Exit Strategy for EIULs

[js44]

That policy is on "life support" now

Sorry about dad's policy. If I ever have one of these, I will have excel sheets tracking everything, every month like my other investments.

 

[wing chun]

Some posts are making a good case for the Fiduciary standard to be applied to insurance agents. It is clear some agents do not understand what they are selling.

You can pay interest on any loan on any policy! Current IUL has a variable rate of 4% or so and a fixed option of also 4%. If you take the fixed option the company charges your cash value 4% and credits your cash value 4% the interest you owe compounds but your loaned cash compounds at the same rate therefore no need to pay the high loan interest of a WL policy to keep the policy alive. The goal if you are using the policy to grow cash and take out maximum income in later years is not to pay extra loan interest to the insurance company to keep the policy alive. The goal is to put maximum cash into the policy owners pocket.

If a variable loan is elected currently you would also pay 4% however if you are using a S&P uncapped index your potential gain is unlimited ,minus the spread. Since September 2015 every IUL a client has elected to purchase,about 700 give or take, in every monthly segment has returned over 14% some segments have been over 18%. That means that the loaned amounts earned a net 10% without the client ever having to pay interest to the insurance company.
If you have over loan protection you can strip out all the cash value of a policy and the policy will never lapse. No taxable event ever. If the loaned value is earning positive arbitrage you can strip all the cash value in a max loan and your policy can still earn positive cash for the next year..

 

[DHK]

If you have over loan protection you can strip out all the cash value of a policy and the policy will never lapse. No taxable event ever.

As long as the policy has been inforce for a certain minimum amount of time and the insured has reached a minimum age. American National's over loan protection kicks in year 16 and age 75 or over.

It's designed to ensure that, should the policy fail to be a retirement income source, that the insured won't suffer phantom income in that year for all the loaned values.

 

[DHK]

If you take the fixed option the company charges your cash value 4% and credits your cash value 4% the interest you owe compounds but your loaned cash compounds at the same rate therefore no need to pay the high loan interest of a WL policy to keep the policy alive.

Let's put some numbers on this.

$100,000 cash values earning 4% = $4,000.

Using your same 4%:
$100,000 loan against policy paying 4% = -$4,000.

$4,000 policy earnings - $4,000 loan cost = $0 gain (assuming a non-direct recognition contract and/or variable loan so the original cash values will grow uninterrupted).

$4,000 policy earnings - $4,000 loan cost + $4,000 paid out of pocket = $4,000 earnings restored to the policy.

Now, if the loan option chosen requires that the policy "recognizes" the outstanding loan in crediting indexed interest or dividends, it skews the whole thing.

$0 not earning interest x 0% interest = $0 earnings (worst case, but as you said, the amount should be placed in a fixed interest bearing option @ whatever rate it pays. I doubt it would meet the same cost as the loan.)

$100,000 loan x 4% loan cost = -$4,000 loan cost.

Now, obviously, if the policy performs GREATER than the loan cost, that's a beautiful thing, but part of our job as agents is to manage client expectations. I'd rather be conservative in that way. You know - under-promise and over-deliver?

I would recommend that you take a look at National Underwriter's Tools and Techniques of Life Insurance Planning to truly understand how life insurance loans work. There's a whole chapter on that alone.

Life Insurance Planning Tools & Techniques | NationalUnderwriter

 

[wing chun]

Ok now your just being obtuse.

If your goal is to generate maximum income then paying $4000 in interest to the insurance company is reducing your income by $4000. the only purpose of which is to prevent a whole life policy from lapsing and triggering a taxable event.

Only 3 reasons to pay loan interest to an insurance company rather than letting interest accrue . Your accountant feels you can tax deduct the interest under the interest on loans used for investment rules. You wish to maintain a specific death benefit amount or you have to prevent your policy lapsing in the future

And next time pick a good IUL policy.

 

[DHK]

You were the one talking about a fiduciary standard for insurance agents, and you're advocating NOT paying back loans, let alone at least paying the loan interest??

Just who exactly is acting in the best interests of the client AND being conservative in their descriptions of how these products work?

 

[Justin Bilyj]

Last time I checked, Mass' interest rate on their whole life is 6% - for loans. They do have a variable option...

 

[js44]

Just who exactly is acting in the best interests of the client AND being conservative in their descriptions of how these products work?

Please don't forget I am not your usual kind of client. I welcome this level of sophistication to the discussion.

As an investor, I pay a downpayment to acquire a piece of real estate. I get back my down payment as soon as possible by improving the property and refinancing and still control it. I get to write off the depreciation every year and I also get some positive cashflow every year tax free. After 30 years it's paid off, usually, I sell it for a profit in 7 to 10 years and 1031 exchange it in a new deal. I can't do this way in stock market investing but if there is a way with this EIUL, I would like to learn.

 

[wing chun]

DHK you just don't get it do you. You need to stop being married to a sales concept and look at what a client is trying to accomplish. If a client wants maximum potential cash ,growth and maximum retirement income. Then you do not repay loan or interest on loan. If I take a $100,000 loan and then pay $ 4000 in interest My spendable income is $96,000. If I repay the loan then my income is -$4000. . The point of using a life policy for cash growth is not to get death benefit. Proper policy design is lowest possible death benefit at all times and take as much out of the policy. Good over loan protection means that the policy will never lapse no matter how much loan interest has accrued and how large the cumulative loans are. The death benefit serves as collateral for the loan and the loan is paid off at death by the death benefit. Positive loan arbitrage means I have the potential to have cash values grow even if I have a max loan on the policy.
If you are correct then why am I able to consistently get clients 100% premium refunds for whole life policies that were purchased for Be Your Own banker and college planning sales concepts. Every Whole Life company I have dealt with has complied with only 2 letters written by me to the company..

 

[wing chun]

JS44 if you want to use a life policy the way The largest public companies and Banks do then you want a IUL with high caps, and lets you change loan interest options fixed to variable on a monthly basis. Surrender charge waiver if you want high early cash value. No surrender charge waiver if you want better long term performance. The waiver of surrender was designed for public companies that did not want to take a charge to earnings in the early years when purchasing Life insurance to fund their executive deferred compensation plans.

Also several new IUL's have just hit and are hitting the market I would wait another month or two until these new policies have been explored by independent experts.