Confused about the Guaranteed rate on WL

[DHK]

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

Net Present Value Reserve Rate based on the death benefit at maturity.

 

[Allen Trent]

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.

neither---it really has nonthing to do with the illustrated "rate". It is solely a rate the carrier used in their pricing assumption to determine how much they need to charge as a premium to make sure the cash value grows to equal the face amount at age 100/120 (after pricing in the admin/expenses.

So, a policy using 4% in a pricing assumption wont need nearly as much premium to make a $100k face policy build cash value to $100k at age 120 compared to policy using 2% in the same pricing design.. However, that product with a 2% assumption will build cash value at a much, much faster rate because the annual premiums will be so much higher.

in short, you cant state any rate of "interest" to a WL client & stating the rate the carrier used to price the product is really not an honest depiction of the policy.

Many carriers have a IRR supplemental page that shows the internal rate of return calculation for both the cash value & the death benefit based on total premiums paid & how long it has been in force

 

[PrivClientSG]

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?

Welcome, and thanks for posting. First, just to get some clarity -- the 4% rate you are referring to is not "a guaranteed rate of 4%. It is 4% -- NOT including mortality and expenses. Some like to call it 4% "gross" but I don't like using that term. If your upline is telling you 4% is the guaranteed rate, until they changed it in 2020 -- while I wasn't part of the conversation, I will tell you that means 4% NOT including mortality and expenses -- and then it was contractually changed in 2020. The guaranteed rate is stated in the contract -- and it will also state what comes out of that 4% (mortality and expenses). You can run an illustration and look at the guaranteed ledger or side of the illustration, and you will clearly see it is not anywhere near 4%.

Now, while I am familiar with Lafayette Life, I have not looked at their new specimen policy, contract language, etc. I have also not run illustrations recently. However, they still do have a "guaranteed" schedule of cash value accumulation, which leads me to believe there is at least a starting point of a guaranteed rate, with mortality and expenses being factored in, and then you arrive at a guaranteed schedule of cash value accumulation. If it's not a contractual obligation, there has to be something that is contractual. If they don't have at least a starting point guaranteed rate, then look at the guaranteed schedule. I won't speak to the non-forfeiture rate as that is outside the scope of this discussion. It is however, absolutely not true that "no one has a guaranteed rate." That is why when you called other carriers, they said they do have a guaranteed rate.

As far as what to tell the client regarding the guaranteed rate -- if that's the direction you want to go in, and you want to have that conversation -- I would tell them the guaranteed rate, not including mortality and expenses. However, this is a slippery slope. You are now looking at a whole life insurance policy is a very, very narrow and myopic fashion. If you are going to have that discussion you need to be familiar with what's taken out of the 4% and what's not -- or as some people like to call it, gross (expenses) vs. net (expenses) -- as there are different factors with different companies, and some companies have changed what they take out. Do you discuss the dividends and how they work? Again, that's an entirely different, but related discussion. Think about it this way -- do you want to talk about how the product is constructed, or do you want to talk about what the product can do for the client?

One additional item to point out with whole life is that you do have guaranteed cash value. Period. Any crediting, performance, cash value, etc., above that guaranteed portion -- once it is credited to the policy, to keep it simple -- it can't disappear or go down (assuming premiums are being paid). It's now guaranteed vis a vis surrender, non-forfeiture options, etc. You can also use that cash value as collateral for a cash value line of credit with a bank or take out a policy loan. Before interest rates spiked up, I had a line of credit against the cash value of my whole life policies and the rate was 2.5% -- and being it's a non-recourse loan -- it does not appear on my credit report! I was also able to borrow up to 95% of the cash value on that line of credit. I also had a line against a UL policy I have, but that wasn't as favorable. That said, Lafayette is a non-direct recognition company. Know the difference between non-direct and direct recognition. When you take out a policy loan, Lafayette continues to credit both interest and dividends to the "total" cash value (as if there was no policy loan). Run an illustration with a loan (two ways -- paying annual loan interest and repaying the loan principal after 10 years, and then not paying the annual loan interest, but paying back the principal and loan interest as a lump sum at the end of 10 years). Then run an illustration without a loan. Compare the three. This should be for your own education. Know your craft. Become an expert. All the best!

 

[Lloyds of Lubbock]

" I really don't sell off of illustrations, I show them the illustration I just make sure they understand the concept."
If you understand the concept the numbers don't mater.
If you don't understand the concept.....the numbers don't matter.
Gross or Net.....I guess you could call it gross but being it is not rate of return number.
I would say it is neither.
When a whole life policy is developed it starts with a single premium.
Then that premium is smoothed out.
Is it a full pay a limited pay?
I will use Guardian as an example.
They have an L95 and a L99
The same face amounts will have the exact same cash values at age 121.
The l95 does have a slightly higher premium
In year 2 the l95 has a guaranteed cash value that is approximately an annual premium.
Th l99 has zero.
They both have the same guaranteed interest rate.
The cash value is accounted for in the policy design, not the interest rate.
So after year 2 if a client cancels they get back an annual premium, an l99 will be a total loss.
This does not happen often but it is a risk to Guardian.
The way they protect themselves is that the expense portion of the dividend in the l95 is higher than the l99 and Guardian recoups the money from early cancellations..
So if you need liquidity early on, an l95 will work for you but you are sacrificing long term performance to get that liquidity.
I hope that made sense....it's late here

 

[Lloyds of Lubbock]

The above poster made some nice points:
"Know the difference between non-direct and direct recognition. When you take out a policy loan, Lafayette continues to credit both interest and dividends to the "total" cash value (as if there was no policy loan)".
He should have added that with a direct recognition company: loans effect dividends.
Based on current interest rates dividends are greater on loaned values than non loaned values.
If rates continue to go up, that could reverse.
Non direct and direct recognition are things for you to know.
I would be extremely hesitant to talk about this with a client.
You should educate your client to be able to tell time.....not build a watch.

 

[PrivClientSG]

The above poster made some nice points:
"Know the difference between non-direct and direct recognition. When you take out a policy loan, Lafayette continues to credit both interest and dividends to the "total" cash value (as if there was no policy loan)".
He should have added that with a direct recognition company: loans effect dividends.
Based on current interest rates dividends are greater on loaned values than non loaned values.
If rates continue to go up, that could reverse.
Non direct and direct recognition are things for you to know.
I would be extremely hesitant to talk about this with a client.
You should educate your client to be able to tell time.....not build a watch.

Hear hear! I've taken the liberty of bolding and underlining part of your post, and about that I say... Absolutely! I couldn't agree more! All the best!