Modified Endowment Contract - Life Insurance Recommendations

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

March 29, 2013

3:24 PM

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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.

Surrender Charges on IUL

by Sean Drummey

November 28, 2011

4:57 PM

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Cash accumulation, Cash Value, Equity Indexed Universal Life Insurance, Estate Planning, In your 40's, In your 50's, Indexed Universal Life, Lincoln National Life Insurance Company, Modified Endowment Contract, Penn Mutual, Retirement income

It’s always good to know the rules for getting money back, so I compared surrender charges for indexed universal life (IUL) carriers. Surrender charges decrease on a declining schedule. For the carriers I compared, it takes between 10 to 20 years for those charges to completely go away. Not surprisingly, Lincoln and Penn Mutual were among those most favorable.

Penn Mutual is the best: no surrender charges after the 9th year, also no surrender charges in excess of target premium.

Target premium is a premium designed maintain a permanent policy for life. Mind you target is a guidepost for keeping the policy in force, how the policy performs may require more or less premium. With Indexed Universal Life one strategy is to over fund the policy above target to build additional cash value. Of the carriers I surveyed, only Penn Mutual and Old Mutual did not require a surrender charge on that portion of the premium.

For example, as in prior comparisons: male age 44, over funding an Indexed UL with $25,000 in premium for 20 years in order to generate tax free retirment income in the form of policy loans. With Penn Mutual this is a $590,000 increasing face amount policy, and the given target premium is $7,918 a year, but by over funding it with $25,000 in premium, just under the IRS limit for a Modified Endowment Contract (MEC), the policy builds the maximum permissible tax free cash value. That amount between $7,918 and $25,000 would not be subject to surrender charges at any time with Penn Mutual.

The least amount of surrender charges in the shortest period of time is a distinct advantage for an Indexed Universal Life in case there is a change in plans.

Sean Drummey
Contact for a free quote
Phone: (910) 328-0447
Email: spdrummey@gmail.com

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

by Sean Drummey

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.

Indexed Universal Life (IUL) compared to a ship’s journey

by Sean Drummey

November 17, 2011

10:38 AM

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California, Cash Value, Equity Indexed Universal Life Insurance, Estate Planning, Indexed Universal Life, Internal rate of return, IUL, Modified Endowment Contract, policy illustration, Variable Life Insurance, variable universal life, VUL

Think of IUL as a means to achieve desired goals: to build cash value and to provide a death benefit. It is like going by yacht across the Pacific from California to Tahiti. This is a long journey, under many weather conditions, and this vessel is particularly designed to be safe and to reach its destination.

Prior to this life insurance that captured stock market, equity, returns was a more perilous journey. Variable Universal Life, a VUL class yacht, was favored. It is a sleek craft with the potential of performing very well (direct stock market participation), but like a yacht without an engine, it has proved to be risky for loss of cargo (cash value) and to capsize and sink (lapse).

So along came Indexed Universal Life as a safer alternative. It is like a powered yacht. Call it a IUL class yacht. She is backed by the ship builder (carrier) with no direct participation in the stock market. She has a sail or multiple sails (Index Account). Sails are designed for use when the winds are favorable (bull market) to build up the cargo (cash value) and ship’s value (death benefit). If there is a typhoon (bear market) approaching, the ship’s owner can use the engine instead (Fixed Account). If there are varying winds or doldrums, the owner may use both sail and engine (Participation Rate). The owner must decide in advance which mode to use for a period of time (Segment). This segment is generally one year. When the segment is over, the yacht owner is awarded for its performance (Interest Rate Crediting ) that increases the value of the cargo (cash value) and yacht (death benefit).

Now this IUL yacht has a very sturdy deck (Floor). Generally this deck is totally protected against leakage (0% market losses). It may even a raised deck (1% or higher Floor). As with a double hull, there are also guarantees in place for the ship not to sink (lapse). These guarantees may be for a set period of time like 10 years, 20 years or for life.

There are, however, certain restrictions placed on the ship’s speed in favorable conditions. The height of the mast is limited by the ship builder (Cap) or the top mast lowered (Spread). The yacht owner may gain extra by increasing the volume of sail (additional premiums). There are however certain rules as to how much sail is permitted (IRS rules for Modified Endowment Contract or MEC).

With an Indexed Universal Life cash value is built higher by increased premium contributions, and by gauging the direction stock market performance. Ideally, when the market is in an upward trend, the owner has directed premium into a high performing index, and when the market is in a downward trend, premium is directed into a fixed account. Regardless of choice or performance, the policy is protected against any losses by the floor. It is similar to a powered yacht that sets the maximum amount of sail with favorable winds, and uses the engine when conditions are unfavorable. There are various possible coverage goals. Some may use an IUL for early cash value accumulation for retirement, others can use the cash value for premium payments in retirement and estate planning.

Keep in mind when reviewing Indexed UL products
Just as yacht makers may brag about the boat’s sails, engine and design, life insurance carriers will promote their Cap (e.g. 13%), Fixed Account guarantee (e.g. 3%), Floor guarantee (e.g. 1%) and other bonus features. What is not evident is the product’s cost of insurance, expense and policy charges, the ship’s drag, how that affects the performance over a long period of time, especially 20, 30 or 40 years out.

How to Evaluate Competing Indexed UL Products
Fortunately, you don’t have to buy this IUL yacht after just reading the specs and trusting that it sails well. Request from the agent a policy illustration to test the product’s projected future performance. This will simulate how load and expense charges affect policy values, and compare that side-by-side with other carriers. This will help determine the all important internal rate of return. It’s similar to computer modeling a yacht race factoring each boat’s design, tonnage and various wind conditions. The carrier’s financial strength and viability is another important consideration because cost of insurance and other expense charges are subject to change, and you are also selecting which carrier will perform best and deliver the best results over time.

Sean Drummey
Contact for a free quote
Phone: (910) 328-0447
Email: spdrummey@gmail.com

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