Index UL Tied to S&P500

XLR8R

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Guys what are the mechanisms behind a)capped b)uncapped crediting options?
Does anyone sell these ULs and if so how do u determine the right client for these policies?

Thanks in advance
 
I'm not aware of any without rate caps. Caps are a number over which the crediting rate will not go, say 12%. So credited interest will never be higher than 12%.

Participation rate is another biggy.

Sometimes rate caps and participation rates will depend on crediting strategy.

Most popular is annual point to point.

Prospect profile depends. It's not necessarily a permanent form of life insurance being a current assumption UL (or mechanically working like one if cash value is planned to be tapped). A lot can be issued with over-loan protection, so it's easier to keep it in force.

Executive compensation is one place they are used. College Funding is another option. You can also look at plain old cash value accumulation with life insurance situations.
 
The cap is only one part of an indexing and crediting strategy. It's an important part, yes, but a small one.

I'm going to start this off by saying that this is exactly the kind of question we assist with at the ILIAA. The way you've phrased your question makes it clear that you're new to this type of product, and I really think that the training we've got to offer would help clear up questions on this and other aspects of the industry.

Now that I've given us a shameless plug, I'm going to earn it. An IUL product is a universal life product that credits interest based on the performance of an associated index. In the simplest of terms, that crediting rate is determined by comparing the index value at the start of the index period versus the end of the index period. The trick is how you determine the beginning and end point.

There are three types of crediting methods: total interest rate methods, annual interest rate methods, and combination indexing methods.

Under the heading Total Interest Rate Methods, there are three sub-types: long term point-to-point, long-term point-to-point with an average end, the look-back method.

Long Term Point-to-Point: the value of the index at the beginning of the index period is compared to the value of the index at the end of the period. No tricks involved; just one number versus another. If the second is higher, you gain - lower, you lose. The percentage increase is multiplied by the participation rate, and the final rate (up to the cap) is applied to the account.

Long Term Point-to-Point with Average End: Same as the above, but instead of a single point determining the end value of the index, the end point is an average value of the index over a short period. So for instance, the first point is the single value at the beginning of the index period, and the end period is (for example) the average value over the last thirty days of the period.

The third sub-type under the total interest rate method heading, look-back methods, has three sub-types: high-water, low-water, and annual highest day look back.

High Water Look Back: Start point is the beginning of the index period. The index level on each anniversary during the term period is recorded. The highest recorded anniversary value counts as the end point.

Low Water Look Back: The exact opposite of the high water; the end point is the last day of the index period. The start point is calculated by taking the index value on each anniversary during the term period and taking the lowest one.

Annual Highest Day: The start point is the value at the beginning of the index term. Each and every day, the index level is recorded. The index on the highest day for the year is recorded, and at the end of the term the highest days are averaged to calculate the end-point.

Okay, those are all the total interest rate crediting methods. Now, on to the annual interest rate methods. With annual rates, the interest rate for every year of the index period is calculated. The sum total of the calculated rates becomes the overall rate. There are three sub-types: annual reset point-to-point, calendar year point-to-point, and averaging annual reset.

Annual Reset PTP: This is also called the ratchet method. Each policy year has a beginning and an end; at the end of the index term (which may be multiple policy years), all policy year rates are added together. Here, the index rate at the end of year one is the same as the rate at the start of year two. A few policies even compound the interest. Basically, it's like a normal PTP but locks in the gains.

Calendar Year Reset PTP: It's the same as the annual reset PTP, but uses January 1 as the reset date no matter when the policy was purchased. This usually results in partial-year calculations.

Averaging Annual Reset: We're back to going by policy, not calendar, year. The start is the beginning of the policy year, while the end is the average of index levels during the year. That average value is determined by taking daily, monthly, or quarterly index values - specific policies will differ. Once the gains are locked in, the start of the new index year is the specific index level at that time, not the average value.

Finally, we come to the last sub-type: combination indexing. There are two types of combo methods: multiyear resets and average end multiyear reset.

Multiyear Reset: This is almost identical to the Annual Reset Point-to-Point method described above. The only difference is that the calculation period is 2+ policy years.

Average End Multiyear Reset: This is almost identical to the Multiyear Reset, but the end value is an average over the last 30-60 days of the index period instead of a single point. You can think of this as a combination of average end and multiyear reset.

These are the main methods by which IUL rates are determined and credited. You take the start point and compare it to the end point. If the end point is higher than the start point, then you've got gains!

You apply gains to an index account by first calculating the percentage by which you've gained (for example: if the start point was 100 and it's now 110, there's a 10% gain). Let's run with that example of a 10% raw gain.

There are three more things you've got to do. First, does the policy have any margins (sometimes called spread)? If it does, you've got to subtract the margin from the raw rate.

Second, what is the policy's participation rate? Multiply the raw rate (minus margins) by the policy participation rate to get the crediting rate.

Third, what is the cap? That's the maximum crediting rate on the policy. If the crediting rate as calculated in step two is above the cap, then you're credited at the cap. If it's below, then you get the crediting rate.

