I’m not in favor of IULs.

[REI_Velocity]

It is an actual fact that the internal COI per thousand of insurance will indeed increase annually as we age, even in the best case projected columns & could actually be higher if carrier raises the COI charts as shown in guaranteed worst case columns. UL-IUL-VUL internal COI is definitely not level term based on issue age, it is annually renewable term of attained age. However, even though the cost per 1,000 of net amount at risk will for sure go up, it is possible to have the client be charged less real deductions for those costs if you are replacing the level insurance amount with cash value growth from deposits & from interest credited.

I have seen some old ULs max funded that credit 4.5% & are net of 4.4% on people 90 years old because there is literally no insurance left in the policy, the cash has grown so high that the only insurance left is the tiny amount required by IRS as corridor of insurance.

Interesting. When you say "literally no insurance left" for the 90 yr old, do you mean there is no renewable term needed to be paid, or that the death benefit is gone and their cash value will be all that is left (except for the minimum requirements you mentioned)?

 

[DHK]

I've done a lot of comparisons to the 2022 7702 updates versus pre-22. You're right, you can essentially pack more cash in the policies now, but it's not really a benefit unless you have a ton of cash to put in.

For example, if a basic underwriting limit for an average income earner is $2,500,000, for pre 2022 policies less premium would buy more death benefit which would mean you'd hit the 2.5mm faster. Now in 2022 you can pack a decent amount more to get the same 2.5mm. So if the game is cash value (which I like), it could be attractive if someone has the funds to "pack more in." However, if someone is on a smaller budget and putting 5 or 10k a year into it then they are getting less DB for their dollar as they won't be anywhere close to that 2.5mm initial limit. Assuming this stays the same for future years, as they make more money and get more policies it could be in their favor since the ins company will consider all of the current insurance they have.

Hope that makes sense.

No, you don't make sense and that's not how you'd want to be creating a life insurance strategy.

A money purchase type of a plan meant to maximum fund a policy... the death benefit is immaterial.

If you are buying a policy purely for death benefit (protection), don't buy a 10-pay. You want a 'pay to 100' or however much you can afford to keep the payment affordable for as long as you can to have the policy do its job.

If you want to pass on assets to the next generation (legacy), then buy as short of a pay policy as you can to get the job done that you want.

If you want to fund a contract that can fund your retirement through non-reportable and non-taxable loans, the death benefit is irrelevant - other than the fact that the policy will have one.

For the people I'm working with, I rarely go past the $1m DB because I'm packing in a ton of premium to a policy for the purpose other than death benefits.

I'm working with a 68 year old for a $33,000 annual premium that will fund a $400,000 DB. It's not about the DB. It's about what the contract will DO for them.

For max funded policies, the amount of DB is irrelevant other than the fact that they will have a death benefit.

 

[DHK]

And you can't really compare dividends to 30 yrs ago. Just before that was the inflation fiasco in the 80's where dividends went waaayyyy up slowing tracking inflation. So of course they went down from there, but that wasn't isolated to WL companies... it's a market thing. In fact, I'd be surprised if we don't see dividends slowly going up with all the fed hikes in 2022.

Btw, IUL caps, spreads, and participation rates have declined over time for the exact same reason. It's all a function of the general investment account of the insurer.

 

[DHK]

Interesting. When you say "literally no insurance left" for the 90 yr old, do you mean there is no renewable term needed to be paid, or that the death benefit is gone and their cash value will be all that is left (except for the minimum requirements you mentioned)?

Net amount at risk for the corridor test.

 

[DHK]

How will all the "floor" rates kicking in on IULs change things? I know the answer, but it's not a good thing and any illustrated returns get crushed. Imagine if it happens for a couple years in a row, or more. I'd love to see some in-force illustrations with today's stock market environment baked in.

Are you talking about a guaranteed minimum amount of interest to be credited after a period of time?

I've seen policies that, if the policy didn't perform at least 3% over say 8 years... the insurance company would credit the policy that 3% that would've been over 8 years had it performed at 3% over those 8 years.

Where does that 3% come from? The general investment account. It's the amount of earnings they would've had if they had just been in the fixed interest allocation in the policy (generally).

Now, I don't sell IUL, but I understand it well enough.

Btw, how well does your current policy do in the event that loans end up exceeding the cash values in retirement? Does your policy have an overloan protection rider to help prevent against a phantom income tax in the year the policy implodes on itself?

Almost all IUL policies do. I haven't seen one that doesn't have one on some level, but there may be one or two that don't.

I only know of two WL companies that do: Penn Mutual and One America.

And these two WL companies do these overloan protection riders for a strategic illustrated benefit to maximize policy cash flow, not just for avoiding the potential phantom income tax.

Granted, the policy has to meet certain conditions: number of years in force and the insured reach a given minimum age, but it's there.

 

[Allen Trent]

Interesting. When you say "literally no insurance left" for the 90 yr old, do you mean there is no renewable term needed to be paid, or that the death benefit is gone and their cash value will be all that is left (except for the minimum requirements you mentioned)?

Designed Properly with a Level Death benefit, the Cash Value replaces the insurance to make it grow more. IE: If I buy a $100k level policy, in year 1 the insurance will lose 100k if I die (net amount at risk). But if I plow max premiums allowed by law into it for 15 years & it makes interest (fixed or index depending on product) & I now have $80k CV when I am 60, the insurance company will only lose $20k if I die that year because they have the $80k of CV on deposit. So, the internal charges of the policy are only based on $20k net amount at risk. Goal of designing many of these is to plow as much cash as possible to it grows faster & has less drag from internal costs. If you instead have the policy as increasing death benefit (perfectly ok to do in some cases), then you will always be charged for the full amount of net amount at risk as the carrier will have to pay a death claim of the entire base face amount plus the cash value. This, design will always have an escalating deduction for insurance charges because you are aging & being charged annually renewable increasing term costs & not making the net amount at risk any lower.

