IUL, and Future Withdrawals

sftong

New Member
16
Hello helpers,

I was recently introduced into a newer product EIUL (Equity Indexed Universal Life) of Pacific Life. I think the upside is 11% and protection at no loss when SPX (S&P 500) lost.

Looking at the cost structure illustration, I understand that there are (i) Admin + Rider cost (ii) Agent Commission (labelled as Premium Loads) (iii) Coverage Charge and (iv) Term Ins. The most expensive in the earlier years was this Coverage Charge, at total $22K in 10 years. Term Ins would eventually be a lot more expensive when I start to forget changing my diapers. :err:

Anyway, here is my situation. I am 39, and in excellent health (plus category), and I have about USD$120K to invest. I asked for $500K Initial Death Benefits, and I can fully front-load that total $120K premium with Over-Funding in 3.5 years which is the minimal duration allowed by law. The reason I am looking at EIUL is to diversify from my current risky investment portfolio. As you know, $100K in bank is still $100K if I die in 10 years. Additionally, I would never touch the money in at least next 10 years, possibly much longer.

Here are what I want to achieve:
1) Some growth of the $120K without downside risk. This case is validated by EIUL downside protection.

2) Critically important, is I would definitely withdraw money from this policy more than 10 years later, for whatever reason. For kids education, or retirement slow-yearly-withdrawal.

3) I definitely do not want the policy to lapse and end up with big tax liability! So if I borrow it, I would pay back. But I am more looking at it as a withdrawal for retirement fund, as point 2 above.

I need your help in clarifying the following doubts. These products seems WONDERFUL, but as I learned growing up, there is NO FREE LUNCH.

1) I understand that these "non-guarantee" returns and protections, is NON-Guaranteed. Mainly, the Caps (growth cap and downside cap), and the Term Ins cost at old ages (e.g. illustration show $3100 cost at age 70). Given your decades of experiences across many companies, what criteria should I use to evaluate the chances of Insurance Companies willy-nilly changing these terms conditions?

Rating Strength? Word of Mouth? The later is difficult to gauge due to conflict-interest.

A helpful sample point here would be, what was the 10-years ago Term-Life cost for an old guy age 70, versus what is the cost now.

Or among those EIUL plans since 10 years ago, how many have changed their caps and cost to the detriment of the insured?

2) I understand that the withdrawal would incur some cost to the cash value of the plan, and I must not withdraw more than $100K in total or else I would start to pay some income tax. I also understand that withdrawal would reduce my cash value and hence affect the credit interest (SPX growth) of next year, while my account has to pay for the annual Term Ins. No worry, I can look at the yearly cash flow and cost and decide the withdrawal amount.

But I would like to know, asides from the notes above, what typical cost am I looking at when I make Withdrawal? Believe me, the agent could not give me the cost break-down after 2 weeks. This is why I am here.

3) Given Negative Interest Rates, and god forbid if SPX record 5 years of straight loss once I buy in, would the company come haunting me to pay higher premiums after 5 years, even if I already paid it full with over-funding at total $120K premiums in 3.5 years? Which part of the plan or specific terms would mention this?

Thanks Much!
Aaron
 
What state are you in if I may ask?

First, the premium load is not the agent's commission. You are thinking about mutual funds. Do not worry too much about the COI charges, that's not how you compare two IUL's.

Second, you do not want to hit your MEC-limit in 3.5 years, that's defeating the benefits of the IUL because of the way the product is designed. You are leaving precious money on the table if you do that.

Third, most companies have some sort of "break in" period. When you try to hit your MEC in the first 3.5 years, you lose value on the premiums you DO pay.

Your premiums are guaranteed in your contract to never exceed a certain amount. That's what the "guaranteed" column is for.
 
What state are you in if I may ask?

Second, you do not want to hit your MEC-limit in 3.5 years,

Third, most companies have some sort of "break in" period. When you try to hit your MEC in the first 3.5 years, you lose value on the premiums you DO pay.

Thanks! I am in Ohio.

I could not Thank you enough for bringing up the MEC issue. I am surprised the agent told me I can put all premium into the policy in 3.5 years without mentioning the big issue with MEC. So in this case, I would better follow the recommended plan of 10 years annual premium contribution.

Can you expand a little on that "break in" period? I google online and could not find anything related to it specifically on life insurance.

I am guessing there have been limited cases of Insurance companies breaking the Caps (growth and no-loss guarantee) in the past that we should not be concern with these assumptions or Non-Guarantees?

Thanks again
Aaron

======================
Initial Premium Limits:
Seven Pay Premium: 17,421
Guideline Single Premium: 77,501
Guideline Level Premium: 15,571
 
Before buying an IUL, the client needs to know all the pros and cons... and more importantly how the policy works. If designed and funded properly, and the design fits the clients wants, needs, and financial situation... it can be a great thing.

