Category: Cap Rate

Indexed UL illustrations (IUL) reforms: the elusive level playing field

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August 31, 2015

1:07 PM

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Cap Rate, Index Cap Rate, indexed life insurance, Maximum cash accumulation Indexed UL

Rule changes commence on September 1st, 2015 for Indexed UL (IUL) illustration. The maximum illustrated rate for the S&P 500® Index will be capped based on a formula called the Benchmark Index Account, a rolling formula of all possible 25 year periods over the last 66 years. The formula for look-back periods used to be up to the carrier, invited cherry picking of the most favorable data sets, and fostered wide discrepancies on the maximum rates.

This rule change does not truly standardize interest rate assumptions. Using the same historical benchmark one might reasonably presume the illustration interest rates would be the same for every product. Nope. Take for example new S & P 500 annual point-to-point interest rate assumptions for three different companies for their products offered.

S & P 500 Annual Point-to-Point

Life Company A:
6.86%  product 1
6.45%  product 2

Life Company B:
7.17%  product 1
7.47%  product 2

Life Company C:
5.02%  product 1
6.00%  product  2
5.75%  product 3  survivor
6.00%  product 4

The interest rate assumption differ because the formula is partly derived the product’s current annual cap and those cap rates vary among products. Cap rates offer no fixed reference point because they are subject to change at the carrier’s discretion. At best there’s a guaranteed minimum cap rate of a few points. A current 13% cap rate could conceivably be reset to 3% twenty years from now. Cap rates have generally dropped at least a point or two since I began to actively monitor them in 2011 on my website.

Regardless, a higher interest rate does not necessarily project the highest cash values or death benefit. Cost of insurance charges affect cash value accumulation. Results vary considerably depending on assumptions. Projections based on such wide variables over long periods of time should be viewed with caution, not as hard values.

To help level the playing field, consumers need to request from agents competing product illustrations using the exact same interest rate assumption. At least one comparison should be at a low rate. For example a consumer should request illustrations run at 5% to compare the premium and cash value accumulation after 10, 20 and 30 years. Consumers should request multiple illustrations. Complete illustration are easy for agent to run and email, pdf format, to allow adequate time for someone considering purchasing life insurance to review. It’s useful to solve an illustration for $1 cash value at age 100, compare the premiums and run a second illustration with the premiums being equal. It’s informative to compare competing product illustrations at really low interest rate assumption like 3%. These sort of illustrations, squeezing out the upside maximum results, reveal better the underlying cost of insurance.

This IUL rule change is welcome reform, but by no means establishes a default starting point for comparisons. The new rules help make a level playing field, but it still requires effort to line up the teams. Ultimately, what’s required above and beyond is a comparison of the product and carrier’s underlying strength rather than tweaking out the highest maximum cash value accumulation.

Indexed Universal Life (IUL): adding a dose of realism to quotes

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February 28, 2014

4:56 PM

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Cap Rate, Indexed Universal Life, Maximum cash accumulation Indexed UL, overfunding, Prevent MEC

Franklin Booth, illustration for “The Flying Islands of the Night” , 1913

When shopping for Indexed Universal Life (IUL) agents ought to provide quotes with full illustrations. Indexed UL illustration are easy for an experienced agent to quickly run. They’re about 10 pages long, can be generated in a pdf file format and emailed. Insist on a full illustration, not a summary. Insist on the illustration being emailed for review. That’s what you’ll get if you contact me. Agents have the latitude to present these illustrations with maximum index interest rate assumptions, which for the S & P 500 Index interest rates ranging from 7.50% to over 8.25%. Not unlikely to see the highest allowed rate assumption, since it’s the default rate on the quote software, and especially because the results look better. Those maximum rates are justified by the index’s historical average over the last 25, 30 or 40 years.

The most common index used is the S & P 500. Here is S & P 500 yearly returns since 1975. Since we’re dealing here with Indexed ULs, translate those numbers to a cap, current caps generally run 11% to 16% percent, and a floor usually 0% or with a few carriers 1%. Now after seeing how the S & P has moved historically, factor in unguaranteed double digit caps, how can an illustration showing 8% interest rate returns in all years be justified?  All years for a 35 year old means 65 years in a row, out to age 100, or even longer.

0, 1, 2, 8, 11
The S & P 500 had zero or negative returns in 2000, 2001, 2002, 2008 and 2011.  How would that 15 year historical performance translate in IUL performance? For someone for example 40 years old having an accumulation phase of 25 years, some down years over that time span has a chance to be absorbed by positive years, but what about the distribution phase when some are targeting IULs for maximum loans? That could be a real problem, and that sort of scenario is masked by maximum interest rate assumptions in all years.

Penn Mutual has an excellent quote illustration system that allows the agent to put in either the maximum interest rate or an assumed interest rate and two alternate assumed interest rate scenarios, so illustrations can show a total of three interest rate assumptions. Also interest rates can be input year by year. Penn Mutual also can generate a IUL historical report which shows 20, 30, 40, 50 or 60 years historical index returns and how that translated to their current 13% cap and guaranteed 1% floor.

Request lower interest rates for added realism
Illustrations should be run in the 5% to 5.5% range to take into account years where the floor is met, if caps rates come down, or if cost of insurance is increased.  Even better, run an illustration, as possible with Penn Mutual, with multiple interest rate assumptions plugged in year by year.  Regardless, of how they are run, all IUL illustrations should be view as very hypothetical, at best a general projection.

Trigger Method Fixed Indexed Universal Life (IUL) with Allianz

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May 30, 2013

10:36 AM

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0% Floor, 1 year point-to-point, 2013, Allianz, Cap, Cap Rate, crediting method, crediting strategy, EIUL, Floor, Index Cap Rate, Index floor rate, Index Segment, Index universal life, Index universal life insurance, indexed life insurance, Indexed Universal Life, IUL, S&P 500, trigger method

Henryk_Weyssenhoff_Spring_1911

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 to offer an Indexed Universal Life (IUL)

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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.

Finding the most cost effective Indexed Universal Life (IUL)

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April 3, 2012

5:45 PM

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0% Floor, Cap Rate, Cash Value, Indexed Universal Life, policy charges

Request an IUL quote and many agents will be inclined to show a rosy scenario return assumption.  After all, high return assumptions are what the companies provide as their default settings to generate quotes.  Carriers often use a 30 year historical look back for the S & P 500 Index that show returns in the high 7% to low 8% range.  Showing that level of returns over a span of 20, 30 years or longer runs up the non guaranteed cash values and death benefit. Comparing carriers apples-for-apples with the same high interest rate is one measure of performance, but not the only measure. Since there are good times and bad times with index performance, it’s best to see the plan put under stress and a variety of scenarios to see how may performs.  Observing how these affect the internal rate of returns is a good way to see which carrier shows the best cost of insurance charges

In addition to the default setting last week comparing carriers I ran:

Quote at 6%
Quote at 3%
Quote solving $1 cash value at age 100
Quote showing no further premium contributions after 15 years

Quotes assuming a 5% or 6% index return are good to temper expectations more realistically. Cap rates, currently in the 11% to 15% range, are likely bring down return averages regardless of what the historical average may show.  Quotes assuming 3% helps reveal which carriers are best with cost of insurance charges. Quotes solving for $1 cash value to age 100 helps show which carrier has higher mortality charges in the later years.  Quotes premiums stopping in 10 or 15 years is a method to see how cash values holds up over the years and to to if and when the policy projects to lapse to compare mortality charges.

It’s prudent to request multiple illustrations showing many possible outcomes: low, medium high, over funded and under funed.

Participation rates IUL: set sail for cash value

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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.