Cap - Life Insurance Recommendations

Indexed Universal Life (IUL) opens a new era for quotes with John Hancock’s historical report

June 25, 2014

3:13 PM

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0% Floor, 1 year point-to-point, Cap, Cap Rate, cash value life insurance, EIUL, Equity Indexed Universal Life Insurance, Increasing Death Benefit / increasing cash value option, Increasing death benefit for cash accumulation, Increasing Face Amount for cash accumulation, Index Cap Rate, Index floor rate, indexed account hypothetical annual rate of return, indexed life insurance, interest crediting, John Hancock life, John Hancock life insurance, John Hancock Life Insurance Company, S&P 500

John Hancock has become the first life insurance carrier to offer Indexed UL (IUL) historical reports. A dose of realism is finally available for client presentations where illustration policy value assumptions mirror real world index fluctuations. This sort of historical report is possible on some Indexed Universal Life (IUL) illustration software but has to be painstakingly created with each year’s values plugged in manually. John Hancock makes it easy to create 10 year, 25 year or 40 year historical reports.

One major problem for consumers to judge Indexed UL performance is illustration design. Carriers based their index return assumptions based on 25 or 30 year or longer averages, so one major benchmark index the S & P 500 annual point-to-point return is given as 7.50% to 7.75% depending on the carrier. Agents can adjust this, as I do at a more conservative rate 5.00% to 5.50% which pegs it approximately a half to one percentage point above current assumption UL, but given a much higher average historical rate, agents are likely to use a figure like 7.75% because the cash value and death benefit numbers show much higher.

Cash value projections 20, 30, 40 years into the future based on one constantly high interest rate assumption makes those results highly unrealistic. For example, an illustration for a 45 year old with a rate of 7.75%, every year, year after year, run like this out to age 120:

2015 7.75%
2016 7.75%
2017 7.75%
2018 7.75%
2019 to 2089 7.75%

That’s obviously nothing like the historical yearly returns which vary considerable year by year. Assuming a 12% cap and 0% floor, the interest rate assumption looks like this over the last 15 years:

1999 12.00%
2000 0.00%
2001 0.00%
2002 0.00%
2003 12.00%
2004 8.99%
2005 3.00%
2006 12.00%
2007 3.53%
2008 0.00%
2009 12.00%
2010 12.00%
2011 0.00%
2012 12.00%
2013 12.00%

John Hancock has just made it much easier to evaluate Indexed UL product performance and design. It’s not perfect. All illustration projections that go out for decades should be looked at, at best, rough guideposts.

Historical performance illustrations are already widely used for annuity quotes. I wonder how long it’ll take the other life companies to join John Hancock in finally giving consumers something better to review when evaluating Indexed ULs.

Artists by Wissam Shekhani; ink over canvas. 2004,

Trigger Method Fixed Indexed Universal Life (IUL) with Allianz

by Sean Drummey

May 30, 2013

10:36 AM

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Allianz recently announced enhancements to their Fixed Indexed Universal Life (IUL) product Life Pro+. Why does Allianz call it fixed? Well, that’s their terminology. Known mostly as Indexed Universal Life (IUL) or sometimes as Equity Indexed UL (EIUL), the name may differ, but all these Indexed UL products have interest returns tied to a market index, most commonly the S & P 500 Index, and have a floor guarantee of at least 0% as downside protection against losses. That’s why Allianz presumably uses the word fixed as opposed to Variable UL which does not have a 0% floor.

One noteworthy feature in Allianz’s enhancements is a trigger method of interest crediting. If the S & P 500 Index annual point to point hits anywhere greater or equal to zero, will trigger 9% credited to the policy. This Trigger Interest Rate is subject to change on an annual basis but is guaranteed never to go below 2.50%. In years the S & P goes below zero, the floor crediting rate is 0%, and if the index measures in that annual point to point above 9%, the credit remains at 9%.

Most of the Indexed UL product caps are currently in the 11% to 13% range and in this strong market those higher caps make them a more alluring crediting strategy. Historical data does not show that 0% to 9% range to be as prevalent as 10% or higher. Allianz still offers the higher capped S& P 500 annual point-to-point option. Their trigger method is an added option in times when S & P 500 performance expectations were not very high.

Prudential’s new Indeed Universal Life (IUL) an initial look

by Sean Drummey

May 11, 2012

10:02 AM

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Prudential’s new Indexed Universal Life (IUL) is now available in many states. PruLife® Index Advantage UL a very straightforward Indexed UL product. The index is the S & P 500 annual point to point with a 10.75% current cap and a guaranteed 0% floor. The fixed account, called the Basic Indexed Account, is guaranteed to never earn less than 2.00% which is very competitive. Illustrations assume at most a 6.83% average return which is based on a 25 year look back on the S & P 500 with a 10.75% cap and a 0% floor. It is commendable for Prudential to illustrate returns at 6.83% tops. Other carriers illustrate the S & P in the upper 7% to lower 8% range based on different assumptions including a more favorable 30 year look back. It’s advisable to review illustrations with even lower assumptions, 5% or 6%, to not oversell expectations, and it’s a helpful reminder in any thorough comparison analysis that Prudential model is more conservative.

For Prudential to establish a 10.75% cap rate, below other carriers, is also of note. Higher caps rates may look attractive, but carriers tend to build in higher cost of insurance rates to cover the additional expense. Cost of insurance charges are likely more evident if an illustration is run with minimal premium, solving $1 to age 100, or minimal returns, as in assuming .01% return on the indexed account.

