IUL Questions

[pfg1]

Hey guys, I have a few q's on IUL. A guy I am working with loves this product, and writes alot of it. He feels it is better than WL in every way....he loves max funded IUL (mainly writes LSW).

I cut my teeth on WL, and really like max funded WL. So we've been discussing.

Trying to wrap my head around IUL a little better, so as to be able to offer it to the right folks. I really like the flexibility the IUL has, and I understand how the indexing works. Obviously I'm not totally up on design at this point, other than it appears its best to solve for min DB / max cash. My main concern is the guarantees (or lack thereof). With WL, I know where my clients will be for sure, and most likely better. With IUL, we really have no clue. The illustrations look great, but will they really even be close? I don't know. Could they be way off and the policy implode? I don't know.

So I know IUL has really only been around about 15-20yrs with much of the popularity coming in the past 10yrs or so. When I look at an illustration run max funded (lowest DB) at 6.5% or 7%, the cash gets really good with an IUL. The "lifetime income" almost seems unrealistic in many cases.

Given the relative "newness" of this product (less than 20yrs) how many agents actually have clients drawing income out of their policies? I'd venture to say not too many, yet. Also, we've been in a time of steady stock market growth since the recession...so obviously there have been nice gains in the policies. I wonder how those look when the market corrects (crashes) and we don't get a huge rebound like we've had? Or loan interest rates go up significantly?

WL contracts have been around forever, and while the dividends aren't guaranteed...many good companies have paid them consistently for close to or over 100yrs. I feel pretty confident that they will continue to do that. There are a ton of people that have used the cash in their WL contracts for all sorts of things, including income. Heck I have a friend that has a 40yr old WL policy that his premium is $1k, his dividend alone right now is about $3k. Thats pretty stout.


What is a realistic rate to run an IUL at, where I can feel confident that my client will do well, and still have a policy in force even if we have a horrible run in the stock market? 6%? Is 6.5% too high? My friend runs everything at 6.95%, he feels confident with that.


What is the flexibility like within IUL contracts in regards to borrowing/repaying cash? (Think infinite banking) I've always been told (by WL guys) that IUL is not very compatible with IBC. I honestly don't know if that is true or not.


Who is the ideal prospect for IUL? Young, middle age, old?


What level of risk would you say this product carries, when explaining to a client? Low, med? Certainly I wouldn't think high.


I'm thinking of offering both as I move my business forward, just trying to get a little more comfortable with this product. I've been searching alot here and online, learning a good bit...but figured I'd pick some of your brains, as I know alot of you are very experienced.


Thank you in advance for anything you can offer!

 

[scagnt83]

So I know IUL has really only been around about 15-20yrs with much of the popularity coming in the past 10yrs or so. When I look at an illustration run max funded (lowest DB) at 6.5% or 7%, the cash gets really good with an IUL. The "lifetime income" almost seems unrealistic in many cases.

..........

What is a realistic rate to run an IUL at, where I can feel confident that my client will do well, and still have a policy in force even if we have a horrible run in the stock market? 6%? Is 6.5% too high? My friend runs everything at 6.95%, he feels confident with that.

As far as the assumed Credited Rate. The most I will show is 7%.

Most IULs have a historical returns (look back returns based on current Caps) of 5%-5.5% 100% of the time in historical models.

So you can usually assume that 5%-5.5% is extremely likely over a 20 year period.

Most IULs (they all have different caps/features), have historical lookbacks of 6%-6.5%; 80%-95% of the time.
Then the 7% range gets into the 70%-80% ranges.


So 7% is on the highest side of reasonable based on historical returns.

By the way, the illustration should be able to show the returns over the past 25 years.

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The "lifetime income" almost seems unrealistic in many cases.

The agents is most likely using GPT testing.

WL uses CVAT.

Assuming a Level Death Benefit, GPT allows a greater amount of the policy gains to go towards the Cash Value, instead of the Death Benefit.


This is why a UL/IUL can create a higher payout % of income vs. WL.

