Category: 2014

Reforming Indexed Universal Life (IUL) Illustrations

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December 12, 2014

10:43 AM

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0% Floor, 1 year point-to-point, 2014, Floor, Index Selections, indexed life insurance, interest crediting, Non-guaranteed current assumptions, S&P 500

Life insurance agents market Indexed Universal Life (IUL) in large part by illustrations showing cash value returns based on interest rate crediting assumptions. The default rate for running an IUL quote is set by the carrier, and that’s based on historical index averages. Long historical look backs, often 30 years, generate the highest interest rate assumptions. To give a quote, agents can assume a lower credit rate by plugging in a lower percentage on the software, but the carrier default rate shows highest cash value accumulation, so the assumed rate, likely between 7% and 8.25%, has the strongest incentive to be presented. Some major life insurance carriers want this practice reformed, concerned that their eventual inaccuracy of the cash value accumulation will give everyone in the life industry a bad name.

Is there cause for concern?  Yes.  Some carriers who object primarily market whole life products, so the criticism is self serving, but their concern is legitimate.

Index UL products credit rate assumptions are up there. The most common index used for IULs is the S & P 500, and the historical average hovers around an 8.00% rate of return.  The illustration runs a steady 8% crediting rate every year until age 120. For a 35 year old, that’s 85 years straight.  Projections have great cash value figures at age 65, and loans for retirement income age 65 to age 100.  Impressive, but unrealistic.

One carrier doing business in New York has modified their illustration to show alternate values more prominently.  It look something like this:

Guaranteed Values Non-Guaranteed Values
(alternate)		 Non-Guaranteed Values
.
 2.00%             4.00%          8.00%

Nothing really new.  Illustration signature pages already have a midpoint assumption. This just runs the values all the way out on the subsequent charts. Still the IUL illustration shows S & P 500 Index annual point interest crediting each and every year even if an alternate cuts the assumed return in half. Interest crediting is subject to cap, now hovering around 13%, but may be reset lower the guaranteed cap is around 4% for many plans.  Indexed ULs have a the zero percent floor guarantee.  How often will the index hit the floor to effect the average?  Showing the same crediting rate every year is harder to justify in the distribution phase for retirement income loans. Compare a 30 year history, to a 15 year history and add up the zeros, by counting 0, 1, 2, 8, 11, as in 2000, 2001, 2002, 2008, 2011.

Here’s a better proposal from Fred Anderson, a life actuary from the Minnesota Department of Insurance.  (emphasis mine)

“Principles that should be included, Andersen said, are a national index of credit rates no more than 1¼ to 2¼ percent higher than traditional universal credit rates; prominent side-by-side mid-point comparisons; the relationship between policy loan rates and credit rates “that addresses a problem there.”

Doing a survey of ten large life company UL credit rates on December 8, 2014, they showed most current assumption UL now credit in the 3% to 4% range. A few were 4% to 5%.  Adding 1¼ to 2¼ percent would mean Index UL illustrations should assume credit rates of 4.25% to at the most 7.00%.  As it stands now, a consumer is more likely to be shown 8% each and every year. It wouldn’t be difficult for life companies to have illustrations with interest rate variations to match actual historical returns, so the client could review cash values that reflect the typical historical ups and downs of index returns. It’s already done on indexed annuities proposals.  John Hancock‘s Indexed UL illustrations already have this option.

Recommendation: Consumers should request Index UL illustrations with non guaranteed credit rates no higher than 5.00% to 5.50%.  A constant crediting rate is unrealistic; consider cash value projections for comparison purposes only.

Posted 12/12/2014.  Interest rates subject to change.

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Spouse as owner of a life insurance policy

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November 10, 2014

2:23 PM

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2014

Who should be the owner of a life insurance policy?  The person insured is generally the owner with the policy established to protect the beneficiary from financial loss.  However, the policy can be set up where the spouse is both the owner and beneficiary of the policy. Why would the spouse want to the owner?  Mainly it’s to prevent the beneficiary being changed or the policy cancelled without the spouse’s consent.