Think of a UL as borrowing a lump sum death benefit from the carrier today just like you would borrow from a bank to buy a house. The faster I pay into a policy or the faster make payments on a house loan, the faster I own all the equity in it & the less I will pay in total for borrowing the money for a death benefit or a house. But, if I take out all the cash out of my policy or I refi to pull all my equity out of my house, long term I will incur more costs from the day I purchased until the day I sell/kick the bucket

 

[REI_Velocity]

No, you don't make sense and that's not how you'd want to be creating a life insurance strategy.

A money purchase type of a plan meant to maximum fund a policy... the death benefit is immaterial.

If you are buying a policy purely for death benefit (protection), don't buy a 10-pay. You want a 'pay to 100' or however much you can afford to keep the payment affordable for as long as you can to have the policy do its job.

If you want to pass on assets to the next generation (legacy), then buy as short of a pay policy as you can to get the job done that you want.

If you want to fund a contract that can fund your retirement through non-reportable and non-taxable loans, the death benefit is irrelevant - other than the fact that the policy will have one.

For the people I'm working with, I rarely go past the $1m DB because I'm packing in a ton of premium to a policy for the purpose other than death benefits.

I'm working with a 68 year old for a $33,000 annual premium that will fund a $400,000 DB. It's not about the DB. It's about what the contract will DO for them.

For max funded policies, the amount of DB is irrelevant other than the fact that they will have a death benefit.

Yeah, you didn't understand what I was saying. We're talking about the 7702 rules and how it effected policies. I don't make them for DB either, but you have to know the impact of what the rule did.

I work with some high net worth people and their finances are confirmed by the insurance company based on UW amounts. Hence I have to know the rules, but I go for max cash value. I'm in the world of investing, real estate, businesses, and such (I'm one of them) and we want cash value. The DB is a side benefit. It is what it is and I want it to be the least amount possible.

 

[REI_Velocity]

Are you talking about a guaranteed minimum amount of interest to be credited after a period of time?

... ... ... ...

Btw, how well does your current policy do in the event that loans end up exceeding the cash values in retirement? Does your policy have an overloan protection rider to help prevent against a phantom income tax in the year the policy implodes on itself?

Almost all IUL policies do. I haven't seen one that doesn't have one on some level, but there may be one or two that don't.

I only know of two WL companies that do: Penn Mutual and One America.

And these two WL companies do these overloan protection riders for a strategic illustrated benefit to maximize policy cash flow, not just for avoiding the potential phantom income tax.

Granted, the policy has to meet certain conditions: number of years in force and the insured reach a given minimum age, but it's there.

Yes, I love Penn by the way. I haven't seen any other company beat them in the way I set up a policy. And yes, they have the overloan protection rider.

As for the first part, the floor that is advertised by agents. It goes something like this, "you get the lions share of the gains but if the market goes negative you'll still make 0, 1, etc %" I know the particulars on the illustrations are often different than what some agents say to get the sale (not good!), but still... I end up talking to a lot of these clients who have been talked into bad policies.

 

[Allen Trent]

As for the first part, the floor that is advertised by agents. It goes something like this, "you get the lions share of the gains but if the market goes negative you'll still make 0, 1, etc %" I know the particulars on the illustrations are often different than what some agents say to get the sale (not good!), but still... I end up talking to a lot of these clients who have been talked into bad policies.

The annual floor of what can be the lowest credited index change usually is 0%. However, most policy contracts & illustrations state that if the lifetime of the contract from date of purchase until date of surrender/death claim produced lower than 2% annual crediting, 2% is the lowest annualized rate that would be used even though in any given year it could have been credited a 0%.

PS-- while the overloan protection is a great idea to always have on a policy, it is not a sure thing. The IRS has never ruled on it, so there is no guarantee that a person whose "overloan protection" merely kept a policy from lapsing & kicking out a massive taxable gain notice will actually function that way. Some carriers policies & illustrations state this is not a sure-fire guaranteed protection of the phantom huge tax notice. Tax question - VUL "Overloan Lapse Protection Rider" - Bogleheads.org

 

[DHK]

Yeah, you didn't understand what I was saying. We're talking about the 7702 rules and how it effected policies. I don't make them for DB either, but you have to know the impact of what the rule did.

I work with some high net worth people and their finances are confirmed by the insurance company based on UW amounts. Hence I have to know the rules, but I go for max cash value. I'm in the world of investing, real estate, businesses, and such (I'm one of them) and we want cash value. The DB is a side benefit. It is what it is and I want it to be the least amount possible.

Oh *I* understood what you were saying. You were being abstract about it (funding a 10-pay $2.5 million policy and finding the money for that premium) while I brought it back to how it really works (find the money for the objective and fund the lowest DB amount regardless of what it is).

The impact of the rule made base-WL protection-based policies more expensive because the reserve rate is less... while max CV policies are more efficient by lowering the DB required to avoid the policy being a MEC. It's not hard to figure out.

The insurance company doesn't do the verification themselves. They require verification from a CPA and/or tax records, and/or other trusted authorities in order to do the financials.