So, let's run through a couple of different scenarios with the 10% raw rate:

1. 100% Participation, no spread, no cap
Take our 10% and subtract 0%, because there's no spread. Multiply by 100% to get 10% (100% participation). There's no cap, so we get the full 10%.

2. 100% Participation, 2% spread, no cap.
10% raw rate - 2% spread = 8%. 8% X 100% = 8%. No cap, so here we get 8%.

3. 90% Participation, no spread, 10% cap.
10% raw rate - 0% spread = 10%. 10% X 90% participation = 9% crediting rate. That's below the 10% cap, so we get 9%.

4. 80% Participation, no spread, 7% cap
10% raw rate - 0% spread = 10%. 10% X 80% participation = 8%. That's above the cap, so we get the cap rate of 7%.

As far as finding clients for this type of policy - walk before you can run. You MUST understand how these policies work before you can sell them. Master these concepts and then move on to prospecting!

Now, I've said all of this for three reasons:

1. Classifying IUL policies as "capped" and "uncapped" is like classifying cars as "black" and "not black." It can be done, and if may serve some purpose, but overall it's just one small part of a very large equation.

2. You have to be on the lookout for those uncapped policies. They do exist (the first one that springs to mind is the Rapid Builder IUL with North American, which has an uncapped S&P as one of its index options), but they'll typically have a very low participation rate. The one I just mentioned, for instance, has a 65% participation rate right now.

3. We are awesome at the ILIAA and you should go to ILIAA.org and join so we can teach you all of this great stuff through fun videos. The first month is just a dollar, so even the most broke of insurance agents can come check us out!

(Sorry for starting off the post with an "offer," but I hope I earned it!)
 
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I'm not aware of any without rate caps. Caps are a number over which the crediting rate will not go, say 12%. So credited interest will never be higher than 12%.

Participation rate is another biggy.

Sometimes rate caps and participation rates will depend on crediting strategy.

Most popular is annual point to point.

Prospect profile depends. It's not necessarily a permanent form of life insurance being a current assumption UL (or mechanically working like one if cash value is planned to be tapped). A lot can be issued with over-loan protection, so it's easier to keep it in force.

Executive compensation is one place they are used. College Funding is another option. You can also look at plain old cash value accumulation with life insurance situations.

Thanks 4 the reply and the info---I also looked @ few threads regarding index tied annuities---seems like a very similar scenario. As for uncapped options I'm 100% sure they are being offered---pretty much the account should be credited according to given participation rate of the company(assuming that S&P500 index went up) Index percentage x par rate
2% is credited regardless to the market performance.
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Ok this is a lot of info---I appreciate your input and as far as offers --thats perfectly fine and understandable.
I do not recall any of above mentioned mechanisms in my LIFE exam----so how in the world are new agents going to cope with this complex matter---let alone sell a product that is beyond beginners comprehension??
Should I start working on Series 6 or what?

Once again thank you for detailed answer---or should I say chapter.
 
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Ok this is a lot of info---I appreciate your input and as far as offers --thats perfectly fine and understandable.
I do not recall any of above mentioned mechanisms in my LIFE exam----so how in the world are new agents going to cope with this complex matter---let alone sell a product that is beyond beginners comprehension??
Should I start working on Series 6 or what?

Once again thank you for detailed answer---or should I say chapter.

You're very welcome!

No need for a Series anything; IULs are covered by your life license, as they are not an investment product. Your policy doesn't grow with the stock market; your policy has interest credited to it depending on the performance of an index. It's a subtle difference, but a very important one.

As for how new agents are expected to learn this kind of stuff, everyone has their own way. Personally, I strongly believe in the value the ILIAA provides. I don't mean to pimp the Association here, but you kinda set me up for that one!
 
I checked it out I just might join the ILIAA...but let me ask u this first:Does your support consists of internet support or do u guys have an office in NY for example?
 
I checked it out I just might join the ILIAA...but let me ask u this first:Does your support consists of internet support or do u guys have an office in NY for example?

It's a two-man shop; Rick's out in California and I'm in Atlanta. We're both available by phone and email, and if you come to Atlanta I'll let you buy me a drink. Maybe even two.
 
Sounds good---just so u know having an actual agency(that helps people start from a scratch) in a dense populated city would be a great move.
I bet u thousands of new agents(overwhelmed with this matter) would keep u guys overwhelmed :))
 
Well, we certainly wouldn't mind having a few thousand members!

One last thing, since you brought up NY and your flag shows you from there: always keep a very close eye on which products you're discussing with your clients. There are a limited number of carriers that do business in New York and you will want to make certain that your products, and carriers, are approved before you recommend them to your clients. For instance, I love the Builder IUL through North American - but it's not available in NY. Instead, I would look at Aviva or Reliastar (ING) of New York.
 
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If the index period is defined as a one year period whereas the beginning date of the policy is used as a reference to starting point of the index period year then I would just compare the two numbers to determine the gain/loss? between that particular date and ending date of the given year/policy?
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This sucker is called Flexible Premium Indexed UL from the Union Central Life INs Company:
Excel Index UL tied to S&P500
 
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