its design, it cannot be "overfunded" unless dividends are added to cash value, which causes them to become taxable to the policyowner.

In reality there is no true technical term for funding a permanent policy up to the MEC limit. You used the term "max funded" in another of your posts so I just followed suit. I usually use the term "overfunding".


And as I understand your second comment it is incorrect.

When choosing the "Paid Up Addition" Dividend option on a WL policy it uses the Dividends to purchase additional units of insurance coverage. The Dividend paid to the policy is not taxable to the policyowner. (unless they withdraw the CV over the basis)

When choosing the "Cash" Dividend option the Dividends are paid in cash to the policyowner and can be taxable. But this does not increase the policy value and is not considered overfunding the policy.

 

[maxherr]

Let's try again: There is NO "increasing costs of insurance" in a UL policy as compared to a WL policy. The costs of insurance is the same. . . . There, is that better?

No, it's still wrong, no matter how you try to explain it. You obviously have never actually read or analyzed a UL contract of any type. You lack of knowledge on the inner workings of UL is dangerous. At least many agents understand the concept of increasing COI, even if they cannot explain it.

WL has a guaranteed fixed premium, because the Mortality Cost is amortized over the full term of the policy, and is dependent on a fixed interest rate. In a UL policy, the "unbundling" of the Mortality Cost (COI) from other monthly administrative and miscellaneous fees, combined with its decoupling from the interest crediting rate, exposes the policyowner, not the insurance company, to the insidious effects of declining interest rates and/or unexpected changes in mortality and other costs of doing business -- which the insurance company gladly accounts for by raising the cost of insurance rate each year.

The Table of Guaranteed Values in any UL policy simply provides the policyowner with the knowledge that the monthly COI rate cannot exceed this amount. Other contractual language informs the reader and policyowner that the COI will increase each year, but cannot tell either by how much -- only that the increase will be limited to the amount shown in the TGV.

Surely, you've seen that in any of the UL contracts you've sold, haven't you? Or, am I correct in stating that you've never read one?

The one thing that has the ability to make UL work is the only thing tied to the interest crediting -- cash accumulation. If the cash accumulation rises at a rate faster than the increasing COI rate, the Net Amount at Risk (NAR) decreases, and mitigates against the higher COI. If it weren't so, the UL contract wouldn't need two to four pages of word math to explain how it works.

When a UL policy's CSV fails to grow by the required amount to keep the COI deduction the same in the next year, the policyowner can mitigate the increase simply by paying more money into the contract -- but that takes a little analytical math to figure out, because there are sales loads to consider and a new COI rate to estimate, since the insurance company doesn't explicitly tell its policyowners what their COI rate is. And whatever information is provided, is generally after the fact, in the end-of-year policy statement. Some insurers don't even provide advance notice that the interest crediting rate is dropping, which could alert a policyowner to begin paying more to offset that loss.

Let me quote from an actual client's policy:

The Cost of Insurance Charge for a specific Policy Month is the charge for the Net Amount at Risk, including any Additional Ratings and any Supplementary Benefit riders which are part of the policy and for
which charges are deducted from the Guaranteed Interest Account and are based on the Net Amount at Risk. The charge for the Net Amount at Risk is an amount equal to the per dollar Cost of Insurance Rate for that month multiplied by the Net Amount at Risk. The Cost of Insurance Rate will be based on our expectations of future mortality, persistency, investment earnings, expense experience, capital and reserve requirements, and tax assumptions. The Maximum Monthly Cost of Insurance Rates at any Age are shown in Section 2 as a rate per $1 ,000 of Net Amount at Risk. To get the maximum rate per dollar, the rate shown must be divided by 1,000. Each Cost of Insurance Charge is deducted in advance of the applicable insurance coverage for which we are at risk.

Niw ask yourself this question, "If there is 'no increasing Cost of Insurance' in a UL policy, why must there be a 'disclosure' such as this? Why would the policyowner need a Table of Guaranteed Values?"

Stop drinking your own Kool-Aid and learn what your product says it does.