What it sounds like you are saying is... you hope that by funding the $ into the policy as fast as you can (non mec) ... that the policy will last the rest of your entire life without making a premium payment - even though a premium payment will be due. You will be in mid 40's... so lets say you live to life expectancy you have close to 40yrs that the policy will have to pay for itself without imploding.

Not saying it won't, but my gut feeling is it won't be as rosy as the agent is showing you. Last thing you need is the letter from the company when you are in your 70's saying your premium is going up or your policy will lapse. Again, not saying what you are planning is bad at all.. just do your homework.
 
Not saying it won't, but my gut feeling is it won't be as rosy as the agent is showing you. Last thing you need is the letter from the company when you are in your 70's saying your premium is going up or your policy will lapse. Again, not saying what you are planning is bad at all.. just do your homework.

Good IUL policies should have some kind of overloan protection rider so you wouldn't have to worry about lapses. You usually have to have your policy inforce for a certain period of time and be of a certain age, but that'll help guard against phantom income taxes because of a lapsed (or rather collapsed) insurance policy.
 
The lump sum you mentioned ($120k) and the details you provided about the policy proposal in your second post guarantee that you will not be able to place all $120,000 into the policy within the timeline you mentioned (3.5 years).

That's okay, though, since taking a lump sum and placing it all in within the time period you are mentioning it most likely counterproductive to cash accumulation. That is to say, you would be buying into way too much death benefit to allow an annual premium sufficient enough to place all of the money into the contract within that sort of time period. Ideally, you would want to spread it for a few more years.

As far as historical cap rates go, several insurers (if not all) have reduced cap rates in the last five to eight years. These reductions have been rather modest. There is a mix in terms of how this takes shape. Some insurers reduce affecting all policyholders while other insurers reduce affecting only new policyholders (i.e. old policyholder continue to enjoy higher caps, but this might come with a higher expense contract so it's not necessarily better).

It's extremely unlikely that any insurer will make sweeping changes to a contract that would necessitate more premiums after 3-ish years. There's been some media buzz over a few insurers who increases insurance expenses on a tiny fraction of older universal life insurance contracts mostly on old insureds. These increases affected mostly policies a decade or two in force, and most products that were not intended for cash accumulation focused purchases.

The planned implementation you mention suggests that you likely haven't had an opportunity (because to date no one has taken the time to explain to you) to fully understand policy functionality.

To be clear, you are on the right track and this product absolutely works in the capacity that you have mentioned, but by the sounds of it you're advice received to date has been somewhat weak.


What it sounds like you are saying is... you hope that by funding the $ into the policy as fast as you can (non mec) ... that the policy will last the rest of your entire life without making a premium payment - even though a premium payment will be due. You will be in mid 40's... so lets say you live to life expectancy you have close to 40yrs that the policy will have to pay for itself without imploding.

Not saying it won't, but my gut feeling is it won't be as rosy as the agent is showing you. Last thing you need is the letter from the company when you are in your 70's saying your premium is going up or your policy will lapse. Again, not saying what you are planning is bad at all.. just do your homework.

I want to correct a technical misstatement here for clarity's sake and future assistance to whomever may stumble across this. The bolded part is where I take issue. For most universal life insurance contract (excluding Guaranteed Universal Life Insurance) premiums are not due. Instead expenses are deducted from the policy. The policy remains in force provided there is cash value after the deductions take place. "Premiums" paid merely provide additional cash value from which expenses are deducted. This is a subtle, but very important aspect to universal life insurance.


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In the OP's case, what he wants to do can be done and done quite successfully. But it has to be done correctly, and that (done correctly) is where those who have chimed in are sounding caution.
 
I want to correct a technical misstatement here for clarity's sake and future assistance to whomever may stumble across this. The bolded part is where I take issue. For most universal life insurance contract (excluding Guaranteed Universal Life Insurance) premiums are not due. Instead expenses are deducted from the policy. The policy remains in force provided there is cash value after the deductions take place. "Premiums" paid merely provide additional cash value from which expenses are deducted. This is a subtle, but very important aspect to universal life insurance.

Yes, you are right...thanks for pointing that out. I guess my wordsmithing could be better. :yes:
 
Thanks! I am in Ohio.

Can you expand a little on that "break in" period? I google online and could not find anything related to it specifically on life insurance.

======================
Initial Premium Limits:
Seven Pay Premium: 17,421
Guideline Single Premium: 77,501
Guideline Level Premium: 15,571

Ohio, I have friends there.

What I mean by "break-in" period. Typically in the first 10 or so years of the policy there is an additional charge for all premiums paid in excess of a certain amount. By contributing so much, you could be losing an extra 2-3% of all the extra money you put into the policy. Whereas if you wait, you keep that amount.

Your agent doesn't seem to know what he's doing. Do you need another one lol?

