How IUL's use options

[DHK]

Why is the premium on a 10pay 2x - 3x higher than a full pay policy??

Time value of money.

Since the value of a limited-payment whole life contract at the date of issue is precisely the same as that of a contract purchased on the ordinary life basis, and since it is presumed that there will be fewer premium payments under the limited-payment policy, it follows that each premium must be larger than the comparable premium under an ordinary life contract. Moreover, the fewer the guaranteed premiums specified or the shorter the premium-paying period, the higher each premium will be. However, the higher premiums are offset by greater cash and other surrender values. Thus the limited-payment policy will provide a larger fund for use in an emergency and will accumulate a larger fund for retirement purposes than will an ordinary life contract issued at the same age. On the other hand, if death takes place within the first several years after issue of the contract, the total premiums paid under the limited-payment policy will exceed those payable under an ordinary life policy. The comparatively long-lived policyowner, however, will pay considerably less in premiums under the limited-payment plan than on the ordinary life basis.

scagnt83, when I think about assets and liabilities, I think of two sets of books:
- The client view
- The company view

For the client: the limited pay policy is paid up once contractually paid up. It is the client's asset.

For the company: the limited pay policy is paid up once contractually paid up. It is the company's future liability to ensure that contract is paid to beneficiaries.

There is always the net amount at risk between the cash values and the net death benefit. That net amount at risk still has a cost. That debit... still needs to be credited from somewhere, even if it isn't explicitly disclosed.

Whose cost is it?

It's not the client's cost... because it's contractually paid up. There are no more charges to assess the client regarding the net amount at risk.

It's the company's cost... because they have the liability to ensure the contract remains profitable and in-force (not including anything the policyholder may do - such as too many loans, surrender the policy for cash, etc.).

How does the company make up for that cost? Investment performance, dividend performance, mortality experience... all contribute to continuing that asset's growth.

Just because it's not a "hard fee" or an itemized fee, doesn't mean it doesn't have a cost that needs to be managed.


Just my mindset. I'm sure we're agreeing using different terms.

 

[scagnt83]

Time value of money.

Exactly. That works both ways though. Insurer adds more to bottom line. Client adds more interest each year which shortens premium duration.

But why does there need to be a higher amount initially?

Because it takes a larger amount of money to create enough value in that short amount of time to cover a lifetime of internal policy expenses.

 

[scagnt83]

For the client: the limited pay policy is paid up once contractually paid up. It is the client's asset.
.....
Whose cost is it?

It's not the client's cost... because it's contractually paid up. There are no more charges to assess the client regarding the net amount at risk.

Its an asset they own... which still has internal fees associated with it... regardless of if they are covered by the guaranteed interest rate or not.

It is owned by the client. It is the clients responsibility to ensure enough premium is paid to cover those future expenses.

And as you mentioned, the client is responsible for not taking out too much in withdrawals or loans... which could cause those internal expenses to lapse the policy.... because expenses dont stop just because premiums do.

 

[scagnt83]

It's the company's cost... because they have the liability to ensure the contract remains profitable and in-force (not including anything the policyholder may do - such as too many loans, surrender the policy for cash, etc.).

How does the company make up for that cost? Investment performance, dividend performance, mortality experience... all contribute to continuing that asset's growth.

No. Its the clients cost. It is charged to an asset the client owns.

So they are legally liable to ensure that cost is covered.

The Guaranteed Interest Rate is the carriers cost that they are legally responsible for.

If the policy is never touched, and all premiums are paid, then it will provide the Client with enough earned interest to cover expenses charged to the asset they own.

If the policy CV is utilized by the client, then it is possible for those future expenses to cause a lapse or loss of value to the policy they own.

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It might seem like splitting hairs. But it is a very distinct legal & technical difference.

Especially going back to your original line about "IUL Fees paying the Dividends on WL policies".

Especially if an agent tells a client "those fees in the policy you own go away after year 10".

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I dont doubt the CEO of a major mutual said that line about IUL fees. Its a pure sales pitch to push WL based on factually incorrect and misleading info.

 

[DHK]

It is owned by the client. It is the clients responsibility to ensure enough premium is paid to cover those future expenses.

Um... since the client doesn't set the premium for a limited pay whole life policy... other than paying the required premiums per the contract... how is it the client's responsibility?

 

[DHK]

It might seem like splitting hairs. But it is a very distinct legal & technical difference.

Especially going back to your original line about "IUL Fees paying the Dividends on WL policies".

Especially if an agent tells a client "those fees in the policy you own go away after year 10".

You and I are VERY good about splitting hairs.

However, unless there's something I'm missing... how can a limited pay WL policy, with premiums set by the company, have ongoing fees to the client after it is contractually paid up?

If you can show me a client invoice or billing - not talking about loans or interest charges for loans - but a 10-pay (or similar) WL policy, contractually paid up, and somehow... it has ongoing fees... I'd like to see it.

 

[Allen Trent]

You and I are VERY good about splitting hairs.

However, unless there's something I'm missing... how can a limited pay WL policy, with premiums set by the company, have ongoing fees to the client after it is contractually paid up?

If you can show me a client invoice or billing - not talking about loans or interest charges for loans - but a 10-pay (or similar) WL policy, contractually paid up, and somehow... it has ongoing fees... I'd like to see it.

not sure if the following makes sense to this discussion or not, but it made sense at the time I thought about both of your points in relation to similar items such as SPWL or PUAR and/or substandard or table rated cases. (I keep reading your points & both agreeing & disagreeing with them----------------------lol)

IE--Some of these unseen costs embedded in the contract or illustration on WL products are pre-paid for items such as SPWL or PUAR. Also, if 2 people age 65 buy a SPWL policy (or 10 pay) with total payments of $100k, wouldnt they perform the same if there were no embedded costs to the client even if 1 of them was a female super preferred & the other was a male tobacco Table F? Any variance in initial cash values or performance over time would indicate that the pricing for each product varies due to the internal costs & assumptions priced into the product by the carrier.

While you guys are splitting hairs, I am talking in circles........LOL

 

[DHK]

Also, if 2 people age 65 buy a SPWL policy (or 10 pay) with total payments of $100k, wouldnt they perform the same if there were no embedded costs to the client even if 1 of them was a female super preferred & the other was a male tobacco Table F?

Yes, they would. For equal dollar amounts in the contract, and health being the differentiator, the biggest difference will be the cost of insurance OR the amount of death benefit purchased.

Female super preferred may get $200,000 for that $10,000 a year for 10 years... while the Table F might get $125,000. (I didn't run anything - purely off the top of my head.)

However, assuming that the underwriting is really calculating expected life expectancy... the Table F policy would be the "You pay more, we pay quicker" plan.

IE--Some of these unseen costs embedded in the contract or illustration on WL products are pre-paid for items such as SPWL or PUAR

Yes, the initial premiums while they show $0 cash values, they are used to post a reserve and help pay current mortality claims for the year. After the first 2-3 years (depending, of course), then it will grow from there for cash values to be accessible by the policyholder. (So handy to have just taken that HS 323 course! lol.)

 

[Allen Trent]

have just taken that HS 323 course! lol.)

for sure, I complete it back in 1999, so I am missing some of the recall of the details

 

[scagnt83]

Um... since the client doesn't set the premium for a limited pay whole life policy... other than paying the required premiums per the contract... how is it the client's responsibility?

Um.... to pay the premium required.... to take the risk required by paying that premium.

The premium is the clients risk and responsibility. Not the carriers.