Have you ever stopped to look at a client's an annual statement? Did you not notice the column lableled "Cost of Insurance" and the fact that the amount of the deduction has increased in Year 2 compared to Year 1. In a UL policy which is not fully funded, which is most of them, this will almost certainly be the case, even if the policy is front loaded with a non-MEC additional amount of capital. (It can also be true of a fully funded or MECd policy, but this would generally require a big decline in interest crediting, or unexpected increases in mortality or other business expenses, which are possible but uncommon.)

Moving on . . .

Again, IUL is about capturing upside market volatility without the downside risk

Is this the same rationale that agents use to tell their prospects, "Your cash value will never decrease because the market goes down"? Where is the disclosure that your cash value will decline in a negative market environment because of all the other charges taken from the cash value, such as [the "unbundled"] monthly Cost of Insurance, Administrative Charge, and/or Contract Charge -- even when the guaranteed minimum 1-3% interest is added?

As for changes in IUL and FIA annuity illustration regulations. Great! I'm all for it. Even using 8% forward-looking, straightline crediting rates, as the regulations will likely permit, is too much, let alone being able to illustrate what a policy could do at 14%.

Do your clients a big favor, if you want to continue selling them any form of UL -- calculate their premiums using the Guaranteed Values, not the Current Values. You won't get any argument from me if you do. It won't guarantee that their policies will not lapse -- notice that the Guaranteed Columns run to zero in a certain number of years -- but because no UL policy has ever descended to the Guarantees, it should result in a long and beneficial policy life.

So... life insurance isn't intended to be a cash reserve in the event of emergency or opportunity?

No, life insurance is not INTENDED to be a cash reserve. Borrowing against the death benefit is a "nonforfeiture" option required in a cash value life insurance policy, which the insurance companies welcome with mixed emotion. In the 1970s, they watched cash flow out to banks offering 13% on CDs, and invented UL to draw the money back in. Terminal illness riders/provisions were a response to the rise in viatical settlements in the late 1980 and early 1990s.

If [cash value] life insurance were intended to be a cash reserve, why does the insurance company impose surrender charges on early terminations, why do they charge interest (even if only 1% more than the crediting rate) on borrowed money?

The answer is simple, the money is not yours. It's theirs -- and there is always a cost to use "Other People's Money." And why, in an emergency, could the insurance company say to a policyowner, "You'll have to come back in six months"? Because that's a provision in every cash value policy -- thanks to the banking industry in the Great Depression.

No, it's not a cash reserve for emergencies. It's a provision in the contract that allows access to a portion of the cash value -- more as a percentage in the later years when there are no surrender charges. The insurance company does not want you using their cash flow as your bank account, but the law concerning nonforfeiture means they have to permit it.

Enough said.

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SCAGENT . . .

I think you did misunderstand what I wrote. You replied:

When choosing the "Cash" Dividend option the Dividends are paid in cash to the policyowner and can be taxable. But this does not increas,e the policy value and is not considered overfunding the policy.

One dividend option, rarely used, is called "Accumulate at Interest." The insurer may hold the accumulated dividends in the policy cash value for accounting purposes, paying interest on those monies, which creates a taxable event, because that money is not supposed to be in a WL policy (due to the "overfunding" it causes) -- same as if the money were in a bank savings account.

Generally speaking, when paid to the policyowner in cash, the dividends themselves are not taxable (but can be in limited circumstances). Using them to purchase paid up additions is a perfectly good use, and one I recommend. They can also be used to pay loans or loan interest, and to pay premiums. After all, the dividends are a portion of your money the insurance company has decided it does not need -- it is "surplus".

In reality there is no true technical term for funding a permanent policy up to the MEC limit. You used the term "max funded" in another of your posts so I just followed suit.

I don't have any disagreement with you on this at all. I'm sure my use of "max funded" was in response to someone else who used that term as well. I just don't use it when talking about WL. On its own, a WL policy should not MEC, with the statutory exception of most single premium policies after June 1986. You get a contract with a guaranteed premium, guaranteed interest rate, guaranteed cash value, and guaranteed death benefit all by virtue of paying premiums on time. The contract generally does not permit paying more money than would be needed to endow the policy at age 121 on non-MEC term -- even if fully paid up at an earlier age.

