Category: Increasing death benefit for cash accumulation

Is Indexed Universal Life (IUL) Better Than UL?

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April 28, 2015

3:51 PM

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Increasing death benefit for cash accumulation, indexed life insurance

Are Indexed Universal Life (IUL) products really better than regular UL?  Does the additional cost really justify an IUL?  For example take:

Male, age 52, preferred best rate class, $250,000 face amount

step #1.  Run a UL illustration solving to endow at age 100, increasing death benefit option.

Note: endow is worth it’s face amount, a $100,000 policy endows when it’s cash value equals $100,000.  Whole Life, the best quality par plans, are designed with increasing face amount and guaranteed to endow at age 100.  That high quality standard is what all UL and IUL  plans should be measured against.

#1 results:
UL: $5,000 annual premium  (rounding to nearest hundred)
Year 20: $121,000 cash value, $371,000 death benefit

Step #2. Run an Indexed UL illustration using the same assumptions, except interest crediting at one basis point, 1%, above the UL’s current interest rate.

#2 results:
Indexed UL: $6,400 premium
Year 20:  $157,400 cash value,  $407,400 death benefit

Note: The Indexed UL requires $1,400 more premium to build sufficient cash value to endow at age 100. Granted the IUL shows higher cash value and death benefit in year 20, but the premium is much higher.

Step #3. run an illustrations of the UL at the same premium as the IUL

#3 results:
UL: $6,400 premium
Year 20:  $164,500 cash value,  $414,500 death benefit

This UL product has better non-guaranteed projections than the Indexed UL, assuming a 4% interest rate and the Indexed UL a 5% interest rate.  Most agents probably quote an Indexed UL assuming interest rates of 7% or 8%, but that, to put it mildly, is very presumptuous.  All Index UL illustrations with interest rate assumptions being the same each and every year are highly improbable. That’s just not how equity indexes perform; they go up and down.  Index UL may have higher upside potential than a UL, but the carrier’s fundamentals are the same, and the hedging cost to cover and Indexed UL’s upside potential typically shows up in its cost of insurance.

 

Curt Herrmann - Sommermorgen

 

 

 

IUL for retirement income

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August 29, 2014

9:51 AM

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Cash accumulation, Cash Value, current interest, Increasing death benefit for cash accumulation, indexed life insurance, IUL, maximizing cash value, Maximum cash accumulation Indexed UL, MEC, MEC limit, Modified Endowment Contract, Modified Endowment Contract

What is the best way to compare Index UL (IUL) companies for cash value accumulation and loans for retirement income?  Request illustrations be emailed to you. All life permanent life insurance, whole life, UL, or IUL with non guaranteed assumptions require illustrations for the insured’s review and signature.  A competent life broker has the ability to email multiple carrier illustrations for comparison purposes.  Make specific requests for the illustration’s structure, especially index interest rates assumptions. Insist each and every carrier use the same assumptions . Then compare cash value accumulation and loans for retirement income. Relative performance of the carriers, identifying the top performer, matters more than the figures themselves, which lack validity since they are projections over too long a period of time. To overfund an IUL request:

1.  Identical  assumptions: rate classification, premium amount, index rate, number of years paying premium, loan years

2. S & P 500 Index annual point-to-point; interest assumption of 5% or at most 5.50%

Commonly presented index interest rate returns of 7% to 8%+ each and every year over 20, 30, 40 years and longer are unrealistic and highly speculative

3. Minimum face amount. Guideline annual premium: Guideline premium test  (maximum non-MEC)

Work backwards from the amount of money intended for premiums to solve for the minimum face amount that’s still within the limits as a non modified endowment contract (MEC).  Come to the agent with a figure, as in, for example, wanting to put in $15,000 a year for the next 20 years.  The initial face amount will be solved from there; it will be made as low as possible to meet IRS guidelines.  

