- 10,806
Lol. I knew what you meant though!
4% extra income... which is 100% free... which equals a 100% return on the contributions you already put in... so in a way you could even say its double 100%.... lol, jk.
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IUL Opinion?
- Thread starter GF888
- Start date
Lol. I knew what you meant though!
4% extra income... which is 100% free... which equals a 100% return on the contributions you already put in... so in a way you could even say its double 100%.... lol, jk.
- Thread starter
- #12
Ok will retry if it doesn't work this time I'll send to someone to post
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Ok we here's the numbers on the illustration. It's a midland iul.
S&P 500 Index
Annual point to point
100% participation
Cap 12 or 13. It doesn't say on the illustration but that's what I was told.
Variable rate loan 6%
Male, preferred non tobacco
Assumes $400 monthly contribution, level for the next 32 years, up until age 65.
It's shows 3 return assumptions:
3% (minimum guarantee)
5.6%
7.6% yrs 1-10, then 8.35% thereafter
For the minimum guarantee, I was told that if it performs less than 3% after an 8 year period, then 3% would be back-credited for those years, in essence a minimum guarantee.
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Here's what I don't get:
Assuming the 7.6% return in yrs 1-10 then 8.35% thereafter with a $400 monthly contribution, that's roughly 144k in premiums over the next 32 years, until an assumed retirement age of 65. The illustration says I can take roughly 62k yearly starting at age 65 through age 100 as a loan Tax Free. That's roughly 2.1MM tax free. It also says assuming I live to age 100 the death benefit is 1.15MM Tax Free. That's a benefit of almost 3.3MM tax free with only contributing 144k in premiums. Sounds GREAT, but unbelievable.
Also, on the 3% return scenario, it shows My cash value, surrender value and death benefit ALL at ZERO only 2 years into retirement assuming the same 62k withdraw. On the 5.6% return, it Shows all zeros for cash value and death benefit roughly 7 years into retirement. does this mean this things explodes if the market isn't performing at least at the assumed 8.35% during the retirement years?
What am I missing here? When my initial response was that it's too good to be true, I was told that not everyone can qualify for these via exam so that's why most can't take advantage of it. Im a believer in that if it sounds too good to be true, it normally is, but this person is confident this is the best option for me.
Any feedback or question is much appreciated!
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Ok we here's the numbers on the illustration. It's a midland iul.
S&P 500 Index
Annual point to point
100% participation
Cap 12 or 13. It doesn't say on the illustration but that's what I was told.
Variable rate loan 6%
Male, preferred non tobacco
Assumes $400 monthly contribution, level for the next 32 years, up until age 65.
It's shows 3 return assumptions:
3% (minimum guarantee)
5.6%
7.6% yrs 1-10, then 8.35% thereafter
For the minimum guarantee, I was told that if it performs less than 3% after an 8 year period, then 3% would be back-credited for those years, in essence a minimum guarantee.
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Here's what I don't get:
Assuming the 7.6% return in yrs 1-10 then 8.35% thereafter with a $400 monthly contribution, that's roughly 144k in premiums over the next 32 years, until an assumed retirement age of 65. The illustration says I can take roughly 62k yearly starting at age 65 through age 100 as a loan Tax Free. That's roughly 2.1MM tax free. It also says assuming I live to age 100 the death benefit is 1.15MM Tax Free. That's a benefit of almost 3.3MM tax free with only contributing 144k in premiums. Sounds GREAT, but unbelievable.
Also, on the 3% return scenario, it shows My cash value, surrender value and death benefit ALL at ZERO only 2 years into retirement assuming the same 62k withdraw. On the 5.6% return, it Shows all zeros for cash value and death benefit roughly 7 years into retirement. does this mean this things explodes if the market isn't performing at least at the assumed 8.35% during the retirement years?
What am I missing here? When my initial response was that it's too good to be true, I was told that not everyone can qualify for these via exam so that's why most can't take advantage of it. Im a believer in that if it sounds too good to be true, it normally is, but this person is confident this is the best option for me.
Any feedback or question is much appreciated!
- 11,504
scagent83 is (IMO) the resident expert on IULs. He's a big believer that they are a great way to go... and I'm confident that he knows how to structure them well.
I, however, am still skeptical of IULs... primarily for the reasons you are looking at.