 

[DHK]

No, it's still wrong, no matter how you try to explain it. You obviously have never actually read or analyzed a UL contract of any type. You lack of knowledge on the inner workings of UL is dangerous. At least many agents understand the concept of increasing COI, even if they cannot explain it.

Obviously you don't understand how life insurance works, or actuarial tables, or anything else.

Did you watch Guy Baker explain "The Box"? Here's the link (again):
https://www.youtube.com/watch?v=7WUQYdpSbzE

Or maybe you'd rather have something more modern:

Guy Baker - Investing and Ethics explaining the difference between term and permanent insurance to COLLEGE students:
https://youtu.be/Fr01R8GiSNk?t=1h2m

WL has a guaranteed fixed premium, because the Mortality Cost is amortized over the full term of the policy, and is dependent on a fixed interest rate. In a UL policy, the "unbundling" of the Mortality Cost (COI) from other monthly administrative and miscellaneous fees, combined with its decoupling from the interest crediting rate, exposes the policyowner, not the insurance company, to the insidious effects of declining interest rates and/or unexpected changes in mortality and other costs of doing business -- which the insurance company gladly accounts for by raising the cost of insurance rate each year.

And right there, you've made my point. Thank you.

And your 2nd point shows what UL also does. Thank you. I know that the risks in a UL contract "pass to the policy holder"... however, the internal costs are the same, whether it is the responsibility of the insurance company or the policy holder.

With WL, the guarantees are stronger. I never said that it wasn't. All I'm saying is that UL has the SAME COSTS OF INSURANCE as WL.

BTW, WL, Term, UL, IUL... ALL have the same costs of insurance! Shocker!

The Table of Guaranteed Values in any UL policy simply provides the policyowner with the knowledge that the monthly COI rate cannot exceed this amount. Other contractual language informs the reader and policyowner that the COI will increase each year, but cannot tell either by how much -- only that the increase will be limited to the amount shown in the TGV.

Surely, you've seen that in any of the UL contracts you've sold, haven't you? Or, am I correct in stating that you've never read one?

The one thing that has the ability to make UL work is the only thing tied to the interest crediting -- cash accumulation. If the cash accumulation rises at a rate faster than the increasing COI rate, the Net Amount at Risk (NAR) decreases, and mitigates against the higher COI. If it weren't so, the UL contract wouldn't need two to four pages of word math to explain how it works.

And how many people actually READ AND UNDERSTAND those additional two to four pages of word math on "how it works"?

I'm keeping it VERY simple here.

When a UL policy's CSV fails to grow by the required amount to keep the COI deduction the same in the next year, the policyowner can mitigate the increase simply by paying more money into the contract -- but that takes a little analytical math to figure out, because there are sales loads to consider and a new COI rate to estimate, since the insurance company doesn't explicitly tell its policyowners what their COI rate is. And whatever information is provided, is generally after the fact, in the end-of-year policy statement. Some insurers don't even provide advance notice that the interest crediting rate is dropping, which could alert a policyowner to begin paying more to offset that loss.

Yes.

Let me quote from an actual client's policy:



Niw ask yourself this question, "If there is 'no increasing Cost of Insurance' in a UL policy, why must there be a 'disclosure' such as this? Why would the policyowner need a Table of Guaranteed Values?"

Because of the flexible nature of the policy.

Stop drinking your own Kool-Aid and learn what your product says it does.

Try learning the math of actuarial tables and watch the videos above.

Have you ever stopped to look at a client's an annual statement? Did you not notice the column lableled "Cost of Insurance" and the fact that the amount of the deduction has increased in Year 2 compared to Year 1. In a UL policy which is not fully funded, which is most of them, this will almost certainly be the case, even if the policy is front loaded with a non-MEC additional amount of capital. (It can also be true of a fully funded or MECd policy, but this would generally require a big decline in interest crediting, or unexpected increases in mortality or other business expenses, which are possible but uncommon.)