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"Premiums" paid merely provide additional cash value from which expenses are deducted. This is a subtle, but very important aspect to universal life insurance.

I see what you mean, but it's still not technically correct. As a licensed profession we are bound by the rules the state has set forth. Go call your insurance commissioner and ask him if he's ok with you telling people there are no premiums due on a universal life contract.

Sounds like something an MLM person would say.
 
I see what you mean, but it's still not technically correct. As a licensed profession we are bound by the rules the state has set forth. Go call your insurance commissioner and ask him if he's ok with you telling people there are no premiums due on a universal life contract.

Sounds like something an MLM person would say.

You are correct, as a profession we are bound by the rules of the state... and we should not tell consumers incorrect info or terminology.

With that being said, you are wrong and should stop giving advice when it comes to ULs. As someone once told me in my first year in the business... you need to talk less and listen more.


UL is technically called Flexible Premium Universal Life. Meaning that Premiums are flexible and not required on a yearly basis.

The only thing required of a UL is that the CV exceeds the yearly expenses.

UL does have a "Minimum Premium". But this is just the amount required on a yearly basis to cover the expenses for the life of the policy, assuming the Current Interest Rate (maximum index crediting rate for IUL).

All you are "required" to pay with UL is the Minimum Premium... which is the same as saying you are only required to pay the expenses. You could pay all of the required minimum in year 1, or you could pay it off every other year, or every 5 years, or every 10 years etc. But as long as there is enough Cash within the policy to pay expenses then no premiums are required.

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What I mean by "break-in" period. Typically in the first 10 or so years of the policy there is an additional charge for all premiums paid in excess of a certain amount. By contributing so much, you could be losing an extra 2-3% of all the extra money you put into the policy. Whereas if you wait, you keep that amount.

Wrong again.

The Premium Load is charged to ALL Premiums during that time period. You are correct that most IULs asses the Premium Load for around 10 or so years. (at least I have never seen an IUL that only asses the premium load to just part of the premium)

So even if you pay the absolute Minimum Premium as dictated by the illustration system (again that is simply the amount needed to cover expenses), there is a Premium Load assessed.


There is no "loss" if you contribute all the way up to the MEC Limit during years that the Premium Load is assessed.


As BNTRS correctly pointed out, the reason he should not contribute so much so soon, is that it will require a much higher DB, which will increase expenses and eat up potential earnings.

7 years to 10 years is optimal for a short pay IUL.

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Your agent doesn't seem to know what he's doing. Do you need another one lol?

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Neither do you.



Sounds like something an MLM person would say.

And you know that with your vast experience? What he said was exactly correct.


You are as green as a blade of grass when it comes to UL. I would refrain from making snide comments about peoples knowledge base when it comes to subjects you know little about. BNTRS is one of the most knowledgeable agents in the nation when it comes to the inner workings of Permanent Life Insurance. He it literally an expert in the subject, second to maybe only myself :D

(last half of that was a joke B ... kinda... lol :1tongue:)
 
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UL is technically called Flexible Premium Universal Life. Meaning that PREMIUMS are flexible and not required on a yearly basis.

You see what you did there?

With that being said, you are wrong

He is wrong. While a UL will stay in force as long as the surrender value is not less than 0, that does not mean there are no premiums due.

You could pay all of the required minimum in year 1, or you could pay it off every other year, or every 5 years, or every 10 years etc.

You can pay all the required minimum for the entire no lapse period and keep the policy in force, but only so long as that. You could even MEC it and do max single premium in the first year and still lapse the policy.


The Premium Load is charged to ALL Premiums during that time period. You are correct that most IULs asses the Premium Load for around 10 or so years.

Read to lead! I said typically there is an additional charge for all premiums paid over a certain amount. I never said there was no charge to begin with. Additional


There is no "loss" if you contribute all the way up to the MEC Limit during years that the Premium Load is assessed.
First as you said he will increase the death benefit in the early years. This will increase his COI which will eat away at his gains, in addition to the excess premium load charges from contributing so much.

Contributing up to MEC leaves you with policy years that see no premiums paid in, and lower premiums paid in when premiums do resume to prevent new MEC status. MEC is based on a rolling 7 year period, but you know that. Many times, only the first 4 years are paid and the last 3 see no payments. Account values often drop or remain stagnant during this period. In later years past age 56, if this occurs the lack of fresh funds can really eat away at the policy on the guaranteed side and reduced interest credits will cause the policy to lapse earlier.

I would refrain from making snide comments about peoples knowledge base

I agree. you and BTFNS are two of the most knowledgeable people on this site about UL's. That doesn't prevent you from making "salesy" statements like referring to required payments into the policy as "premiums". As if they don't exist. It sounds nice, but it's just not legally nor technically valid. Even minimally funded, these payments will generate nominal accumulation for at least a period of time. They are premiums.
 
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