Category: Modified Endowment Contract

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.

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

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

 

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.