That 7.6%... assumes that you'll earn 7.6% every year (most of the time with these illustrations). We know that is an unreasonable assumption. Yet, we also know that the caps are HIGHER than what is allowed to be illustrated. Which means, to me, that you simply cannot predict the future outcomes of these products.
However, with the 3%... that's also too grim of a picture to show too.
Remember that with IULs, the idea is to capture the upside of the market, and no downside. There will be negative years in the corresponding index (with a 0% return for that year)... but rarely is that illustrated in these projections. This will have an impact on the compounding results over time.
The part we don't know is your premium & death benefit. For these, we usually want to see a very low death benefit and as high of a premium as possible (to preserve tax benefits).
Have you completed a medical exam for the policy yet? Just because it is ILLUSTRATED at preferred non-smoking, doesn't necessarily mean that's the rating you will get when the policy is issued.
Also, one of the things I look for... is the "break even" point. Essentially, what year will the policy be equal to the premiums you've paid in, on both of the non-guaranteed sides... and the guaranteed side.
I, however, am still skeptical of IULs... primarily for the reasons you are looking at.
That 7.6%... assumes that you'll earn 7.6% every year (most of the time with these illustrations). We know that is an unreasonable assumption. Yet, we also know that the caps are HIGHER than what is allowed to be illustrated. Which means, to me, that you simply cannot predict the future outcomes of these products.
However, with the 3%... that's also too grim of a picture to show too.
Remember that with IULs, the idea is to capture the upside of the market, and no downside. There will be negative years in the corresponding index (with a 0% return for that year)... but rarely is that illustrated in these projections. This will have an impact on the compounding results over time.
The part we don't know is your premium & death benefit. For these, we usually want to see a very low death benefit and as high of a premium as possible (to preserve tax benefits).
Have you completed a medical exam for the policy yet? Just because it is ILLUSTRATED at preferred non-smoking, doesn't necessarily mean that's the rating you will get when the policy is issued.
Also, one of the things I look for... is the "break even" point. Essentially, what year will the policy be equal to the premiums you've paid in, on both of the non-guaranteed sides... and the guaranteed side.
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- 10,806
Whoa! That policy is not designed correctly.
It definitely is not fully overfunded (meaning a minimum death benefit for the chosen premium).
When I run your numbers with a correctly designed policy the Guaranteed Rate of 3% does not zero out until age 93. The Midpoint of 5.5% keeps increasing in Cash Value well into your 100s. Obviously the Current goes into your 100s too.
One of 2 things are going on:
1. The agent has good intentions but is completely incompetent
2. The agent is greedy and unethical
Either way you do not want to do business with them.
An IUL can be a great financial vehicle if designed correctly. On a historical basis using current Caps a Credited Rate of 5.5% would have happened 99% of the time. But if the agent does not use the Minimum Death Benefit then the policy is basically just a really expensive Death Benefit.
As I mentioned before when an agent uses the Minimum Death Benefit they are paid the least since the commission is based on the Death Benefit and not the amount of Premiums.
Personally even if I was inclined to not use Min Death Benefit out of greed (which im not))... I would be way to scared to out of fear of a lawsuit! I do this stuff to fund executive benefit agreements in companies... they would take me to court in a second if it was not designed correctly.
Using a very reasonable 6% Credited Rate, the Rate of Return on the Cash Value would be at 5.7% at age 65. Using a 5% Credited Rate, the RoR on the Cash Value would be at 4.7% at age 65.
It can be an excellent supplemental savings vehicle. That RoR is a tax free return. But 2 things are very important.
1. It should be used in addition to your 401k match limit.
2. It should be a fully overfunded policy using the Minimum Death Benefit for the premium paid.
Unfortunately the policy you were shown was not using a Minimum Death Benefit. (not anywhere near it)
I also prefer North American's IUL over Midlands. Midland pays what is called a "trail" commission that lasts the life of the policy. North American does not. The Trail creates a small load which causes the Midland policy to slightly underperform the North American Policy. North American and Midland are "sister" companies owned by the same parent corporation. The policies are basically identical except for that one thing. (North American does pay a slightly higher first year commission, but it does not effect the Cash Value long term like the Trail Commission does)
It sounds like you are interested in the concept. But obviously you want an experienced and knowledgeable agent who knows how to correctly design the policy. I would be happy to speak to you further via the forum or through email if you would like.
I have attached a Rate of Return output of a North American Illustration using a 6.5% Credited Rate. This will give you a true example of what a properly designed IUL can do for you using a reasonable Credited Rate.