Keep in mind the owner of a life insurance policy completely controls that policy.  Here are some of the ownership rights:

Change the beneficiary(s) or the death benefit shares received by the beneficiaries
Cancel or surrender the policy for its cash value
Discontinue Premium payments
Transfer ownership of the policy
Borrowing from the policy’s cash value
Cash value withdrawals from the policy
Determine how the beneficiary will receive death proceeds

So looking into opaque crystal ball of the future, why should the spouse be owner?  What could possibly go wrong?

Divorce

I’ve been working on a cocktail called “Grounds For Divorce”
Polishing a compass that I hold in my sleeve

Elbow “Grounds for Divorce” lyrics

White Nights, 1922, Mstislav Dobuzhinsky

The most obvious reason the spouse to be owner is self interest protect in case of divorce. A woman financially dependent on her husband, those with young children would be better off owning the life insurance policy to protect her interest.  In a life insurance and divorce article’s comment section I recently read, there are several examples of spouses left with nothing due to beneficiary or cancelled policies, some despite a divorce ordered court agreement.  Won’t happen to me?  Older couples in long-term marriages aren’t immune, since gray divorce has increased significantly for those over 65.   Cross ownership of life insurance policies, each owning the policy of the other spouse, is a common option to consider.

Certainly when a ex-spouse is financially dependent on The ownership of a life insurance policy by an ex-spouse is not clear cut as to its validity. It would depend on the financial interest, how much the former spouse depends on their ex financially.  Certain states have laws to address this issue. In community property states: Louisiana, Arizona, California, Texas, Washington, Idaho, Nevada, New Mexico and Wisconsin different rules apply, and the spouse has more secure beneficiary rights.

Medicaid Eligibility

Life insurance with cash value counts towards an elder’s assets for medicaid edibility.  To avoid this the spouse or children would be better off owning the policy.

Capacity

What if the person insured as owner exhibits signs of dementia or Alzheimer’s and makes a beneficiary change and cancels a life insurance policy?  If the insured has a family history of dementia or there is a large age difference, it may be advisable for the spouse to own the policy.

Estate Taxes
Federal estate tax changes in 2013 has rendered life insurance ownership as part of taxable estate a non factor for all those expect millionaires north of 5.25 million and for couples $10.5 million indexed for inflation. For state estate taxes, in several states ownership may be a consideration.

Please contact me for a free and confidential life insurance quote

Licensed Agent:  Sean Drummey
phone:  (910) 328-0447
email:    spdrummey@gmail.com


Disclaimer:  This website has been prepared for general information purposes only. The information on this website should not be construed as legal or tax advice on any subject matter.  No recipients of content from this site, clients or otherwise, should act or refrain from acting on the basis of any content included in the site without seeking the appropriate legal, tax or other professional advice on the particular facts and circumstances to their own specific situation and state of residence before making any decisions.  In any event I will not be liable in respect to actions taken or not taken based on the contents of this Website.

Tentative Offers for Lowest Life insurance Rates with a Health Condition

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January 31, 2014

5:37 PM

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2014, credits, impaired risk, standard, standard non tobacco rates, Standard Plus, substandard rates, Table 2, Table 3, Table 4, Table 8, Table B, Table C, Table C to Standard, Table D, Table H, table shave, Up to 2 Tables, Up to 3 Tables

Urnersee
The best way for someone with a moderate to major medical condition, like epilepsy, elevated liver functions, Crohn’s Disease, colitis or many others, to get the lowest life insurance rates is to first get a tentative offer. Here’s the way it works. Give an independent agent and broker the basics of your health history. Then a short summary is provided to carrier underwriters of the health condition: onset, degree of severity, medications taken, degree of control, age, height and weight. Then underwriters review and reply, usually within 24 to 48 hours, with an offer of a tentative rate classification. That classification is a non-binding offer, fair enough because it’s based on limited information, but it does provide a good indication as to which carrier to apply for and a likely rate.