4. Increasing death benefit for premium payment years.

5.  Set the premium payment years from 20 to 30 years.  If older, allow at least 15 years, but usually a relatively short period of time, like 15 years, isn’t enough time to build sufficient cash value to allow for retirement income loans.

This is the accumulation period.  Compare cash accumulation after the accumulation period ends.  

6. Level death benefit all years in distribution period and thereafter to age 100 or age 120

7. Loans at fixed rate or maximum variable capped rate

Ask if variable loan rate is capped. Variable loan rates are frequently based on Moody’s Corporate Bond Yield index and those rates have been much higher in the past than currently.

8. Distributions starting at age 65 or after set number of years of accumulation

9. Limited distribution period to 5, 10 or 15 years

Compare which carrier has the higher values, but do not place weight in the amount which is not a reliable value when the index interest rate return assumption is a constant

10. Solve for cash value of at least $1,000 at age 100 or $1 at age 120

Example:  male, age 35, preferred plus, $12,000 premiums 30 years at increasing death benefit; zero premiums thereafter at level death benefit; 5.50% S & P 500 annual point-to-point, minimum Non-MEC, guideline premium test, solve for maximum distributions 15 years, variable loan option at cap 5.5%, monthly loans, solve for $1,000 cash surrender value age 100

key figures to review in the illustration’s yearly summary charts:

  • year 30 – most cash value accumulation
  • years 31-46 – highest annual loans

Mt. Hood, Illustration by R.S. Gifford

Increasing death benefit option

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April 17, 2012

3:29 PM

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Burial insurance, Cash accumulation, Cash Value, Increasing death benefit, Increasing Death Benefit / increasing cash value option, Increasing death benefit for cash accumulation, Increasing Face Amount / increasing cash value option, Increasing Face Amount for cash accumulation, Option A level death benefit, par whole life, participating whole life, Whole Life

The coverage amount for permanent life insurance can either be level or increasing death benefit.  Either the benefit always remains the same, a fixed $250k for example, or it goes up over the years: $251k, $253k, $257k, etc. Which is best?  Obviously a rising death benefit is preferable, but whether its value outweighs its additional cost depends mostly on your age. Generally when under age 60, an increasing death benefit is better. Over age 60 a level death benefit works better simply because it’s more cost effective. Those in higher income brackets usually should opt for an increasing death benefit.  This is also called a level or increasing face amount.  With life insurance the initial benefit is called the face amount, and thereafter it’s called the death benefit.

Level Death Benefit:  Option A

pros:  less expensive; builds higher cash value

cons: the value of death benefit amount erodes due to inflation; less flexible

Increasing Death Benefit:  Option B

pros:  death benefit amount rises over the years to help the policy value keep pace with inflation; better for partial surrender of cash value; better for loans; more flexible, most policies will allow the owner to change from an increasing death benefit to a level death benefit.

cons:  more expensive

An increasing death benefit is used often with Indexed Universal Life (IUL), at least in the cash value accumulation phase. For policy loans to generate tax free retirement income switching the death benefit from increasing to level produces higher income amounts.

A level death benefit is best for Guaranteed Universal Life, also called no lapse Universal Life

For current assumption Universal Life, a regular UL, an increasing death benefit is preferable since most of those plans are geared for those in their 30’s, 40’s and 50’s.  A structure of an increasing death benefit UL and cost will depend on the assumption of the target case value: how much and a what age.  Typical cash value targets will be $1 or to endow, to be worth the initial face amount in cash, at either age 100 or age 120.  Whole life, the high quality ones, age guaranteed to endow at age 100.  A proper analysis of a UL should compare it structured like a whole life, to endow on the non guaranteed side at 100.  I have found, especially at younger ages. that whole life premiums are very competitive, sometimes even less expense, than a UL if they are both structured to endow at age 100.  Sometimes agents will solve a UL for $1 at age 100 to cut its cost, but for the policy holder that runs the risk of the policy underperforming and running out of cash value in later years. This was part of the problem for many UL policies written in the 1980’s and 1990’s.  At the very least the target cash value assumption at age 100 should be half of the original face amount, for example a $125k target cash value at age 100 for a $250k initial face amount.