*Disclaimer:
The attached illustration is not complete and is not meant to be specific advice or meant to be used to induce a decision about your personal insurance needs. A full illustration along with situation specific advice should be sought before making a buying decision for this or any other type of life insurance.
Everyone's financial situation is different. You should consult with me or another licensed and experienced agent about your personal situation before making a buying decision. The attached illustration is for general discussion purposes only. Even at the same age your policy could look different due to Health Rating or additional Riders chosen.
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- 10,806
Obviously you will never have a consistent year over year return since its based off of a market index.
But we can use historical lookbacks and see what it would have done year to year based on the current Caps. Many IULs (NA/Midland included) would have performed at an Annualized 7%-8% over the past 20 years. So no it did not actually do that each and every year, but the combined return of all the various returns each year, is equal to the policy doing that each year.
But more importantly 20 and 30 year historical lookbacks show a 99%-100% Annualized return for the 5%-5.5% range.
So when I sell IUL I tell client to expect between an annualized 5% Credited Rate and 8% Credited Rate. I usually run illustrations from 6%-7% depending on how bullish a client is about the market in general. I would never ever show a client an illustration over 7% Credited Rate.
I do agree that the minimum guaranteed rate of 3% is way too grim. That would assume that the market returns ZERO every year for the life of the policy... and if that happens the client will have way more to worry about than the policy since the country would be in shambles!
- Thread starter
- #16
Thanks guys!
Still trying to understand how these work exactly.......so in the 3% and 5.6% assumption that i was given I am LITERALLY out of money within the reflected timeframes (2 years and 7 years)? And the ONLY way to for this to work, based on his assumption is to get the 8.35 return%.
Also, if you recall this is being recommended as a replacement for my contributions to my 401k w match. He also recommended my wife stop contributing to her 403b (she is a teacher) and use that monthly amount to add in as well. His argument is that I get the tax free income and death benefit that I don't get in the 401k, and based off same returns of 8.35% over the same timeframe within 401k, my funds would be gone in roughly 11 years assuming the same 62k withdraw vs the iul which last till age 100 tax free PLUS death benefit tax free. It sounds great but my gut tells me I shouldn't stop contributing to the matching 401k. I keep hearing the iul as a great supplemental plan, but only when other plans are maxed out, which I'm not even close to.
Also, thank you for the other illustration scagnt83. It had additional detail that the other one did not which is helpful. Though, what does surrender value and death beni IRR Percent mean?
Also can anyone explain how the fees are structured in something like this? I haven't been ale to get a straight answer from him yet on this. It looks like there is an immediate loss the first 7,8,9 or 10 Years which has been explained as the "cost of insurance" to me, but what exactly does that mean in numbers?
Is there a big difference from preferred to not? I dont know if I would qualify as preferred, as I smoke cigars once in a while.
Thanks all!
Still trying to understand how these work exactly.......so in the 3% and 5.6% assumption that i was given I am LITERALLY out of money within the reflected timeframes (2 years and 7 years)? And the ONLY way to for this to work, based on his assumption is to get the 8.35 return%.
Also, if you recall this is being recommended as a replacement for my contributions to my 401k w match. He also recommended my wife stop contributing to her 403b (she is a teacher) and use that monthly amount to add in as well. His argument is that I get the tax free income and death benefit that I don't get in the 401k, and based off same returns of 8.35% over the same timeframe within 401k, my funds would be gone in roughly 11 years assuming the same 62k withdraw vs the iul which last till age 100 tax free PLUS death benefit tax free. It sounds great but my gut tells me I shouldn't stop contributing to the matching 401k. I keep hearing the iul as a great supplemental plan, but only when other plans are maxed out, which I'm not even close to.
Also, thank you for the other illustration scagnt83. It had additional detail that the other one did not which is helpful. Though, what does surrender value and death beni IRR Percent mean?
Also can anyone explain how the fees are structured in something like this? I haven't been ale to get a straight answer from him yet on this. It looks like there is an immediate loss the first 7,8,9 or 10 Years which has been explained as the "cost of insurance" to me, but what exactly does that mean in numbers?
Is there a big difference from preferred to not? I dont know if I would qualify as preferred, as I smoke cigars once in a while.
Thanks all!
- Thread starter
- #17
Dangit, I just posted a long reply but it said it wouldn't post until a moderator approved it......can someone plz approve?