Rate classifications are Preferred Best, Preferred, Standard Plus, Standard, and the substandard Table 2 to Table 8. Substandard table ratings are alternately given letters: Table B though Table H.

For a major health condition with a history of control, the goal is often to get a standard rate or a low table rating. Final offers of coverage are based on medical records and full underwriting review. There are broad outlines as to what rate to expect, but since medical conditions vary by individual, the tentative quote process is a very valuable tool. One thing that trips up tentative quotes is that people often don’t know or fully understand the scope of their medical condition, or what’s in their medical records. During the application process medical information remains confidential in accordance HIPAA privacy rules.

Tentative offers will vary, sometimes considerably. It’s a very instructive. The same condition will be a Standard rate with one carrier, while others judge it to be more likely at Table 2 or Table 4. Once the rates classifications are received, compare quotes at those rates classes, see rates with a dose of realism and apply to the life insurance company likely to give the best offer.

Term Conversion to Indexed Universal Life (IUL)

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January 10, 2014

2:42 PM

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2014, Age 100, age 100 guarantee, Age 120 guarantee, American General Life Insurance Company, Cash accumulation, Cash Value, Conversion, current assumption UL or CAUL, current illustration, exchange, guaranteed universal life, GUL, in force illustration, level term, no exam life insurance, no medical exam, no physical exam, term, term conversion, term life, Universal Life, universal life policies with secondary guarantees

Buick_Convertible_1949

This week I was drawn by a client inquiry into analyzing the merits of converting a term policy into permanent.  A term policy’s ace in the hole is its conversion privileges.  Health conditions may arise as the decades go by. No matter how much one’s health may have changed for the worse, if still within the conversion period, a policy owner can convert all or part of the term policy to permanent without evidence of insurability at the original rate classification.  Be sure to ask about conversion when shopping for term.  It’s the second most important consideration after lowest premium.

For the American General term policy I was reviewing, they currently offered term conversion to either an Indexed Universal Life and a whole life product.  The indexed universal life product “AG Extend IUL” offers a no lapse guarantee rider to age 100.  That’s really great news for American General term policy holders: fixed premium and coverage guarantee to age 100. It would be better to have one to age 120 and beyond, but a lengthy guarantee is much better than not one of all.  It’s one step above the 5 to 25 year no lapse for other Indexed UL or current assumption UL products.

One of the problems with Indexed Universal Life is uncertainty on how it will perform over time.  Illustration shows non guaranteed projections, and they are very speculative in both the interest rate given, and how it’s shown at that rate for all years. An agent would be tempted to show the maximum interest rate allowed by the software. Carriers based those rates based on historical averages, as in the S & P 500 over the last 30 years. So an illustration may shows the S & P 500 annual point-to-point at 7.75% or 8.00% in all years.  Yes, each and every year.   The S & P certainly doesn’t perform like that in real life.  In all years for a 45 year old that projects a positive return, each and every year, for 75 years.   I run my IUL illustration a 5%. It’s more conservative projection but still a very uncertain projection because actual performance of the indexed may vary considerably and the carrier can change cap rates, participation rates and policy charges.

That’s why a lengthy guarantee on an Indexed UL like is “AG Extend IUL” is valuable.  Set the premium to the age 100 guarantee and then down the road the policy holder can evaluate actual performance and make changes accordingly to save on premiums if that age 100 guarantee is no longer necessary. So for example, start an Indexed UL at age 54 with premiums that guarantee coverage to age 100. Then when 75 year old  and in declining health, request an inforce illustration, and project how much premium the policy will need to have coverage to age 85.

If a Guaranteed Universal Life product is offered for conversion, generally that’s a better option to take, especially for those in their 60’s or 70’s.  If only a current assumption UL or Indexed UL is offered, funding it adequately, setting the premium high for plenty of cushion for cash value accumulation is well advised.  Have the agent show illustrations with coverage cash value to endow, or worth the face amount, at age 100.  Those run at target or $1 at age 100 might have more appealing premiums but might end up being underfunded for the long haul.