Indexed Universal Life

[DHK]

It works fine with IUL... and sometimes BETTER with IUL.

Most IULs offer variable loans that don't reduce the amount to be credited by a particular segment, so it's just like a "non-direct recognition" WL... except it's IUL. "Wash loan" or not... the key is to keep the original capital working and growing.

The key with either WL or IUL... is that it takes a relationship with an AGENT who understands and is committed to regular policy and financial reviews with the client. Without that, it WILL fall apart.

 

[CFP83]

First, I would suggest a full-fact find.

Amen! Not a statement I hear around here enough.

How many times a year do we hear the statement from a friend or prospect
" I've got $____, what do you think I should do with it?"

I love to respond by saying, in a light-hearted manner of course, "well I'm not bookie, I'm a planner.....so if you really want some good and meaningful feedback lets take an hour or so to figure out what you need.

 

[meclimit]

It works fine with IUL... and sometimes BETTER with IUL.

Most IULs offer variable loans that don't reduce the amount to be credited by a particular segment, so it's just like a "non-direct recognition" WL... except it's IUL. "Wash loan" or not... the key is to keep the original capital working and growing.

This "feature" of IUL causes a big problem.

With WL non-direct recognition, the interest rate charged on the loan (linked to the Moody's corporate bond yield average) correlates with the dividend crediting rate on the policy (insurers invest almost exclusively in long-term corporate bonds). So it usually is a wash.

With IUL, it is quite possible that the loan rate will equal 8+% if the economy starts going in the future. But the loan collateral (in the index) doesn't correlate well with this. So its entirely possible to get 0% return on the loan collateral (not factoring in COIs/expense charges), and have to pay 8% loan interest. If someone is trying to take a stream of "income" from the policy this is a big problem. If the loan interest is not paid, then several years of 0% return on the loan collateral and a 8% loan rate can put the policy itself in jeopardy. If the client understands this risk -- to get the potential positive loan spread -- that's fine.

But this is a big risk for a supposedly riskless product, particularly if you showed a positive loan spread (4% interest on loans, 8% returns on the loan collateral) on the product illustration. Try having a conversation with a client that they now have to pay more into their policy to keep it from imploding when they thought they were going to get a retirement income from the product.

 

[DHK]

This "feature" of IUL causes a big problem.

With WL non-direct recognition, the interest rate charged on the loan (linked to the Moody's corporate bond yield average) correlates with the dividend crediting rate on the policy (insurers invest almost exclusively in long-term corporate bonds). So it usually is a wash.

Agreed.

With IUL, it is quite possible that the loan rate will equal 8+% if the economy starts going in the future. But the loan collateral (in the index) doesn't correlate well with this. So its entirely possible to get 0% return on the loan collateral (not factoring in COIs/expense charges), and have to pay 8% loan interest.

Yes... that can be a problem... if you're limited to only one method or segment of interest crediting for the entire policy. Most agents may sell a 1-year point to point... because it's the easiest to explain. I don't do that.

However, I take a tactical and a strategic approach. Remember that IUL and FIA are all about capturing the upward VOLATILITY of a given index (subject to cap, PR, etc.). How often you are able to capture that volatility will help in reducing the risk of a 0% return year over year.

I prefer a 1-year point to point AND a monthly averaging option. One will always "beat out" the other... but the monthly will capture the monthly upswings, which happen even in down years during that same year.

If someone is trying to take a stream of "income" from the policy this is a big problem. If the loan interest is not paid, then several years of 0% return on the loan collateral and a 8% loan rate can put the policy itself in jeopardy. If the client understands this risk -- to get the potential positive loan spread -- that's fine.

First, you saw how I negate the risk of a 0% return year. Second, it takes an AGENT who understands and commits to continuous reviews of the strategy with the client. No agent commitment, no reviews = big problems. I don't care if it's WL or IUL. It will fail.

But this is a big risk for a supposedly riskless product, particularly if you showed a positive loan spread (4% interest on loans, 8% returns on the loan collateral) on the product illustration. Try having a conversation with a client that they now have to pay more into their policy to keep it from imploding when they thought they were going to get a retirement income from the product.

Every policy, every financial decision has an element of risk in it. No where did I say I illustrated 8% rates on an IUL. In fact, I feel most comfortable showing 6%... especially since current cap rates are around 12% with 100% PR.

Those "conversations with a client" should be a well-documented, regular annual occurrence if the agent is keeping in contact with the client as they should be.