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Given the relative "newness" of this product (less than 20yrs) how many agents actually have clients drawing income out of their policies? I'd venture to say not too many, yet. Also, we've been in a time of steady stock market growth since the recession...so obviously there have been nice gains in the policies. I wonder how those look when the market corrects (crashes) and we don't get a huge rebound like we've had? Or loan interest rates go up significantly?

Plenty of policies are being used as income. I have policies on the books that are, so do other agents I know.

Before last year, the 25 year historical lookback for most policies was around 7.5%-8%. That is including 2000-2002, & 2008 ( a total of -83%).

Even the 10 year returns that include those years are around 5.5%-6%.

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WL contracts have been around forever, and while the dividends aren't guaranteed...many good companies have paid them consistently for close to or over 100yrs. I feel pretty confident that they will continue to do that. There are a ton of people that have used the cash in their WL contracts for all sorts of things, including income. Heck I have a friend that has a 40yr old WL policy that his premium is $1k, his dividend alone right now is about $3k. Thats pretty stout.

Yes, but the market has been around for well over 100 years. So you can backtest all you want based on the Caps/Spreads/etc.

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What is the flexibility like within IUL contracts in regards to borrowing/repaying cash? (Think infinite banking) I've always been told (by WL guys) that IUL is not very compatible with IBC. I honestly don't know if that is true or not.

People who do not understand UL/IUL say that.

It is actually more conducive to IBC than WL is because of it's ability to use GPT testing.

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Who is the ideal prospect for IUL? Young, middle age, old?

Any really. You can short pay it and set it up as a 10 pay for a 55 year old.
Or if you have a 35 year old you can do the opposite.

Either way, with the premium flexibility, you have no problems designing the policy to fit the exact situation.

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What level of risk would you say this product carries, when explaining to a client? Low, med? Certainly I wouldn't think high.

It is a Fixed Product. So saying it has a high risk tolerance is completely incorrect.


Assuming an overfunded policy. Most high quality IULs will have historical lookbacks of 5% around 100% of the time, or close to it.

Most all will have 4% credited rate, 100% of the time.

And any decent overfunded IUL at 3%-4% will last for life. And those rates have historical occurrences of 100% of the time over 10 year periods. (I think all the way down to 5 year periods, but dont quote me on that)


So on the risk scale, it sits just slightly above WL & UL. But it sits WAY below a VUL or any securities product.

 

[pfg1]

sc....thank you for the response. I appreciate it.


Can you elaborate a little more on this.... with my limited knowledge at this point, I'm not following. Sorry....

People who do not understand UL/IUL say that.

It is actually more conducive to IBC than WL is because of it's ability to use GPT testing.

 

[scagnt83]

I'm thinking of offering both as I move my business forward, just trying to get a little more comfortable with this product. I've been searching alot here and online, learning a good bit...but figured I'd pick some of your brains, as I know alot of you are very experienced.

North American/Midland probably have the best IUL at the moment.
After that there is LFG, Penn Mutual, & Allianz.

LSW isnt a bad product. But there is nothing about it that makes it better than the other options listed. And if you look at the income produced NA/Midland will beat LSW last time I checked. Plus all of the ones listed above have a much higher Comdex Rating than LSW. So considering that this a a long term product, I always opt for the higher rating, especially when it is paired with the stronger product.

jmo

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sc....thank you for the response. I appreciate it.


Can you elaborate a little more on this.... with my limited knowledge at this point, I'm not following. Sorry....

There are 2 types of "testing" that occur inside of a permanent life insurance policy.
The "test" is basically the test to make sure it qualifies as a life insurance policy.

This is the "DEFRA" test.
It is separate from the MEC test.

All permanent policies use 1 of the 2 types of DEFRA tests allowed.

The DEFRA test actually adjusts the values of the policy automatically.

How the values are adjusted depends on the type of test used. (obviously the point is to limit the ability to overfund the policy, they just do it in different ways)


WL always uses CVAT - Cash Value Accumulation Test

This tests the amount of CV against the amount of DB. If the ratio becomes too close, the DB increases.

Being a WL guy Im sure you have seen this on many illustrations. As the CV increases, so does the DB.


But UL gives you a choice. You can choose CVAT, BUT, it also give you the option of GPT.

