Term Conversion to Indexed Universal Life (IUL)

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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.

 

 

Cash Value Life Insurance Choices

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Whole Life: life insurance participating, or par

  • Dividends
  • Builds Cash Value
  • Guaranteed Cash Value Accumulation
  • Endow, worth face amount in cash, at age 100 or age 121
  • Increasing face amount
  • Cash dividends option, after a period of years
  • Paid Up Insurance
  • Cash value protects policy if payments are missed
  • Coverage guaranteed to age 100 or age 121

Pros: Since it builds on top of guaranteed cash value, par whole life has highest potential for cash value accumulation, flexible to changing circumstances; good to start for children, in 20’s, 30’s or upper income
Cons: much more expensive than Universal Life (UL) or Indexed Universal Life (IUL)

Indexed Universal Life:  IUL

  • Builds Cash value, higher upside potential with index crediting then current assumption UL
  • some guaranteed cash value accumulation, not all years
  • Flexible on payments
  • Option for increasing face amount, option B
  • Cash value protects policy if payments are missed
  • Policy lapses with zero cash value

Pros: less expensive than Whole Life, flexible to changing circumstances
Cons: if underfunded and or performs poorly can lapse without additional premium; higher cost of insurance charges than UL, periodic review is advisable, more complex, more choices to make than current assumption UL

Universal Life: UL, current assumption UL

  • Builds Cash value
  • Flexible on payments
  • Option for increasing face amount, option B
  • Cash value protects policy if payments are missed
  • Policy lapses with zero cash value

Pros: less expensive than Indexed UL, flexible to changing circumstances, lower cost of insurance charges than Indexed UL
Cons: if underfunded and or poor interest credited can lapse without additional premium

Whole Life: non-participating, non-par

  • guaranteed cash value accumulation

Pros:  fixed premium, guaranteed cash value accumulation, endow at age 100 or age 120; good for final expense
Cons: level death benefit; cash surrender value matter little compared to death benefit

Guaranteed Indexed Universal Life: GIUL

  • cash value accumulation, generally not in 80’s and older

Pros:  lifetime guarantee, or set guarantee year
Cons: lower casher value accumulation than Indexed UL

Guaranteed Universal Life:  Guaranteed UL, GUL,  no lapse guarantee UL

  • Little to no cash value accumulation

Pros: least expensive lifetime guarantee age 120+, also least expensive setting guarantee to age 90, 95, 100, 105, 110 or whatever length desired;  ability to structure longer guarantees, and at older ages than term life, for example 30 year guarantee at age 59
Cons: missed premium payments lapse policy, little to no cash value accumulation
Return of Premium Term:   ROP term

  • guaranteed cash value accumulation
  • reduced paid up insurance with some carriers

Pros:  At the end of the term you get all your premiums back; builds cash value, mostly in the last years of the term period
Cons:  death benefit same as term if you pass away, cash value not included; more expensive than term, especially after mid 40’s

Survivorship Universal Life: age 105 versus age 120

Protective Life is reintroducing their life insurance survivorship product “Protective Survivor UL” which will replace “Protective Centennial Survivor GUL”.

Survivorship, or second-to-die life insurance is for couples for estate planning purposes.  It is much less expensive than taking out two policies, and can provide coverage even if one of the couple has health problems and is uninsurable.  Guaranteed Universal Life is far less expensive than traditional whole life insurance.

Notable is the trend of certain carriers away from lifetime guarantees.  Though lifetime is available, Protective Survivor UL is competitive to age 105 and lesser ages.   Given the projected rise in the number of centenarians in the coming decades, selecting coverage to age 120 is advisable, since there are still multiple carriers like Prudential and American General that offer these lifetime guarantees at competitive rates.