 

[BNTRS]

This "feature" of IUL causes a big problem.

With WL non-direct recognition, the interest rate charged on the loan (linked to the Moody's corporate bond yield average) correlates with the dividend crediting rate on the policy (insurers invest almost exclusively in long-term corporate bonds). So it usually is a wash.

With IUL, it is quite possible that the loan rate will equal 8+% if the economy starts going in the future. But the loan collateral (in the index) doesn't correlate well with this. So its entirely possible to get 0% return on the loan collateral (not factoring in COIs/expense charges), and have to pay 8% loan interest. If someone is trying to take a stream of "income" from the policy this is a big problem. If the loan interest is not paid, then several years of 0% return on the loan collateral and a 8% loan rate can put the policy itself in jeopardy. If the client understands this risk -- to get the potential positive loan spread -- that's fine.

But this is a big risk for a supposedly riskless product, particularly if you showed a positive loan spread (4% interest on loans, 8% returns on the loan collateral) on the product illustration. Try having a conversation with a client that they now have to pay more into their policy to keep it from imploding when they thought they were going to get a retirement income from the product.

This is all easily mitigated if you start out with proper assumptions. We illustrated this point about a year and a half ago when we discussed using life insurance for retirement income on the insurance pro blog.

The actual performance, from market returns performed better than our assumptions, and our income began with the first of three major negative years at the beginning of the last decade. So the loan spread was negative 58% of the time and the actual results still came out better than our original assumed illustration, which was an assumed 6% credited interest rate.

The trick to all of this is knowing what you are doing.

 

[scagnt83]

Infinite Banking is not so good with IUL -- particularly if the loan collateral is kept in the index accounts and there is no wash loan feature. Policy lapses much more likely to happen if the loan interest can't be paid.

That is completely not true.

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This "feature" of IUL causes a big problem.

With WL non-direct recognition, the interest rate charged on the loan (linked to the Moody's corporate bond yield average) correlates with the dividend crediting rate on the policy (insurers invest almost exclusively in long-term corporate bonds). So it usually is a wash.

Again not true. To assume that it will equal out is a HUGE assumption. Especially considering that Carriers invest their money mainly in US Treasuries... not Corporate Bonds.

They do buy Corporate Bonds, but not nearly as much as they do the 10yUST. This is insurance law.

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With IUL, it is quite possible that the loan rate will equal 8+% if the economy starts going in the future. But the loan collateral (in the index) doesn't correlate well with this. So its entirely possible to get 0% return on the loan collateral (not factoring in COIs/expense charges), and have to pay 8% loan interest.

It all depends on the product. There are IULs that use a fixed loan rate, even for NDR Loans.

And there have been extremely few times in history that the market was negative over 3 years in a row.

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If someone is trying to take a stream of "income" from the policy this is a big problem. If the loan interest is not paid, then several years of 0% return on the loan collateral and a 8% loan rate can put the policy itself in jeopardy.

Another untrue statement assuming we are talking about a fully overfunded policy.

If you want proof run an illustration.

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But this is a big risk for a supposedly riskless product, particularly if you showed a positive loan spread (4% interest on loans, 8% returns on the loan collateral) .

If you are running an IUL at 8% then you are using unrealistic assumptions.


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If someone is trying to take a stream of "income" from the policy this is a big problem.

You should educate yourself on GPT vs. CVAT testing within a life insurance policy.

Then you will realize why an IUL at the exact same crediting rate as a WL, will produce a much larger income stream.



You sound like me 7 years ago. All the knowledge I had was what mother mutual promised was the "truth".... but once you fully educate yourself on the real facts you realize that they kept blinders on you.

You have made multiple misstatements about IUL.
Even an incorrect statement about carrier reserve requirements.... Which is ok, but it shows that you have some work ahead of you to be fully educated on these products.

Try browsing through some WL/UL threads on here. If you can sift through the bs, there is some very valuable info.

 

[findsm]

This is all easily mitigated if you start out with proper assumptions. We illustrated this point about a year and a half ago when we discussed using on the insurance pro blog.

The actual performance, from market returns performed better than our assumptions, and our income began with the first of three major negative years at the beginning of the last decade. So the loan spread was negative 58% of the time and the actual results still came out better than our original assumed illustration, which was an assumed 6% credited interest rate.

The trick to all of this is knowing what you are doing.

I want to say thanks for the link! I'm definitely wanting to soak up information on this matter. Im currently researching plans, options and etc so I can always show my clients the right direction.