Whole life is either level or increasing death benefit.  Participating whole life, called “par” whole life for short, offers dividends that increases the death benefit over the years.      Final expense whole life for seniors is level death benefit “non par” or non-participating whole life. They do build some cash value, but the key is the benefit amount, affordability and simplified underwriting.

Choose “par” whole life for child life insurance.  Mail offers for child life insurance are level benefit “non par” whole life, non-participating, and they are a rip off considering how much more value you get for just a few dollars more with a increasing benefit whole life plan like Mass Mutual.

Equitable “Long-Term Care Services Rider” has an increased death benefit option.  This is a very distinctive feature offered for a hybrid life/LTC product.  Most other carriers only allow Option A, a level death benefit, for LTC benefits.

Please request a quote : free and strictly confidential

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

revised: 4/29/2022

Equitable checked 8/1/2022

Hybrid life long-term care looking even better after Prudential’s exits LTC market and increases premiums

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March 14, 2012

5:37 PM

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Cash accumulation, guaranteed universal life, hybrid long term care insurance and life insurance, Increasing Death Benefit / increasing cash value option, Increasing death benefit for cash accumulation, Indemnity Benefit, Indexed Universal Life, life insurance and long term care, long term care life insurance hybrid with return of premium, Prudential life insurance

Prudential announced it will stop selling individual long term care (LTC) insurance policies at the end of March. Prudential ranked fifth in the LTC market.  They will still sell group products.

In 2011 Prudential announced rate increases on its first and second generation individual LTC policies. The premium rate increase percentage requests were substantial: 18% or 32% on the first generation product, and 15% or 30% on the second generation. That higher tier of increases was on plans with a cash benefit rider.  The actual increase for those policy holder depends on what each state’s Department of Insurance approves.  From what I reviewed, states were approving most of what was requested and premium increase letters were going out this year to Prudential LTC policy holders.

All individual long term care insurance policy holders have to worry about rate increases.  In contrast with a hybrid life insurance LTC policy, the policy owner is able to lock in a fixed premium for life with a guaranteed UL plan.  For those with other retirement or estate planning goals, Indexed UL plans provide an opportunity for cash accumulation and increasing death or long-term care benefits.

 

 

 

Using an Indexed Universal Life (IUL) as a college savings plan: example of how it works

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January 17, 2012

5:00 PM

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In your 40's, Increasing death benefit for cash accumulation, maximizing cash value, MEC limit, tax-free loans

Using Indexed Universal Life (IUL) for college savings uses the same cash accumulation strategy as Indexed ULs for tax-free retirement income.  Cash value grows tax deferred and is distributed as tax free loans.  The IRS limits the amount of premium that can be put into a contract and keep the distributions taxed advantaged, rules for Modified Endowment Contract (MEC), so the goal is to put in the maximum premium allowed below that limit.  In life insurance terminology, the guideline level premium determines the policy face amount.  The death benefit is structured as increasing during the accumulation phase and level during the distribution phase.

Granted other options are available, but with an indexed UL, there’s downside risk protection with at least a 0% floor to index crediting, Lincoln has 1%.  Also there’s a death benefit in the ultimate worst case scenario for the parent.

The starting point for the prospective policyholder is to determine how much premium and for how long?  The countdown clock for college savings is simple: 18 years.

Male age 42, best health rate,  $10,000 premium per year for 18 years.  Amounts assume a 8.45% index interest rate, S & P 500 annual point-to-point index.

Carrier Initial Death Benefit Cash Value
Year 18		 Death
Benefit
Year 18		 Distribution
Years 19-22		 Cash Value
Year 23		 Death Benefit
year 23
.
Lincoln $225,000 $348,527 $574,527 $102,444 $67,157 $181,703

What if the market doesn’t preform that well?   Be sure to review multiple index return scenarios.  They are easily illustrated.  Here are 5% index return projections.

