Category: Maximum cash accumulation Indexed UL

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.

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

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.

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.

Best Indexed Universal Life (IUL) for retirement income: How does AXA Equitable measure up?

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November 22, 2011

4:29 PM

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Cash accumulation, Cash Value, Guideline level premium, In Your 20's or 30's, In your 40's, Increasing death benefit, Increasing death benefit for cash accumulation, Indexed Universal Life, Internal rate of return, IUL, Maximum cash accumulation Indexed UL, Maximum cash accumulation IUL, policy illustration, Transamerica Life Insurance Company

Which is the best Indexed Universal Life (IUL) carrier for tax-free policy loans for retirement income?   AXA Equitable has been in 2011 a consistently leading seller for Indexed UL.  Let’s compare AXA side-by-side with other carriers to see how it performs.  AXA product features include four index options.  But beyond reviewing specs like rate caps and guarantees, the most useful way to evaluate carriers is to run policy illustrations using the the same premium and death benefit and compare projected returns.

The Indexed UL structure employed here is to overfund premiums with the minimum amount of death benefit to stay within IRS rules for tax advantaged life insurance.   Then in retirement income take the maximum amount of  tax free loans while still retaining a lifetime death benefit.

This Indexed UL strategy is an alternative for someone in their 30’s, 40’s and 50’s to directly investing in equity markets for retirement.  IULs allow you to take advantage of market gains without the downside risk.

Here’s what it looks like for a male age 44 putting in $25,000 a year for 20 years, and then starting at age 65 taking the maximum out in tax free policy loans for retirement income for the next 20 years, while retaining at least a $100,000 death benefit to age 121.  The death benefit starts at about $540,000 for each carrier and increases for years 1 – 20.

Carrier Cash Value
Year 20		 Death Benefit
Year 20		 Loan Amount
Years 21-40		 Cash Value
Year 41		 Death Benefit
Year 41
Lincoln  1,072,791  1,611,714   145,602  826,476  1,115,403
North American  1,144,104  1,683,029   147,248  658,775     981,056
Minnesota Life  1,100,898  1,655,898   137,217  584,737     876,987
John Hancock  1,085,171  1,323,908   139,719  614,556    913,093
Transamerica  1,065,637  1,630,637    95,000  215,254    346,582
AXA Equitable     995,284  1,534,207    86,402   98,473    212,604
Aviva     972,524  1,527,524   120,188 *
*yrs. 21-31 only		    83,677    204,366

I quoted AXA Equitable’s S & P 500 current rate which assumes 7.55% which is below the 8% plus range of S & P 500 rates assumed by other carriers, and that does have something to do with its lower cash value and death benefit accumulations on the chart at year 20.

Regardless,  AXA only uses a variable  loan rate which is currently illustrated at 3% policy yeas 1-10 and 2% thereafter.   The rate is the greater of 3% or published monthly average Moody’s Corporate Bond Yield.  Guaranteed not to exceed 15%.  They do not offer a fixed rate.

Since those loan payouts are not competitive with Lincoln’s 5% fixed rate or higher variable rates assumed by the other carriers, AXA Equitable does not appear be competitive.  Best way to find out which carrier is right for you is to request that I email you free quotes in the form of policy illustrations.

Carriers & Products quoted:

Lincoln National Life Insurance Company:  “Lincoln LifeReserve Indexed UL  (2011)”
North American Company for Life and Health Insurance:  “Rapid Builder IUL”
Minnesota Life Insurance Company:  “Eclipse Indexed Life”
John Hancock Life Insurance Company:  “Indexed UL”
Transamerica Life Insurance Company:  “Freedom Global IUL II”
Aviva Life and Annuity Company:  “Advantage Builder Series IV”
AXA Equitable Life Insurance Company:  “Athena Indexed Universal Life”

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

Disclaimer:  Information and quotes are current and accurate to the best of my knowledge on November 22, 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.