Illustrating Stochastic Returns in IUL.

[Cash]

Nice copy and paste. If you truly do this homework you should be working at a company.

Ha. Already tried that. Jackson National, Protective, Sammons, plus the Western Southern group all said no. Columbus Life and Lafayette Life were the most disappointing because they made it sound as if I had a job somewhere in the company. I was looking for apartments in Cincinnati and everything.

Doing the research isn't a big deal though especially if it gets a good discussion going and helps people out on here. It's been a slow week anyways with Christmas. Plus that whole wanting to do the best for the client thing...

 

[BNTRS]

The deterministic illustration — what we now have — showed a 100% chance that a $5,417 premium would keep the policy in force for life, assuming an 8% constant interest rate. A stochastic illustration using historical S&P 500 returns (8.45% long-term average, without dividends) with a 0% floor and 13% cap showed that this same premium would keep the policy in force until maturity only 20% of the time. With a 10% cap, failure was almost certain.

They based failure off the guaranteed column, which is a tad misleading in terms of how things have actually played out.

Furthermore, if you wanted to rely on a deterministic illustration to estimate the premium that would have only a 10% chance of failure, you would have to reduce the constant interest rate to 5.2% to 6.3%, depending on the assumed cap. So it would take a downward adjustment of 1.7% to 2.8% to get a premium that might be viewed as acceptably risky by the buyer.

If you really think that the default interest rates used by carriers is an acceptable rate off which to build assumptions, you're a moron. The industry (the companies) themselves have expressed concern over making assumptions based on those default rates alone.

A lot of the "research" that Dick Weber does is "sponsored" by Guardian Life, FYI.

Deterministic illustrations are so unreliable for making policy purchase and maintenance decisions that it should be a no-brainer to ban their use and require stochastic illustrations.

Meaning we should also dump the same system that whole life companies use? Since, afterall, the dividend assumption is constant in an illustration.

Stochastic modeling for an illustration doesn't do anyone any favors. It was very incorrectly identified already in this thread, and I'd challenge anyone trying to advocate for it here to actually define it.

While I certainly appreciate academic rigor, if you can't explain the difference between the products on your own with the tools that are already available to you, then you need to take some serious self reflection time.

 

[Cash]

They based failure off the guaranteed column, which is a tad misleading in terms of how things have actually played out.



If you really think that the default interest rates used by carriers is an acceptable rate off which to build assumptions, you're a moron. The industry (the companies) themselves have expressed concern over making assumptions based on those default rates alone.

A lot of the "research" that Dick Weber does is "sponsored" by Guardian Life, FYI.



Meaning we should also dump the same system that whole life companies use? Since, afterall, the dividend assumption is constant in an illustration.

Stochastic modeling for an illustration doesn't do anyone any favors. It was very incorrectly identified already in this thread, and I'd challenge anyone trying to advocate for it here to actually define it.

While I certainly appreciate academic rigor, if you can't explain the difference between the products on your own with the tools that are already available to you, then you need to take some serious self reflection time.

Did you find the full article? I only found an abstract. An 8.45% interest rate doesn't sound like a guaranteed colum to me.

The point is that the sequence of returns matter so using a historical average is setting up the client for disappointment. All I am trying to do is get a good number, no harm there. If the companies themselves are so concerned about it then it shouldn't be a big deal for me to be a little concerned as well.

I'm not sure why anyone should define 'stochastic' for you, I am sure you know how to use Google. I realize you make part of your living bashing agents on your blog but your bs self righteousness doesn't fool anyone here.

 

[BNTRS]

Did you find the full article? I only found an abstract. An 8.45% interest rate doesn't sound like a guaranteed colum to me.

The point is that the sequence of returns matter so using a historical average is setting up the client for disappointment. All I am trying to do is get a good number, no harm there. If the companies themselves are so concerned about it then it shouldn't be a big deal for me to be a little concerned as well.