Carrier Initial Death Benefit Cash Value
Year 18		 Death
Benefit
Year 18		 Distribution
Years 19-22		 Cash Value
Year 23		 Death Benefit
year 23
.
Lincoln $225,000 $246,646 $471,646 $59,658 $46,689 $207,551

Looking at a 10 year time span for $10,000 in premium instead of 18, the results didn’t work out very well: $37,021 in distributions assuming 8.45%.  As in most savings plans, the earlier the start, the better.

Lincoln National Life Insurance Company:  “Lincoln LifeReserve Indexed UL (2011)
Quote run 1/17/2012.  Rates subject to change.

Sean Drummey
Phone: (910) 328-0447
email: spdrummey@gmail.com

 

Indexed Universal Life (IUL): less blue sky projections

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January 12, 2012

5:12 AM

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0% Floor, 1 year point-to-point, Cash accumulation, Dow Jones Industrial Average, early cash value accumulation, Equity Indexed Universal Life Insurance, Guaranteed Floor, Income distribution, Increasing death benefit for cash accumulation, Index universal life, Indexed Universal Life, interest crediting, Lincoln life insurance, Lincoln National Life Insurance Company, Maximum cash accumulation Indexed UL, over-funding, rapid cash value accumulation, S&P 500, tax-free loans

Indexed Universal Life (IUL) illustrations commonly show 7% to 8+% returns based on historical averages over the last 20 to 30 years. Whether or not an Indexed UL can capture that kind of performance over the coming decades is debatable. 2008 bore an unsettling resemblance to 1929, except officials were able to spread foam on the runway.  The Euro’s instability lead to an additional dose of foam for European banks late last year.  All this uncertainty can make Indexed ULs more attractive because guarantees eliminate downside market risk while providing a life insurance benefit.  But what about the upside Certainly 2011’s index results surveyed were below average.  Tops was the Dow Jones Industrial Average at 5.53%.  The S & P 500, the most widely used index, came in at 0%, which is the floor for an Indexed UL regardless.  But then again, seeing blue sky, 2012 is off to a good start, and historically that’s a very good sign.

When reviewing an Indexed UL, it’s prudent to scenario the possibility of lower returns.  I ran a series of comparisons last fall on overfunding an Indexed UL to build cash value for retirement income.  Lincoln performed very well compared to the competition.   I used the S & P 500 Index, annual point-to-point, and Lincoln assumed on the illustration an 8.45% average return.

Over 8%?  How about 5%?
What would returns look like projecting at a more pedestrian 5%?   Assume a male, age 44, excellent health, putting in $25,000 a year in premiums for 20 years with the goal tax-free distributions for retirement income at age 65. Initial death benefit $520,000.

Carrier S&P 500
Index
Return		 Cash Value
Year 20,
Age 64		 Death
Benefit
Year 20,
Age 64		 Retirement Income
Yrs. 21-40
Ages 65-84		 Cash Value
Year 41,
Age 85		 Death Benefit
year 41,
Age 85
 ‘
Lincoln 8.45%  $1,077,926  $1,597,926  $146,326  $830,516  $1,120,514
‘
5.00%     $727,834  $1,247,834    $51,396 $219,059     $317,285

Take a different example with less premium.  $10,000 premium a year for 20 years: male, age 47, excellent health. Initial death benefit $185,000.

Carrier S&P 500
Index
Return		 Cash Value
Year 20,
Age 67		 Death
Benefit
Year 20,
Age 67		 Retirement Income
Yrs. 21-40,
Ages 68-87		 Cash Value
Year 41
Age 88		 Death Benefit
year 41,
Age 88
.
Lincoln 8.45% $424,913 $609,913 $46,590 $186,833 $252,943
.
5.00% $287,005 $472,005 $19,732 $62,067 $77,698

When shopping for an Indexed Universal Life
All Indexed UL proposals come with full illustrations.  They’re required.  Brochures are okay as a start, but zero in on the illustration’s chart.  An agent can easily generate and email them on .pdf format.   Illustrations are based on current assumptions, for example 8.45% for Lincoln, but can be run with interest rate assumptions anywhere from 0% up to current.  Make sure to request and review lower interest rate assumptions as a counterpoint.