Moving on . . .



Is this the same rationale that agents use to tell their prospects, "Your cash value will never decrease because the market goes down"? Where is the disclosure that your cash value will decline in a negative market environment because of all the other charges taken from the cash value, such as [the "unbundled"] monthly Cost of Insurance, Administrative Charge, and/or Contract Charge -- even when the guaranteed minimum 1-3% interest is added?

There are 3 factors to figure out with every "investment" that is designed to appreciate in value: risk, return, costs.

Risk = When my capital is in this account/policy, what can happen to it?

Return = What's the potential return in this account/policy?

Costs = what is the COST of the initial and ongoing costs and fees for this account/policy?

Costs are different from risk, yet costs do factor into the risk of the policy.

As for changes in IUL and FIA annuity illustration regulations. Great! I'm all for it. Even using 8% forward-looking, straightline crediting rates, as the regulations will likely permit, is too much, let alone being able to illustrate what a policy could do at 14%.

Do your clients a big favor, if you want to continue selling them any form of UL -- calculate their premiums using the Guaranteed Values, not the Current Values. You won't get any argument from me if you do. It won't guarantee that their policies will not lapse -- notice that the Guaranteed Columns run to zero in a certain number of years -- but because no UL policy has ever descended to the Guarantees, it should result in a long and beneficial policy life.

Let's talk about guaranteed values:

Guaranteed values are assuming MAXIMUM costs of insurance (which is possible, but rarely happen. And if it does, it's to everyone in their rate class. Plus, if they do, the GOOD RISKS will simply get a new policy with another company and the POOR RISKS will hold onto that. Even Guy Baker references that and calls it ADVERSE SELECTION.

In addition, guaranteed values assume NO MARKET UPSIDE FOR THE LIFE OF THE POLICY. Even the federal government will continue to spend more money to ensure that the market will keep going up.

No, life insurance is not INTENDED to be a cash reserve. Borrowing against the death benefit is a "nonforfeiture" option required in a cash value life insurance policy, which the insurance companies welcome with mixed emotion. In the 1970s, they watched cash flow out to banks offering 13% on CDs, and invented UL to draw the money back in. Terminal illness riders/provisions were a response to the rise in viatical settlements in the late 1980 and early 1990s.

But because of nonforfeiture rights - which is the rights of the POLICYHOLDER - the POLICYHOLDER can manage their policy in any way they choose.

If [cash value] life insurance were intended to be a cash reserve, why does the insurance company impose surrender charges on early terminations, why do they charge interest (even if only 1% more than the crediting rate) on borrowed money?

Life insurance is NOT a "bank account". It is still insurance. You know there are costs of establishing a policy.

Cash value policies take about 10-15 years to "break even".

The answer is simple, the money is not yours. It's theirs -- and there is always a cost to use "Other People's Money." And why, in an emergency, could the insurance company say to a policyowner, "You'll have to come back in six months"? Because that's a provision in every cash value policy -- thanks to the banking industry in the Great Depression.

Agreed... the money is theirs... to guarantee the death benefit. But the policyholder is in CONTROL.

No, it's not a cash reserve for emergencies. It's a provision in the contract that allows access to a portion of the cash value -- more as a percentage in the later years when there are no surrender charges. The insurance company does not want you using their cash flow as your bank account, but the law concerning nonforfeiture means they have to permit it.

Enough said.

Your philosophy is simply different from mine. I like empowering policyholders to the economic benefits of life insurance.

You are more of a traditionalist.

Two separate belief structures.

Both are correct and accurate according to current laws, taxes, and provisions.

You can cling to your philosophies and I can cling to mine.

As you said: "enough said".

 

[maxherr]

All I'm saying is that UL has the SAME COSTS OF INSURANCE as WL.