To judge how an Indexed UL product compares with competitors is not cut and dry. There are many variations of age, gender, health rate class, goals and premium targets. I initially ran Prudential’s IUL assuming a maximum cash accumulation, increasing face amount, tax free loan for retirement income for a male in his mid 30’s against top performers, including Lincoln and Penn Mutual, and within those parameters, I did not find Prudential competitive. Prudential indicates their competitiveness is in minimum premium, solving for lifetime coverage, scenarios and with longer no lapse guarantees. In fairness to Prudential the scope and extent to their competitiveness will require multiple comparative tests to see how premiums and policy values compare depending on the particulars of the client.

Looking at Prudential’s illustration and trying to decipher exactly how the policy charges to the Basic Interest Account are credited was very difficult. Prudential requires a minimum of a year’s worth of charges be held in the basic interest account. It’s still early in the product’s release, and undoubtedly agents will be provided explanations in product guides and other training avenues.

Indexed Universal Life (IUL) vs. Universal Life

by Sean Drummey

May 3, 2012

9:24 AM

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Milton-Freewater, Mural, Umatilla County, Oregon scenic images

Which is better Indexed Universal Life or Universal Life?

Indexed Universal Life (IUL): more upside potential
An IUL can realize higher returns. Those returns are based on market performance with cap rates right now generally ranging from 11 to 13%. That’s the high end with a 0% floor, or point or two better, to protect against the downside losses. So between the cap and floor what will interest rate returns average? When shopping for coverage companies give percentage rates based on historical results over the last, 20 to 30 years or longer. It’s likely the typical agent will show them as high as the carrier will allow: 7% to lower 8% range. But, given caps rates are subject to change and market volatility, having an agent show a more conservative 5% to 6% rate of return is certainly in order.

Universal Life: steady
A universal life illustrations projections are based on current assumptions. The rate of return is in 3% to 5% range.

Cost of insurance are likely higher with an Indexed UL. Want to compare the two products apples-for-apples? Request an Indexed UL illustration and a UL illustration with the same premium at the same interest rate, using a low interest rate like 2%, then look how the returns chart out over the years to see which out performs the other.

Indexed Universal Life: higher maintenance to follow upside
Those who have no interest in following the stock market, in whether S & P 500 Index or another chosen index will go up, down or going sideways, or do not want to pay much attention to their life insurance policy, an Indexed UL is not the right product to buy. Indexed UL require decisions on the allocation of premium to the fixed or an indexed account. The floor of the indexed account may be 0%, or even 1% or 2%, but in a down market it’s better to have premium allocation to the fixed account to earn higher returns.

Universal Life: lower maintenance approach
It’s tempting but not wise to put a permanent life insurance policy in a drawer and forget about it. For any cash value life insurance, whole life with dividends or universal life, an annual review is advisable. Policy owners receive an annual statement, but the crucial elements of the policy values that an owner needs to track are often not given, or not readily identifiable or understood. Keep a copy of the policy illustration as issued and annually, or at least every few years, compare projected values, the original target value of the policy, to actual values. Better yet request an in force illustration to evaluate the policy’s current status and how it projects in a year by year chart. A policy owner is usually entitled to one a year.

Permanent life insurance should be tailored to the owner’s situation and goals. Age, gender, the amount of insurance, the individual’s health and level of engagement to the policy all count. I have recently looked for my clients at both Indexed UL and UL, and sometimes a UL fits better.

Prudential to offer an Indexed Universal Life (IUL)

by Sean Drummey

April 13, 2012

4:05 PM

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1 year point-to-point, Cap, Cap Rate, crediting strategy, Index Cap Rate, Index Selections, Indexed Universal Life, John Hancock life, John Hancock Life Insurance Company, Prudential life insurance, S&P 500

Prudential starting in May will offer their first Indexed Universal Life (IUL) called PruLife® Index Advantage UL. The indexed account will be S&P 500® Index with annual point-to-point crediting. That’s a very basic design and similar to another late entry to the Indexed UL market John Hancock. Prudential intends to be competitive in premiums and cash value accumulation. They are already very competitive in premiums for guaranteed universal life and survivor universal life.

It’s important to judge which Indexed Universal Life carrier is best for the long haul. Prudential indicates they are more going for superior overall design rather than focusing on a high cap rate. The highest cap rate doesn’t necessarily mean the best performing product. Cost of insurance and the internal rate of return are something to review even more closely.

Participation rates IUL: set sail for cash value

by Sean Drummey

December 14, 2011

5:19 AM

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Cap, Cap Rate, Cash accumulation, Cash Value, cash value life insurance, cost of insurance, Indexed Universal Life, Participation Rate

This analogy is fairly close. Indexed Universal Life (IUL) is like a yacht. To maximize cash value during market gains, sails are set during favorable conditions. The mast acts like the cap. Right now the highest cap rates are running about 14%. So that is like a 14 foot mast. The participation rate, or par, acts like a sail, ideally like a spinnaker, to maximize cash value. Most of the carriers offer a 100% par rate. Many guarantee a 100% par. But that doesn’t mean the carrier can’t still control crediting cash value in too favorable market conditions. If the market index went ahead the carrier’s ability to credit, the cap rate would be lowered. It is like in favorable winds, no matter how large the sail, if the mast is only 8 feet tall, you’re not going to catch as much of those winds.

The overall elements of an Indexed Universal Life: cap, par, fixed account, indexed accounts, cost of insurance, the carrier, needs careful review before selecting the best product. Just as a yacht, one needs to examine the craft overall: masts, sails, engine, weight, center board and design.