tax-free loans - Life Insurance Recommendations

IUL comparison for maximum cash value accumulation and tax-free loans

April 27, 2023

12:42 PM

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Age 44, In your 40's, Increasing death benefit, IUL, tax-free loans

Male, age 44, standard non tobacco

$200,000 annual premium years 1-10, zero premium years 11+: total premium $2,000,000
5.00% interest crediting S & P 500 index annual point-to-point, all years. This is not the maximum crediting allowed but helps compare carrier performance apples-to-apples.

structured maximum cash value accumulation, guideline level premium, minimum face amount, increasing death benefit, non-MEC guideline level premium test

Cash Value Accumulation (non guaranteed based on 5%)

Company A: $2,967,294 initial death benefit, year 20 cash value: $3,749,106, age 79 no lapse guarantee
Company B: $3,255,183 initial death benefit, year 20 cash value: $3,352,877, age 93 no lapse guarantee

Tax-Free Loans

Same structure as above except an increasing death benefit years 1-20, level death benefit years 21+, variable loan rate 4.50%

Company A: $803,212 loans years 21-25, total loans $4,0116,060 net outlay ($2,016,060)
Company B: $680,000 loans years 21-25, non guarantee lapse age 86

Comments: Even though company A projects clear advantages in cash value accumulation and policy loans, company B with its age 93 no lapse guarantee (NLG) indicates a fundamentally stronger product impervious to cost of insurance (COI) increases in or cap reductions, any carrier undermining of product support in the future.

Indexed Universal Life (IUL) quotes run April 2023. Please contact me to discuss these two competitive carriers.

Age 44, In your 40’s, Increasing death benefit, IUL, tax-free loans

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

by Sean Drummey

May 11, 2012

10:02 AM

Leave a comment on Prudential’s new Indeed Universal Life (IUL) an initial look

0% Floor, 1 year point-to-point, Cap, Cap Rate, cash value life insurance, cost of insurance, crediting strategy, Fixed Account, Guaranteed Floor, Increasing death benefit for cash accumulation, Increasing Face Amount for cash accumulation, Indexed Universal Life, Loans, maximally funded, Maximum cash accumulation Indexed UL, over-funded, S&P 500, tax-free loans

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.

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

by Sean Drummey

January 17, 2012

5:00 PM

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

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

by Sean Drummey

January 12, 2012

5:12 AM

Leave a comment on Indexed Universal Life (IUL): less blue sky projections

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

by Sean Drummey

December 4, 2011

10:15 AM

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

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.