You are completely wrong. I don't know who taught you how UL works, but you have no clue when you continue to make this assertion. Hundreds of thousands, if not millions of policyholders have learned what you fail to understand -- only they learned after it was too late to pay the freight of COI charges in their UL policies (mostly plain vanilla and variable, but also some indexed as of late) at later ages when the cash value had been depleted exactly because of the increasing COI in the contract.

I go to court on July 6, as the plaintiff's expert in a trial involving a $50,000 UL policy sold to a 64-year-old in 1986, with a "planned premium" of $180.41 per month. You do the math . . . when the policy was improperly lapsed by the insurance company in August 2012, he was exactly 313 months into the contract, with just 59 more left to go (the policy matures in 2017). Let's put you on the defense side of the math, since you believe there is no increasing cost of insurance in a UL policy.

On cross examination, plaintiff's attorney asks you: In general terms, you have said that universal life insurance is "unbundled," correct? Yes. And all forms of universal life insurance follow the same essential formula that takes the policyowner's premiums, adds whatever the current interest amount the insurer has agreed to pay, then deducts the various monthly expenses, such as the monthly contract charge, and the monthly administrative charge, and the monthly cost of insurance amount that the policyowner has agreed to pay, isn't that correct? Yes. (my profound apologies if the words I put in your mouth are incorrect)

Then, please explain to the jury, Mr. DHK, universal life insurance expert that you believe you are, if there is, as you want the jury to believe, no increasing cost of insurance in a universal life insurance policy, how it was possible for the plaintiff to have been required to pay more than $67,000 in premium payments in 26 years -- just to avoid a policy lapse . . . because there is no cash value in the policy, if the planned premium to that same point in time was only $56,468.33?

(We'll patiently wait for your response)

Next question: In April 2015, the insurance company offered to reinstate the plaintiff's policy, after paying past due premiums of about $3400, with a new monthly payment of about $480. Please explain to the jury how this is possible if there is no increasing cost of insurance in his universal life insurance policy?

(Again, we'll wait to hear from you on this)

Final question: My client, a World War II combat pilot who flew more than 30 bombing runs over Germany without being shot down, purchased his policy believing that he was doing the right thing for his wife -- to make sure she had a little something if he died. Do you believe he should now be asked to pay nearly three times as much money as he was originally told his premium would be, knowing that if he does so between now and 2017, should he live that long, he will have paid more than $100,000 for a $50,000 death benefit? Do you believe that's what he agreed to do in 1986?

(We'll wait to find out what you believe)

--------------------------------

Now, as for "The Box" video you linked to, apparently you don't understand that either. Universal Life Insurance is not the long, flat box that Whole Life is. To use Baker's own analogies, Universal Life is a "box" linked to a "pay-the-curve" engine. The box is the cash value and the curve is the annually increasing Cost of Insurance -- which you refuse to admit exists. As even Baker points out, the box shrinks if the interest is higher than anticipated, but the real hazard is what happens when interest rates go down (or, what he fails to mention, because the video is so old, remains flat for an extended period of time), it takes a whole lot more money to refill the box.

Failure to keep the box filled to mitigate against the increasing cost of insurance is what destroys UL policies. It's the reason they now have the ubiquitous "no lapse" guarantees, which evaporate at a certain point in time, or in the event of a partial withdrawal, or, in some instances, if a loan is taken.

Universal Life insurance was created in a time of excessive inflation, banks were paying 13% or more on CD deposits, and attracted lots of cash flow. Insurers created UL to compete based on the assumption that high interest rates were here to stay, and, as Baker says, with high interest, less money is needed to keep the box full. To this very day, some 40 years into the history of UL, illustrations are still premised on straightliine rates of return, or, worse, wild crediting assumptions that are completely bogus.

I have one current illustration that only works if the policy is credited with an average rate of more than 26% over 55 policy years (with maximum crediting of more than 64% in years 37 and 38. Utterly absurd. The interest crediting in years 1-14 (the surrender period) have been artfully suppressed by the illustration at an average of about 5.19%. Then the gimmick factor takes over, and in the absence of those credits, the $70,152 annual premium (bolstered by a total of $654,000 in added premiums in the first three years) on this $5 million policy would be somewhere in the stratosphere at about $195,000-$245,000 in years 37 and 38, possibly even more, and continuing higher still in the years that follow, since the crediting rates fall off rapidly beginning in year 39.

