Fees of newer multiplier index segments

[DHK]

The problem with all IUL illustrations, as I see it, s that the illustration is based on ACTUAL return, not an AVERAGE return. I’ve watched countless videos by agents,marketers, and carriers over the past two months on these products. This is the elephant in the room that rarely so much as alluded to, much less mentioned head on. Heard one today where he said “whole life guys” make a big deal about the fact that IUL’s will invariably and inevitably have “zero gain” years, but that the zero years don’t matter. All it takes is one zero year for a 6% illustration to show itself for the fiction that it is unless the index returns greater than 12.36% the next year AND the cap is greater than the gain. Get two zero years and you have a UL that over funded or not will likely implode eventually like the rest of its older brothers have.

Good points.

1) IUL should be a concept sale, not an illustration sale. So 6% 'average' happening per year, every year, is just a calculation for the compliant illustration, not an expectation of the actual results.

2) IUL cap rates go down for the same reasons that WL dividend rates go down - general account performance, new sales, and mortality experience. The difference is that WL is far more steady and IUL has the potential of a higher annual return following a 0% year. It would offset itself - assuming (I hate that word) a decent rebound in the index.

I would generally prefer a 50/50 split between a capped index allocation and an uncapped index allocation with a spread. Capture a decent upside rebound on both strategies.

So while "whole life guys" think that IUL is 'lesser', the truth is that the underlying facets behind both policies are similar - they just credit interest with different methods.

Six of one, and half a dozen of the other - assuming a skilled agent behind each is setting the proper expectations and funding structure behind them. (And with some agencies, asking for a skilled agent... is where I fear more issues will be in the future.)

 

[pfg1]

The problem with all IUL illustrations, as I see it, s that the illustration is based on ACTUAL return, not an AVERAGE return. I’ve watched countless videos by agents,marketers, and carriers over the past two months on these products. This is the elephant in the room that rarely so much as alluded to, much less mentioned head on. Heard one today where he said “whole life guys” make a big deal about the fact that IUL’s will invariably and inevitably have “zero gain” years, but that the zero years don’t matter. All it takes is one zero year for a 6% illustration to show itself for the fiction that it is unless the index returns greater than 12.36% the next year AND the cap is greater than the gain. Get two zero years and you have a UL that over funded or not will likely implode eventually like the rest of its older brothers have.

I agree with you to a degree, however a couple of zero years IMO won't implode a policy long term, because they earn more other years and will likely max out the cap quite a bit. Assuming a 10% cap, a few zero years every decade will bring them down into the 6% range most likely. If they end up with more zero years, they are now down into WL territory. 4-5%

Looking at the past 20yrs, going by calendar year there have been 7 zero years which puts the IUL performance for most carriers down into the 6% range. Not near imploding at all, however also not near the holy grail scenario that is painted either. However if they owned that policy for the past 10yrs, they are around 7.5%/yr avg ROR over that time period.

I believe that if the product is designed properly and as long as they overfund it, if the bottom doesn't fall out causing cap rates go super low they will do ok. This is why I still like WL better... slow and steady but always does good and is contractually guaranteed to do decent regardless.

Back to the thread topic, the smoke and mirrors of multipliers and leverage, NOPE.

 

[DayTimer]

I agree with you to a degree, however a couple of zero years IMO won't implode a policy long term, because they earn more other years and will likely max out the cap quite a bit. Assuming a 10% cap, a few zero years every decade will bring them down into the 6% range most likely. If they end up with more zero years, they are now down into WL territory. 4-5%

But the illustration is based on actually receiving 6% per year. My point is that a 6% average will not save the IUL.

Then, there is the FACT that no company that I have found will issue an IUL where the COI is fixed from date of issue.

The best bet to not screw a client eventually is to find a product with a 14%+ cap and illustrate it at 4%. I do not know if there is a 14% cap out there. And even if there is (I know F&G was there at one point) there is no guarantee the cap will stay at 14%.

 

[Allen Trent]

The problem with all IUL illustrations, as I see it, s that the illustration is based on ACTUAL return, not an AVERAGE return.

actually, I think you have it backwards. the IUL illustrations show the average return happening each & every year & don't show any actual historical return that would show some big years, some 0 years & some flatter years. This is why the multipliers are more of a problem because they still show the average return crediting each & every year & never show the negative years where the market was flat or down & the multiplier made it an actual negative return.

 

[pfg1]

actually, I think you have it backwards. the IUL illustrations show the average return happening each & every year & don't show any actual historical return that would show some big years, some 0 years & some flatter years. This is why the multipliers are more of a problem because they still show the average return crediting each & every year & never show the negative years where the market was flat or down & the multiplier made it an actual negative return.