GPT stands for GUIDELINE PREMIUM TEST.

This test looks at the amount of CV accumulation, vs. the amount of Premium paid into the policy THAT YEAR.

If the ratio is too close, then it actually limits the premium.

(if you run a ul illustration using gpt/level db, and dial down the DB too much, the illustration will start to reduce the premium in some years)


Also, the UL lets you choose between an increasing DB (opt 2), and a Level DB (opt 2). You can actually change from 2 to 1 at any point in the policy with most companies.


The DB option is important because combining the Increasing DB, with the GPT testing. Then switching to a Level DB once premiums cease.
Is the most efficient way possible to fund/design a permanent life policy.

While you pay premiums, the increasing DB makes sure that you dont have too much gains going to the CV, so Premium is not limited.

But once Premiums stop, you switch to a Level DB. Since at that point there is no mechanism in the policy to force the DB to increase, the majority of the gains are free to go into the CV.
The only reason the DB will increase after that is to avoid Endowment (the CV surpassing the DB). So eventually the DB will raise some to avoid Endowment.


So compare that to a WL, where the DB is being forced increase year after year.
A much larger % of the gains are going to the DB in the WL. So obviously that hinders the CV growth compared to an UL.


Simply put, the GPT testing allows more of the gains to go to the CV. Thus creating a larger amount of money to utilize for IBC. Also, a larger % of gains going to the CV, helps to support the loans.


Then there is the Loan aspect.
IULs have extremely favorable Loan provisions compared to most WL policies.
The cost of borrowing the money is usually much less with IUL.

You also have a much greater chance of positive arbitrage on the Loan using an IUL.

 

[pfg1]

Great info SC, thank you.

Sounds like you are a big fan of IUL's. Do you do much with WL?



Anyone else care to chime in?

I'm open to hearing any and all info - pro's / con's of IUL's. Trying to learn as much as I can.

 

[scagnt83]

Great info SC, thank you.

Sounds like you are a big fan of IUL's. Do you do much with WL?

.

Im a big fan of both. Especially 10/20 pay policies. I started the business with NYL so I was originally brainwashed to think that Indexed Products are the devil.

But once you really understand the product you can see that it fits the needs of many people who want what WL does. But at the same time it does not take WLs place. Some clients want the absolute most guarantees possible, which obviously WL wins out on.

But many clients, especially ones looking to supplement retirement income, are ok with the idea of a few 0% years mixed in (or 1% with IULs like LFG), especially if it means no losses, and capturing gains up to 13%.

On the other hand, if economists are correct and interest rates rise over the next decade, and that causes the market to stagnate, then the rising rates could push the WL ahead on a RoR basis.
But obviously that scenario, along with the 6.9% indexing scenario, are not guaranteed, and who the hell knows if which will happen.

For cases large enough, I often like a mix of both IUL & WL.
Penn has a great WL. It has actually has an IUL feature, called the "overloan protection rider".
If the Loans cause the policy to implode, the policy automatically reduces to a paid up $15k policy. This ensures that you have no adverse tax consequences.

That is another reason that IUL works better than WL for IBC. Anytime you are planning to take income the overloan rider is an extremely good feature to have.

 

[pfg1]

Thanks again SC, good info. All this helps me understand a little bit better, I appreciate it.

 

[scagnt83]

Thanks again SC, good info. All this helps me understand a little bit better, I appreciate it.

No problem
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[pfg1]

Another question for you guys.... when a client dumps a premium in, say an annual premium - is that $ all allocated into one crediting date? Where as a monthly premium would give them 12 different dates?

Thanks

 

[scagnt83]

Another question for you guys.... when a client dumps a premium in, say an annual premium - is that $ all allocated into one crediting date? Where as a monthly premium would give them 12 different dates?

Thanks

It depends on the product.

Generally speaking, yes, if you pay annually it will allocate to just 1 crediting date.

But, some products offer a DCA account that will hold the premium and allocate it out over the year to have 12 (usually) different crediting periods.

But, some products only allocate to the indexed accounts Quarterly (LFG is one).
So with them the most you can ever have in 1 contract year are 4.