In that same illustration -- just to put an end to your "no increasing cost of insurance" error -- the 1st year COI deduction (this policy is written on a 70-year-old female) totals $6,076. In year 14, it is $108,595. In year 39, it is $1,078,081. And all of those numbers are premised on increasing cash surrender values which are illustrated growing at about 5.18% on average.

To that point in time, the planned premium totals $3,389,928, COI deductions total $14,496,111, interest credits total $14,457,315. And surrender value is a mere $2,010,879 -- if the policy actually credits $1,248,308 in interest on a cash value of $1,801,847 . . . a rate of 62.08%.

No insurance company has ever credited UL policies with that kind of interest. I didn't make up these numbers -- they came directly from an illustration I ran with the company's own software. But all of this information was hidden from the policyowner in the original sales illustration presented by the agent and in the illustration packaged with the policy at delivery.

So much for "just more disclosure" -- that's what people pay me to analyze.

 

[DHK]

OMFG, you are so misunderstanding me.

What you are referring to is the LIABILITY of the costs of insurance, not the ACTUAL COSTS OF INSURANCE.

Let's look at each paragraph of your diatribe one at a time:

You are completely wrong. I don't know who taught you how UL works, but you have no clue when you continue to make this assertion. Hundreds of thousands, if not millions of policyholders have learned what you fail to understand -- only they learned after it was too late to pay the freight of COI charges in their UL policies (mostly plain vanilla and variable, but also some indexed as of late) at later ages when the cash value had been depleted exactly because of the increasing COI in the contract.

And that's because they were sold UNDERFUNDED contracts with promises they couldn't keep and without annual reviews.

We've talked about this.

I go to court on July 6, as the plaintiff's expert in a trial involving a $50,000 UL policy sold to a 64-year-old in 1986, with a "planned premium" of $180.41 per month. You do the math . . . when the policy was improperly lapsed by the insurance company in August 2012, he was exactly 313 months into the contract, with just 59 more left to go (the policy matures in 2017). Let's put you on the defense side of the math, since you believe there is no increasing cost of insurance in a UL policy.

Sold in 1986, huh? That's going to be your 'case study'? This'll be explained quite quickly. I've already explained that UL is not "WL at half the price".

On cross examination, plaintiff's attorney asks you: In general terms, you have said that universal life insurance is "unbundled," correct? Yes. And all forms of universal life insurance follow the same essential formula that takes the policyowner's premiums, adds whatever the current interest amount the insurer has agreed to pay, then deducts the various monthly expenses, such as the monthly contract charge, and the monthly administrative charge, and the monthly cost of insurance amount that the policyowner has agreed to pay, isn't that correct? Yes. (my profound apologies if the words I put in your mouth are incorrect)

This is correct.

Then, please explain to the jury, Mr. DHK, universal life insurance expert that you believe you are, if there is, as you want the jury to believe, no increasing cost of insurance in a universal life insurance policy, how it was possible for the plaintiff to have been required to pay more than $67,000 in premium payments in 26 years -- just to avoid a policy lapse . . . because there is no cash value in the policy, if the planned premium to that same point in time was only $56,468.33?
(We'll patiently wait for your response)

Because the agent in 1986 sold the policy with under-funded promises and neglected to keep regular contact with their policyholder through reviews.

Next question: In April 2015, the insurance company offered to reinstate the plaintiff's policy, after paying past due premiums of about $3400, with a new monthly payment of about $480. Please explain to the jury how this is possible if there is no increasing cost of insurance in his universal life insurance policy?

(Again, we'll wait to hear from you on this)

Because the agent in 1986 sold the policy with under-funded promises and neglected to keep in regular contact with their policyholder through reviews.

We can keep this response going all day.