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Well instead of waiting to see if it can be approved....
First, thanks to everyone. Scagnt83, thx for the illustration. I have a bunch of questions but just to put a few out there....
1. Are caps, loan rates, participation, etc. all fixed or guaranteed once you start or can they be changed at anytime?
2. How exactly do the fees work? In the illustrations it looks like you take an immediate loss for the first 7,8,9 or 10 years. Is this a type of "surrender" penalty? I was told by the person who recommended this that it's the "cost of insurance" but I really want to understand the numbers behind it.
3. Why not stop contributing to matching 401k and put those contributions to an IUL (which is what being proposed to me). The person also recommended my wife stop contributing to her 403b (she is a teacher) and put that towards the iul. He says you can't touch the death benefit and tax free income, which is tempting plus no downside, but my gut tells me I shouldn't stop paying into a 401k.
I'm sure I'll have a few more questions but I'm typing all this on an iPad and it's a pain in the A.....
Thanks again for any help!
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Well instead of waiting to see if it can be approved....
First, thanks to everyone. Scagnt83, thx for the illustration. I have a bunch of questions but just to put a few out there....
1. Are caps, loan rates, participation, etc. all fixed or guaranteed once you start or can they be changed at anytime?
2. How exactly do the fees work? In the illustrations it looks like you take an immediate loss for the first 7,8,9 or 10 years. Is this a type of "surrender" penalty? I was told by the person who recommended this that it's the "cost of insurance" but I really want to understand the numbers behind it.
3. Why not stop contributing to matching 401k and put those contributions to an IUL (which is what being proposed to me). The person also recommended my wife stop contributing to her 403b (she is a teacher) and put that towards the iul. He says you can't touch the death benefit and tax free income, which is tempting plus no downside, but my gut tells me I shouldn't stop paying into a 401k.
I'm sure I'll have a few more questions but I'm typing all this on an iPad and it's a pain in the A.....
Thanks again for any help!
- 11,504
Looks like until you've got more posts, that we just "report post" to get moderators to approve and show the post. (Thanks mods!)
Most agents who sell these still don't understand these... so you're not alone.
Definitely not structured/funded well for that death benefit.
First, 401k plans can have a risk of loss that is not present in IUL. I doubt any 401k earns 8.35% year over year.
Second, I referenced this youtube video in another thread... so maybe it might help.
Ed Slott CPA - From Forever Taxed to Never Taxed
Surrender values show how much of your account value you can actually access via loans or withdrawals. Most of these policies have surrender charges for about 15 years. After that time, the account value and surrender value are the same.
Death benefit IRR is the rate of return should you die in a given policy year.
That's why one of the things I look for is the "break-even" point... when the account/surrender values = premiums paid in. If you look at the illustration that scagent83 put together for you, you can see that it "breaks even" by year 9. Some policies (some illustrations I've done myself) either never break even... or do so after 20 years. I'm not an expert on IUL illustrations... yet. Until I can have it look the way I want, I don't recommend it.
Every company does things differently. Cigars might not be an issue as opposed to smoking cigarettes.
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These parts are typically called "moving parts" within these contracts. They can be changed based on prevailing interest rates, and the cost of the stock options purchased to generate the rates of return.
However, of those three factors, the participation rate is the least likely to be changed... but it could depend on which indexing segment option you choose.
I mentioned some of this above. In essence, if you were to want to borrow, withdraw, or cancel your policy, that is the amount of cash you can expect to have access to.
Everybody's situation is different. Right now, for $400/month... I'd look at this as a Roth IRA with a death benefit, and the opportunity for no downside growth opportunities.
If that was the amount you're contributing to your 401k... you simply need to save more money out of your income.
There are a lot of other benefits of life insurance - including "banking on yourself" for when you are making larger purchases. You can borrow from your policy, and repay the interest back to the policy... instead of finance companies and credit cards. You'll never be liable to another 'outside lender' again.
If cash becomes tight (such as laid off)... you can defer your payments for a while, including on the outstanding loan. If you get laid off, and you have a 401k loan... that loan is payable in full within 60 days... or it becomes a taxable distribution, probably subject to IRS penalties as well.
If you become disabled... depending on the policy, either the COI charges will be waived, or a stipulated premium will be contributed to the policy (cash continues to build)... or both. Your 401k cannot do that.
