Confused about the Guaranteed rate on WL

[leo]

I got into the business in 2020 mainly selling term, and GUL and some but par WL My upline who I was under would tell us the Guaranteed rate was 4% until they changed it in 2020. They would always run the illustrations. I would always tell people the same thing 4% until they changed it..

Friday I was on a webinar and we were going over Lafayette Life and they said my new upline said Lafayette Life doesn't have a guarantee rate it depends on the illustration and the non-forfeiture rate is between 2%-3.5%. They told me no one has a gaurenteed rate. The way he explained it, made no sense to me. I called other carriers and they said they do have a guaranteed rate.

What is a non-forfeiture rate couldn't find it I understand non-forfeiture options but never heard rate. What are you supposed to tell the client what rate the guaranteed cv is based on?

 

[Allen Trent]

I got into the business in 2020 mainly selling term, and GUL and some but par WL My upline who I was under would tell us the Guaranteed rate was 4% until they changed it in 2020. They would always run the illustrations. I would always tell people the same thing 4% until they changed it..

Friday I was on a webinar and we were going over Lafayette Life and they said my new upline said Lafayette Life doesn't have a guarantee rate it depends on the illustration and the non-forfeiture rate is between 2%-3.5%. They told me no one has a gaurenteed rate. The way he explained it, made no sense to me. I called other carriers and they said they do have a guaranteed rate.

What is a non-forfeiture rate couldn't find it I understand non-forfeiture options but never heard rate. What are you supposed to tell the client what rate the guaranteed cv is based on?

definitely not 4% guaranteed. Whole life is near impossible to blindly state a given rate for the guaranteed or projected cash value as they dont grow in a linear fashion like that. Most have little to no interest or dividends in the early years because of the front loaded costs of issuing policies like underwriting, commissions, etc. Early years are negative.

The guaranteed columns of a WL (cash value & death benefit ) are the worst case a participating policy can perform.

If you want to see the cash value growth rate of your specific illustration (varies by product, age, risk class, face amount size, etc, etc):

1. Pick a year--what is the cash value in that given year on guarantee column
2. subtract the premium being paid
3.Divide by the cash value of the year Prior

IE: If year 10 cash value is $10,000 & premium paid $2,000 = $8,000 divided by $7843 =2%

Basically, $7843 prior year at 2% equals $8000 plus the $2,000 premium made the cash value 1 year later get to $10,000

Also, you can look at the policy contract & it should have a section that states how the policy contract was developed based on which CSO mortality table & interest rate..............but keep in mind, a stated interest rate for how a carrier deterimined the needed premium annually to guarantee that the cash value grows to endow to equal death benefit at age 100 or 120 (or 85 for older contracts) doesnt mean the clients cash value is growing by that stated rate. It means that when the carrier had to price their product with a stated life expectancy, a stated expense ratio, a stated expected rate of return on carrier investments, that these rates developed why a client age X has to pay Y each year to have the cash value grow to equal the face at maturity as required by law.

Example-- this relative of mine that has a 1972 WL policy had me look at their policy last week. here is their section saying the policy was created based on 1958 mortality table at the time & based on a 3.5% interest rate.



Here is a simple run illustration to illustrate my point that a rate cant be stated. Easiest when I show a Single Premium WL so you dont have to adjust for the annual premium.

On guaranteed columns It loses 10% in year 1 due to cost/commissions, but it has to get rolling so that eventually the CV equals the face at age 100 (or 120 in other cases)

year 5-6 it makes 3.34%
year 20-21 it makes 3.07%
year 40-41 it makes 2.47%

 

[scagnt83]

The guaranteed interest rate for WL is 4%.

That does not mean it receives a 4% dividend or that the CV earns 4%.

It is an internal calculation to calculate the guaranteed values.

 

[DHK]

Whole life has a guaranteed rate based on the age of policy maturity (these days, age 121).

From there, a present value calculation including costs of insurance is done based on the policy structure chosen and underwriting risk classification.

Don't take the premiums and work forward.

Take the death benefit and work backward from there.

Now, it's not going to be 4% due to the new 7702 laws allowing a lower amount passed at the end of 2021.

[EXTERNAL LINK] - A Small Tax Change Is a Boon for Permanent Life Insurance

 

[scagnt83]

Now, it's not going to be 4% due to the new 7702 laws allowing a lower amount passed at the end of 2021.

[EXTERNAL LINK] - A Small Tax Change Is a Boon for Permanent Life Insurance

Forgot about that. Its 2% now, right?

 

[DHK]

Forgot about that. Its 2% now, right?

Yes, 2% is the absolute minimum required by law, but most companies are around the 3% mark for guaranteed amounts. Of course, this would be disclosed on the illustration (or should be) as well as the policy itself.

 

[Lloyds of Lubbock]

The 2% rate is a rate of computation not accumulation.
If I remember correctly the guaranteed cash value is the present value of future death benefit minus the present value of future premiums accumulated a 2% with an adjustment for expenses.
There is a table of GCV in every whole life policy that shows the value per $1000 of face amount.
All whole life policies have a guaranteed rate. If your upline said different.....find a new one he needs to know what he doesn't know.
A long time ago I was told by a very wise man: "If you are going to live by the numbers, you are going to die by the numbers".
You will never tie that guaranteed rate into an illustration and the dividend crediting rate also cannot be tied the numbers in an illustration.

 

[DHK]

doesn't have a guarantee rate it depends on the illustration and the non-forfeiture rate is between 2%-3.5%.

Just to bring clarity to where there is confusion... I think he's confusing the guaranteed rates in a whole life contract with the fact that once a dividend is declared and credited, it cannot be forfeited. Hence, his incorrect use of the term 'non-forfeiture rate', but I think that's where he's coming from.

 

[SamIam]

I believe I was on the same webinar last week that Leo was on, and I heard the same thing that was being said. I think the speaker misspoke in a way, saying there is no Guaranteed rate you just can't figure it out from the start because of the dividend if credited

When it was 4% when you figured out the IRR it wasn't 4% Just like Allen Trent mentioned above, it was less, so the same would be true today with it being at 2%.

I brought this up last week on the Facebook group Don K who I think works for, said Lafayette Life the same thing from David is saying by working backward, and it actually makes sense.

 

[SamIam]

Yes, 2% is the absolute minimum required by law, but most companies are around the 3% mark for guaranteed amounts. Of course, this would be disclosed on the illustration (or should be) as well as the policy itself.

But is that 2% a gross rate or would it be a net rate?

I really don't sell off of illustrations, I show them the illustration I just make sure they understand the concept.