Carrier: Lincoln National Life Insurance Company; Product: ” Lincoln LifeReserve Indexed UL  (2011)”
Quotes run 1/11/2012 and are subject to change.

For your own personalized free quote please contact me.

Sean Drummey
Phone: (910) 328-04447
email: spdrummey@gmail.com

Nationwide’s new Indexed Universal Life (IUL) compared to top Lincoln and Penn Mutual

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December 4, 2011

10:15 AM

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1 year point-to-point, Age 65, Income distribution, Increasing death benefit for cash accumulation, Level death benefit for maximum income distribution, Level Face Amount for maximum income distribution, Lincoln Life, Maximum cash accumulation Indexed UL, MEC limit, Nationwide, Overfund, Penn Mutual, tax-deferred accumulation, tax-free loans

Nationwide has a new IUL product called “Yourlife Indexed UL”.   I’ve posted a series of comparisons analyzing the top performers for tax deferred cash accumulation and tax-free retirement distributions, so I plugged in those assumptions to see how Nationwide compared.  Granted, it’s not a true apples-for-apples comparison.  The index selection for Lincoln and Penn Mutual is the S & P 500, 1 year point-to-point. Lincoln assumes a 8.45% hypothetical return and Penn Mutual a 8.41%.    Nationwide uses a weighted average multi-index  blended strategy, 1 year monthly average, assuming a 7.6% index crediting.

Only time will tell on upside assumptions.  While pondering the unknowns of the future, it’s good to remember the strength of indexed universal life is knowing there is a floor to stand upon.

Below are figures to the same benchmark structure: male, age 44, great health puts in $25,000 a year for 20 years, and at age 65 the takes out tax-free retirement income for the next 20 years in the form of policy loans, with enough left over for a death benefit.   $25,000 a year might be above what you’re considering, but showing high premium is like a drag race to see how fast the car will go, fast as in building cash value, and then popping the chute, projecting how the retirement distribution performance.

Carrier Cash Value
Year 20		 Death Benefit
Year 20		 Loan amount
Yrs  21 -40		 Cash Value
Year 41		 Death Benefit
Year  41
Lincoln  1,072,791  1,611,714  146,428  831,161  1,121,364
Penn Mutual  1,148,802  1,738,802  145,609  522,606     841,829
Nationwide     933,926  1,503,928  119,820   89,900     302,664

With the goal being maximum retirement income, knowing the carrier’s options and rules on policy loans is vitally important.   Nationwide has a fix loan option “declared rate loan”  that showed a $88,236 income distribution on the policy illustration.  For potentially better performance, like many other carriers Nationwide has a variable loan option “alternative loans” based on Moody’s Corporate Bond Yield Average, currently Nationwide illustrates at 4.79%, which gave a better $119,820 income distribution figure.  But what will that figure be in the future?  They have a guaranteed minimum of 3.00% and a guaranteed maximum rate of 8%.

Both Lincoln and Penn Mutual have fixed rate loan options that project better than the variables loan rates of the competition, including Nationwide.

Lincoln National Life Insurance Company:     “Lincoln LifeReserve Indexed UL  (2011)”
The Penn Insurance and Annuity Company:    “Accumulation Builder II IUL”
Nationwide Life and Annuity Insurance Company:  “Yourlife Indexed UL”.

Image Source: Wikemedia Commons

Disclaimer: Information and quotes are current and accurate to the best of my knowledge on December 4, 2011.  Product features and rates are subject to change.  Quotes are non-guaranteed projections based on current interest rates and cost of insurance. Tax information is general information only. Please seek professional tax advice for personal income tax questions and assistance.