Overfund - Life Insurance Recommendations

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

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.

Reviewing Global Indexed UL (IUL): American General and ING

by Sean Drummey

March 29, 2013

3:24 PM

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1 year point-to-point, 2 year point-to-point, 5 year point-to--point, 7-pay test, American General Life Insurance Company, EIUL, Equity Indexed Universal Life Insurance, Guideline level premium, Increasing Death Benefit / increasing cash value option, Increasing death benefit for cash accumulation, Index account options, Indexed Universal Life, ING, Maximum cash accumulation Indexed UL, Maximum cash accumulation IUL, MEC, MEC limit, Modified Endowment Contract, Modified Endowment Contract, Not a Modified Endowment Contract (MEC), over-funding, Overfund, Participation Rate, Prevent MEC, Prevent MEC

American General recently introduced the Indexed Universal Life (IUL) product “Elite Global Plus II”. The choices for indexes are the S & P 500 annual point-to-point, or a 5 year point-to-point blended index: S&P 500®, the EURO STOXX 50® Index, and the Hang Seng Index. This blended index performance is weighed 75% best index, 25% second best index multiplied by the participation rate. There is a guaranteed interes of .25% annually.

American General’s product is very similar to ING with their “ING IUL-Global Choice.” ING also has a blended index using the same indexes and weight, though ING also offers a 2 year point-to-point as well as the 5 year point-to-point. Participation rates are the focus rather than cap rates on these 5 year point-to-point products. Both products offer a 15% guaranteed participation rate.

The strength of this index selection and weighted approach are hypothetical high rates of return as gauged by historical averages. Very high. ING has put out some impressive historical data to back up that assertion. American General shows a 9.28% interest rate as current illustrative rate for the 5 year point-t0-point. That rate is based on an historical average from December 31, 1992 through December 31, 2012.

The American General product has a Choice Loan and a Standard Loan. It’s not easy to discern all the loan provisions from the producer guide, but running an illustration states “6.00 Effective Annual Rate – Guaranteed Charge” for the Choice Loan.

Testing product performance is a matter of running illustrations side by side with another carrier using the same premium and structure and see which project better cash value accumulation and loans for retirement income . Cash value accumulation involves running maximum premium below the MEC, or Modified Endowment Contract, by using guideline level premium test or 7 pay premium test. I ran American General and ING, illustrations with $500 a month, age 30, male preferred non tobacco, at guideline annual, increasing face amount, 30 years of premium, and then zero premium thereafter and maximum loans for retirement income years 31 to age 100, assuming 7% interest, same index: 5 year point-t0-point. I usually run test illustrations at 5% interest, but I have been comparing lately at 7%, so I used that as a benchmark. American General illustrated at a 65% participation rate, or par, ING illustrated at a 75% par. American General had better cash value accumulation, however ING had higher loans for retirement income. As a practical matter the loan income figure is more important than cash value accumulation.

After an initial look, ING appears to be a stronger product for those interested in this sort of 5 year blended international indexes approach. Granted that is based on only one example, and many more comparisons for different ages, health classification, premium amounts and length of premium contributions is necessary before making a more definitive judgement.

Indexed Universal Life (IUL): less blue sky projections

by Sean Drummey

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

by Sean Drummey

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.