Final question: My client, a World War II combat pilot who flew more than 30 bombing runs over Germany without being shot down, purchased his policy believing that he was doing the right thing for his wife -- to make sure she had a little something if he died. Do you believe he should now be asked to pay nearly three times as much money as he was originally told his premium would be, knowing that if he does so between now and 2017, should he live that long, he will have paid more than $100,000 for a $50,000 death benefit? Do you believe that's what he agreed to do in 1986?

(We'll wait to find out what you believe)

Because the agent in 1986 sold the policy with under-funded promises and neglected to keep in regular contact with their policyholder through reviews.

I think we agree with this... and that we agree that the vast majority of agents don't do the uncommon discipline of policy and financial reviews with their clients on a regular basis.

--------------------------------

Now, as for "The Box" video you linked to, apparently you don't understand that either. Universal Life Insurance is not the long, flat box that Whole Life is. To use Baker's own analogies, Universal Life is a "box" linked to a "pay-the-curve" engine. The box is the cash value and the curve is the annually increasing Cost of Insurance -- which you refuse to admit exists. As even Baker points out, the box shrinks if the interest is higher than anticipated, but the real hazard is what happens when interest rates go down (or, what he fails to mention, because the video is so old, remains flat for an extended period of time), it takes a whole lot more money to refill the box.

Which is why
1) proper expectations are set in the beginning, and
2) regular policy reviews are a critical factor to making sure a strategy works long-term.

Failure to keep the box filled to mitigate against the increasing cost of insurance is what destroys UL policies. It's the reason they now have the ubiquitous "no lapse" guarantees, which evaporate at a certain point in time, or in the event of a partial withdrawal, or, in some instances, if a loan is taken.

Failure of AGENTS to perform POLICY AND FINANCIAL REVIEWS is what destroys UL policies.

Universal Life insurance was created in a time of excessive inflation, banks were paying 13% or more on CD deposits, and attracted lots of cash flow. Insurers created UL to compete based on the assumption that high interest rates were here to stay, and, as Baker says, with high interest, less money is needed to keep the box full. To this very day, some 40 years into the history of UL, illustrations are still premised on straightliine rates of return, or, worse, wild crediting assumptions that are completely bogus.

Which is why I continue to assert that the failure of AGENTS to perform POLICY AND FINANCIAL REVIEWS is what destroys UL policies.

I have one current illustration that only works if the policy is credited with an average rate of more than 26% over 55 policy years (with maximum crediting of more than 64% in years 37 and 38. Utterly absurd. The interest crediting in years 1-14 (the surrender period) have been artfully suppressed by the illustration at an average of about 5.19%. Then the gimmick factor takes over, and in the absence of those credits, the $70,152 annual premium (bolstered by a total of $654,000 in added premiums in the first three years) on this $5 million policy would be somewhere in the stratosphere at about $195,000-$245,000 in years 37 and 38, possibly even more, and continuing higher still in the years that follow, since the crediting rates fall off rapidly beginning in year 39.

Which is why I continue to assert that the failure of AGENTS to perform POLICY AND FINANCIAL REVIEWS is what destroys UL policies.

In that same illustration -- just to put an end to your "no increasing cost of insurance" error -- the 1st year COI deduction (this policy is written on a 70-year-old female) totals $6,076. In year 14, it is $108,595. In year 39, it is $1,078,081. And all of those numbers are premised on increasing cash surrender values which are illustrated growing at about 5.18% on average.

And now we're back to my original issue.

To that point in time, the planned premium totals $3,389,928, COI deductions total $14,496,111, interest credits total $14,457,315. And surrender value is a mere $2,010,879 -- if the policy actually credits $1,248,308 in interest on a cash value of $1,801,847 . . . a rate of 62.08%.

No insurance company has ever credited UL policies with that kind of interest. I didn't make up these numbers -- they came directly from an illustration I ran with the company's own software. But all of this information was hidden from the policyowner in the original sales illustration presented by the agent and in the illustration packaged with the policy at delivery.

So much for "just more disclosure" -- that's what people pay me to analyze.

So, let's sum up, shall we?