Correct. They show the policy AVERAGING at whatever rate you illustrate at.
In the illustrations I run, you can see what the policy would have actually done over the past 5, 10, 20yrs, etc. (Based on the crediting strategy)
Running at 5.5% or 6%... I feel is relatively realistic. Again, assuming caps don't keep coming down. Most companies are in the 10% or less range at this point.
If you overfund, the policy should be fine. If you underfund, you are taking a big risk, imo.

I recently ran one for a teen... overfunded, at 3% avg it didn't lapse. Because the young age and low cost of ins I guess, it builds up some steam early and keeps on trucking. The key imo is least cost coming out, and most cash going in.

 

[Allen Trent]

Correct. They show the policy AVERAGING at whatever rate you illustrate at.
In the illustrations I run, you can see what the policy would have actually done over the past 5, 10, 20yrs, etc. (Based on the crediting strategy)
Running at 5.5% or 6%... I feel is relatively realistic. Again, assuming caps don't keep coming down. Most companies are in the 10% or less range at this point.
If you overfund, the policy should be fine. If you underfund, you are taking a big risk, imo.

I recently ran one for a teen... overfunded, at 3% avg it didn't lapse. Because the young age and low cost of ins I guess, it builds up some steam early and keeps on trucking. The key imo is least cost coming out, and most cash going in.

Excellent--agree. Just had a heated exchange with an agent that ran a no-lapse product with at target premium of $3,000 at only a $1300 annual premium for someone around age 50. It will only last 17 years & the client could get a 20 year term for half the premium & a 30 year term for about the same 30 year. cant fathom why agents intentionally do this. To design with the hopes someone will magically have more money in the future is a risk I don't think is worth it. just buy the term with a good conversion privilege & if the newfound future money does indeed come, then convert to it then.

 

[DHK]

I haven't done this... but the ONLY time I could even THINK of counting on a kind of 'windfall'... is if I'm writing a case, and it comes back rated. Rated cases: You pay more, we pay quicker! And then you can use the death benefit proceeds to fund the other policy on the healthy spouse.

Even then... that's still a 'maybe'. I've heard of this, and I will study it out more, but I'd rather take the facts as they are NOW... and not count on some magical windfall in the future.

 

[Allen Trent]

I haven't done this... but the ONLY time I could even THINK of counting on a kind of 'windfall'... is if I'm writing a case, and it comes back rated. Rated cases: You pay more, we pay quicker! And then you can use the death benefit proceeds to fund the other policy on the healthy spouse.

Even then... that's still a 'maybe'. I've heard of this, and I will study it out more, but I'd rather take the facts as they are NOW... and not count on some magical windfall in the future.

on rated cases, I like to see the utilization of the death benefit paid out over a number of years as an income. Some call it Income Protection rider. this allows the added cost of a table rating to be softened by the death benefit being paid out over a number of years.

Plus, using UL or IUL as term can be very expensive compared to level term with all the internal costs, load fees & ART COI inside UL & IUL

the only time I would be comfortable with a underfunding would be some bizarre rare case where the client has a known lump sum like a CD, Annuity, Land contract payoff coming due. but even then, I have trust issues with people following through on what they say they will do & would still be scared to knowingly underfund.

 

[pfg1]

Excellent--agree. Just had a heated exchange with an agent that ran a no-lapse product with at target premium of $3,000 at only a $1300 annual premium for someone around age 50. It will only last 17 years & the client could get a 20 year term for half the premium & a 30 year term for about the same 30 year. cant fathom why agents intentionally do this. To design with the hopes someone will magically have more money in the future is a risk I don't think is worth it. just buy the term with a good conversion privilege & if the newfound future money does indeed come, then convert to it then.

Its my belief that they do it for commission...that agent is getting paid on $3k target rather than $1300. I've never built any policy with additional room in hopes that they may put more in. I totally agree....much better to build a max funded policy that they know they can fund, AND add a convertible term (for the what if later).
The problem in this industry... there are organizations that sell IUL this way regularly. SMH

 

[pfg1]

people following through on what they say they will do

The biggest downfall of IUL, imo.... being its sold as a flexible premium. If/when the crap hits the fan financially, the first thing a client will do is cut the premium back to the minimum. Once they are used to paying the min, its rare that they will go back up in my opinion.

This is one reason why WL works better. They can cut back to the minimum, but it will still perform if they pay that minimum. Yes, it won't kick butt like it would if max funded, but it won't lapse and will still be a decent policy in the long run. IUL will eventually lapse at min payment.