EIUL Expenses and returns on Cash value

[js44]

S&P index will be around 30 years from now even if FAANG like stocks go out of business. They will be replaced by other big businesses and will be added to S&P Index. There is an be an upward bias built into it. Plus, There will definitely be dividends. If one is looking for investment, this seems to lot safer, except for fear of market crashes. That's where these life insurance products come into play with a promise of floors and tax free withdrawals.
But these products seem so complicated. I just want to know how much are the expenses taken out every year. Can they increase those expenses by any amount or is there a cap?
Then, how can we combat these expenses? How much premium should we deposit in them so that yearly return on them(however much, maybe 8%) will not only offset these expenses but also provide for my retirement?
Next, can we reduce that 8% by how much and still accomplish my goal. It all comes down to this. Can anyone address this please with a real example of expenses and how much overfunding will cover that with annual returns?

 

[DHK]

I just want to know how much are the expenses taken out every year. Can they increase those expenses by any amount or is there a cap?

Expenses are based on the given dividend and your increasing age.

Life insurance companies are not in the habit of arbitrarily increasing costs of insurance "just because" they can. They will usually do so through a class of people or underwriting classification and send out a notice that way. Such rate increases *should* be required to be filed by each state's DOI.

Just remember this: the good risks... may leave and get coverage elsewhere. The bad risks stay because they HAVE to - to keep their coverage. This creates adverse selection and it's generally a precarious situation to be in as an insurance company.

Then, how can we combat these expenses?

The easiest way, is to adjust the death benefit.

How much premium should we deposit in them so that yearly return on them(however much, maybe 8%) will not only offset these expenses but also provide for my retirement?

I would consider a borrowing strategy and focus on the VOLUME of interest, rather than the rate.
For example: If you have a $500,000 cash value in an IUL and you want to supplement your income with tax-free loans, I'd suggest dividing the $500k by 20 for $25,000 per year.
- Loan interest for $25,000 for the 1st year loan may be at 5% (just a guess). 5% of $25,000 = $1,250 loan cost against your entire earning potential of $500,000 - any insurance costs.
- The next year - take another $25,000 loan for a total of $50,000 + $2,500 of total loan costs against your new IUL cash values offset by insurance costs.

Next, can we reduce that 8% by how much and still accomplish my goal. It all comes down to this. Can anyone address this please with a real example of expenses and how much overfunding will cover that with annual returns?

Don't think in terms of rate. Think about volume and rates charged against certain values.
- Indexed Interest crediting based on cash values (of course, it's not guaranteed).
- Life insurance expenses based on a given age & death benefit.
- Loan interest based on loan values each year.

Managing those three will help you have a quality IUL program to use for retirement income planning.

 

[scagnt83]

Expenses are based on the given dividend and your increasing age.

This is only half correct. (the age part) Dividends play no part in IUL.

- Expenses are set from the start in the contract. But there is a range.

- The Expenses they charge are dictated by interest rates and carrier performance.

 

[scagnt83]

The easiest way, is to adjust the death benefit.

Only if the policy is past the Surrender Period.
If you lower the DB during the Surrender Period, you will incur Surrender Charges.

Also, you have to be careful not to violate GPT when decreasing the DB. And MEC too if it's within 7 years of the last Premium payment.

Generally speaking, I dont recommend DB decreases unless its an old policy.

 

[js44]

- The Expenses they charge are dictated by interest rates and carrier performance.

Interest rates raise, S&P becomes more volatile and CALL options become more expensive -- Cap rates decreased?

 

[js44]

Seems to me instead of fearing the market crashes, I will be dreading the expense increases and cap rate reductions Trading one fear with another.

 

[scagnt83]

Seems to me instead of fearing the market crashes, I will be dreading the expense increases and cap rate reductions Trading one fear with another.

There are trade-offs with every financial product.

One reason I use the early cash value type of policies, is if things go south, you can get your money back.

But just like the market, you have to look at a Carrier's history with Expenses and Caps.

So far, I have zero policies that have had significant changes to either. Caps do fluctuate. But even with decreasing rates over the years (bad for the carrier) Im still very satisfied with Cap levels on my book of business.

 

[scagnt83]

Interest rates raise, S&P becomes more volatile and CALL options become more expensive -- Cap rates decreased?

Its not the price of Calls that have the main effect on Caps. Its the amount of Premium needed to go into Bonds to cover Guarantees.

The higher rates are, the less % of Premium is required to go to Bonds. So more is able to go to Call Options.

In the scenario you described, the extra Premium going to purchase Calls, would likely offset the increase in price.

Interest Rates increasing are a good thing for life insurance. No matter what the market does.

 

[pfg1]

My gut is that as bond portfolios mature, most companies will see a decrease in caps heading forward. We've already seen some of the big players do this, with more likely to come. How much, how often? Who knows. We've also seen some companies raise cost of insurance - though I think this is less likely to happen.