The biggest issue with UL policies is the failure of agents to properly structure and explain policies in the first place. The second area is the failure of agents to stay in the business long enough to SERVICE what they've SOLD!

It still does NOT take away from my assertion that IUL and UL has the same policy costs as WL.

Here's the difference (that I suppose needs to be spelled out for you) is that the liability of WL costs of insurance are on the insurance company (stronger guarantees) - as long as the minimum fixed premium is paid.

The liability of UL costs of insurance are on the policy holder (less guarantees) because of the flexibility of premium payments and the varying of interest crediting rates.

You have said nothing that negates those two statements.

Care to try again?

This is getting old.

 

[Jerard]

You are completely wrong. I don't know who taught you how UL works, but you have no clue when you continue to make this assertion. Hundreds of thousands, if not millions of policyholders have learned what you fail to understand -- only they learned after it was too late to pay the freight of COI charges in their UL policies (mostly plain vanilla and variable, but also some indexed as of late) at later ages when the cash value had been depleted exactly because of the increasing COI in the contract.

The fact that UL's have increasing COI is so obvious I'm in awe of any any agent that won't admit to it. I do agree that UL and WL both have increasing COI. The only difference is that in a WL policy the CV is exactly calculated to maintain the policy to the stated maturity date. Whereas a UL's CV is a slave to the current interest rate. Now if an agent showing a UL were to price it at the rate that would cause the policy to last way beyond the life expectancy of the insured, then it should be fine. But how many agents actually do that? Most will sell it for whatever rate they can just to make the sale and never go back to check on the polices status. This is why these products, in the wrong hands, are so dangerous.

Max....you present this augment much better than I could. I thank you for that.

 

[DHK]

Again, please note that I have NEVER stated that permanent life insurance policies are a "set it and forget it" strategy.

It is NOT.

Your cases that you are dealing with, are with agents that have left the business, or are failing to service what they have sold.

Period. End of story.

Show me a case that you're working on where the agent set up the policy properly and is in regular contact with their policy holders... and MAYBE we'll be comparing "apples to apples" for once in this thread.

 

[unic.consulting]

The fact that UL's have increasing COI is so obvious I'm in awe of any any agent that won't admit to it. I do agree that UL and WL both have increasing COI. The only difference is that in a WL policy the CV is exactly calculated to maintain the policy to the stated maturity date. Whereas a UL's CV is a slave to the current interest rate. Now if an agent showing a UL were to price it at the rate that would cause the policy to last way beyond the life expectancy of the insured, then it should be fine. But how many agents actually do that? Most will sell it for whatever rate they can just to make the sale and never go back to check on the polices status. This is why these products, in the wrong hands, are so dangerous.

Max....you present this augment much better than I could. I thank you for that.

You are right. It is dangerous not to explain the entire policy to the clients. Universal Life is not a policy to be sold quickly and out the door. But if you are an agent who has a continuing relationship with your clients, IULs can be great. I disagree with you that the WL is exactly calculated. When a WL is put in force, they are guessing at what the interest rates are going to be for the next 30-90 years. If they guess wrong, the insurance company could lose money (or provide larger dividends). With UL, they don't have to guess because they can recalculate it each month.

 

[Jerard]

You are right. It is dangerous not to explain the entire policy to the clients. Universal Life is not a policy to be sold quickly and out the door. But if you are an agent who has a continuing relationship with your clients, IULs can be great. I disagree with you that the WL is exactly calculated. When a WL is put in force, they are guessing at what the interest rates are going to be for the next 30-90 years. If they guess wrong, the insurance company could lose money (or provide larger dividends). With UL, they don't have to guess because they can recalculate it each month.

I've never seen or heard of a WL policy lapsing for any reason other than the premiums being discontinued. This is even written into the contract as to what causes a policy to terminate. If there is any WL contract that says it can lapse for any reason other than the non payment of premiums, I'd like to see it.

An insurance company can "guess" all they want, but if it's not in the contract the company is SOL. Remember that policies are "contracts of adhesion" which means that once the client gets the policy the company is stuck with it.