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Does anyone know of an easy and free way to illustrate stochastic returns in an IUL?
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Does anyone know of an easy and free way to illustrate stochastic returns in an IUL?
DHK - What does the CAGR end up being with your method? I am just uncomfortable with a determined return when sequence matters so much.
Tahoe Ray - thank you. I read somewhere that FINRA does not allow companies to illustrate stochastis returns on VULs. Some guys try to show it using loans but that seems like a poor way. I am glad IULs carriers are allowed to show variations in yearly returns since no FINRA. I understand that an agent can take advantage of the illustration but geeze it's UL we are talking about, it is meant to be able to do different things.
DHK - What does the CAGR end up being with your method? I am just uncomfortable with a determined return when sequence matters so much.
Because you are asking about this, you are clearly above the standard of most agents trying to sell IUL.
CAGR doesn't matter in the illustration. Most agents are trying to predict the future performance of the policy, and that's where you're going wrong with the IUL sale. We don't know what the market will do.
In addition, doing "back-testing" isn't a good idea because the underlying options will have varied costs and affect caps/participation rates over time.
It's probably where most IUL agents are going wrong in selling it. (That's why there's an interest rate limit on what you're allowed to illustrate versus the current year cap. I'm sure universally right now, that the limit is far below the current caps on all policies.) It's also a reason why the industry is looking at IUL illustrations; Insurers Take Aim At IUL Illustrations
This is a different sale than a WL sale. WL has a guaranteed column and a non-guaranteed column based on current dividend rates... which most WL agents say will generally be paid because of their dividend paying history, but may vary over time - they can be less or more than they are illustrated.
IUL is about managing volatility and crediting the positive years to the cash value, and no loss in down years. As long as the underlying index has movement, up and down... your policyholder will profit from that volatility... up to the amount of the current year cap.
If illustrations weren't required, I wouldn't use one. I think they paint the wrong picture and create false expectations of the product. In fact, I'd explain the client that I don't like the "rosy picture" this illustrates because it is simply wrong. There is no investment out there that will pay out 8.5% (or whatever is your max) every year. If there was, everyone would buy it. Plus, if the market has a double-digit return, that isn't being shown either.
What the IUL illustration shows is the surrender schedule (difference from account value and surrender value), models how interest is credited, and whatever else you build-in to your illustration - such as loans, withdrawals, or payments stopping into the policy.
Sell the concept... not the illustration or the "illusion of infinite growth promises".
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I learned from Marvin Feldman the rule of 1 to 100: In 1 year, 100% of your illustrations will be wrong.
Help them know WHY they bought... but not exactly WHAT they bought (illustrations).
Because you are asking about this, you are clearly above the standard of most agents trying to sell IUL.
CAGR doesn't matter in the illustration. Most agents are trying to predict the future performance of the policy, and that's where you're going wrong with the IUL sale. We don't know what the market will do.
In addition, doing "back-testing" isn't a good idea because the underlying options will have varied costs and affect caps/participation rates over time.
It's probably where most IUL agents are going wrong in selling it. (That's why there's an interest rate limit on what you're allowed to illustrate versus the current year cap. I'm sure universally right now, that the limit is far below the current caps on all policies.) It's also a reason why the industry is looking at IUL illustrations; Insurers Take Aim At IUL Illustrations
This is a different sale than a WL sale. WL has a guaranteed column and a non-guaranteed column based on current dividend rates... which most WL agents say will generally be paid because of their dividend paying history, but may vary over time - they can be less or more than they are illustrated.
IUL is about managing volatility and crediting the positive years to the cash value, and no loss in down years. As long as the underlying index has movement, up and down... your policyholder will profit from that volatility... up to the amount of the current year cap.
If illustrations weren't required, I wouldn't use one. I think they paint the wrong picture and create false expectations of the product. In fact, I'd explain the client that I don't like the "rosy picture" this illustrates because it is simply wrong. There is no investment out there that will pay out 8.5% (or whatever is your max) every year. If there was, everyone would buy it. Plus, if the market has a double-digit return, that isn't being shown either.
What the IUL illustration shows is the surrender schedule (difference from account value and surrender value), models how interest is credited, and whatever else you build-in to your illustration - such as loans, withdrawals, or payments stopping into the policy.
Sell the concept... not the illustration or the "illusion of infinite growth promises".
----------
I learned from Marvin Feldman the rule of 1 to 100: In 1 year, 100% of your illustrations will be wrong.
Help them know WHY they bought... but not exactly WHAT they bought (illustrations).