I'm not sure why anyone should define 'stochastic' for you, I am sure you know how to use Google. I realize you make part of your living bashing agents on your blog but your bs self righteousness doesn't fool anyone here.

It's not self righteousness to point out a significantly flawed application of a mathematical tool. How about instead of name calling in the face of criticism, you actually come up with coherent arguments to defend a position?

And no I don't make a living bashing insurance agents. I make a living selling insurance policies--99% of which are either whole life or universal life insurance to some pretty sophisticated people who on average are giving me middle five figure outlays. This isn't theory for me like it is for a lot of people--and the stakes are often higher for me than they are for the average agent who is trying to talk someone into $100 a month into a whole life or universal life policy.

Further I'll note the numerous articles I've written in defense of insurance agents. In fact, today's article does this very thing. Not to mention the very public arguments I've gotten into with other commentators in defense of insurance and insurance agents.

But back to my original criticism. There has already been a lot of work done around indexed universal life insurance and what an appropriate crediting rate is, and this has been done with stochastic modeling. We even did our own version and came to the same conclusions most everyone else who has taken the time to crunch numbers has come to.

My position is simple. We don't need stochastic illustrations because they don't give us any better insight nor do they depict the nature of the product in any meaningful way that better ensures understanding.

I've challenged anyone here who wants to take the opposing position to argue against that with some degree of reasonable evidence to the contrary, and simply saying that it's doing right by the client falls dangerously close to a circular logic that isn't helping the position.

 

[Cash]

It's not self righteousness to point out a significantly flawed application of a mathematical tool. How about instead of name calling in the face of criticism, you actually come up with coherent arguments to defend a position?

And no I don't make a living bashing insurance agents. I make a living selling insurance policies--99% of which are either whole life or universal life insurance to some pretty sophisticated people who on average are giving me middle five figure outlays. This isn't theory for me like it is for a lot of people--and the stakes are often higher for me than they are for the average agent who is trying to talk someone into $100 a month into a whole life or universal life policy.

Further I'll note the numerous articles I've written in defense of insurance agents. In fact, today's article does this very thing. Not to mention the very public arguments I've gotten into with other commentators in defense of insurance and insurance agents.

But back to my original criticism. There has already been a lot of work done around indexed universal life insurance and what an appropriate crediting rate is, and this has been done with stochastic modeling. We even did our own version and came to the same conclusions most everyone else who has taken the time to crunch numbers has come to.

My position is simple. We don't need stochastic illustrations because they don't give us any better insight nor do they depict the nature of the product in any meaningful way that better ensures understanding.

I've challenged anyone here who wants to take the opposing position to argue against that with some degree of reasonable evidence to the contrary, and simply saying that it's doing right by the client falls dangerously close to a circular logic that isn't helping the position.

I didn't call you a name

The reason I would like to see, not the client, a stochastic illustration is to understand what is a good rate to illustrate as to not sell a benefit that will likely never come to pass. Why? Because the geometric mean is always equal to or less than the arithmetic mean. So how far do I need to adjust the rate down given by insurance companies in the illustration software to it's deterministic returns will be more closely aligned with the variable returns seen in the real world. As you said yourself in this very thread

"If you really think that the default interest rates used by carriers is an acceptable rate off which to build assumptions, you're a moron." (there you go with that name calling)

I am not arguing for their use industry wide or with clients, rather, you are arguing against them. I am trying to do some due diligence and in that attempt I believe they are useful. Why? Because sequence of returns matter. And as I said above, the geometric mean cannot outperform and is highly unlikely to match the arithmetic mean. And the timing of the initial investment or the timing of the initial draw of the income matters when calculating the difference of the two returns. Is it the only piece to the puzzle? No and no one said it was.

We were having a friendly discussion that went beyond "who has the best term life for Montana" threads that usually pop up and you went demeaning people. Self reflection? Please.....

You sir took the time to do it yourself, as you stated in your last post, so who needs the self reflection?