There are plenty of benefits... but the policy MUST be properly structured to take full advantage of that. If it's not well structured... you'll lose those benefits due to the inefficiencies in the contract.
Most agents who sell these still don't understand these... so you're not alone.
Definitely not structured/funded well for that death benefit.
First, 401k plans can have a risk of loss that is not present in IUL. I doubt any 401k earns 8.35% year over year.
Second, I referenced this youtube video in another thread... so maybe it might help.
Ed Slott CPA - From Forever Taxed to Never Taxed
Surrender values show how much of your account value you can actually access via loans or withdrawals. Most of these policies have surrender charges for about 15 years. After that time, the account value and surrender value are the same.
Death benefit IRR is the rate of return should you die in a given policy year.
That's why one of the things I look for is the "break-even" point... when the account/surrender values = premiums paid in. If you look at the illustration that scagent83 put together for you, you can see that it "breaks even" by year 9. Some policies (some illustrations I've done myself) either never break even... or do so after 20 years. I'm not an expert on IUL illustrations... yet. Until I can have it look the way I want, I don't recommend it.
Every company does things differently. Cigars might not be an issue as opposed to smoking cigarettes.
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These parts are typically called "moving parts" within these contracts. They can be changed based on prevailing interest rates, and the cost of the stock options purchased to generate the rates of return.
However, of those three factors, the participation rate is the least likely to be changed... but it could depend on which indexing segment option you choose.
I mentioned some of this above. In essence, if you were to want to borrow, withdraw, or cancel your policy, that is the amount of cash you can expect to have access to.
Everybody's situation is different. Right now, for $400/month... I'd look at this as a Roth IRA with a death benefit, and the opportunity for no downside growth opportunities.
If that was the amount you're contributing to your 401k... you simply need to save more money out of your income.
There are a lot of other benefits of life insurance - including "banking on yourself" for when you are making larger purchases. You can borrow from your policy, and repay the interest back to the policy... instead of finance companies and credit cards. You'll never be liable to another 'outside lender' again.
If cash becomes tight (such as laid off)... you can defer your payments for a while, including on the outstanding loan. If you get laid off, and you have a 401k loan... that loan is payable in full within 60 days... or it becomes a taxable distribution, probably subject to IRS penalties as well.
If you become disabled... depending on the policy, either the COI charges will be waived, or a stipulated premium will be contributed to the policy (cash continues to build)... or both. Your 401k cannot do that.
There are plenty of benefits... but the policy MUST be properly structured to take full advantage of that. If it's not well structured... you'll lose those benefits due to the inefficiencies in the contract.
- 10,806
That policy is not designed correctly. Not even close. What does it say for the Based Death Benefit at the top of the illustration?
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First question. What exactly is your matching ratio? Is it dollar for dollar up to 4% of your salary?
You need to contribute to the 401k up to the match. What he is telling you to do is not only ridiculous, it is dangerous to your financial safety.
He is leaving out some very important equations in his math.
Before I continue, I sell both IUL and I sell Retirement Plans for businesses (including 401Ks). So I am a big fan of both methods. But the logic to contribute up to the match is simple math.
First, the IUL will not perform the exact same as the market. By design, it is made to slightly underperform the market. So you must use at least a 1% lower return for the IUL. Some years the IUL will capture all of the markets returns, but it will not do it every year.
So lets say you get a dollar for dollar match for your 401k, up to 4% of your salary.
With the 4% match; Your job will pay $1 for every $1 you put into your 401k, up to 4% of your salary. So if you put in $4000, they put in $4000 at exactly the same time. To your boss, this is just an extension of your salary. When you do not contribute up to your Match, it is like saying "no thanks, I dont want an extra $4,000 in my 401k".
Also, the 401k you pay pre-tax. Which means you do not have income taxes withdrawn from that portion of your paycheck. It will take 20%-30% more (depending on your tax bracket) in after tax money (meaning money you take from your cashed paycheck that has had taxes taken out, and use to buy the IUL) to match the same $4k you put into your 401k before taxes are taken out.
But the Match alone is an immediate 100% gain on your 401k funds. You put in $1, they put in $1. You put in $4k, they put in $4k. And that is before the actual market returns.
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No problem.
The Surrender Value IRR is the Rate of Return on the Surrender Value (Cash Value).
The Death Bene IRR is the Rate of Return on the Death Benefit.
IRR stands for Internal Rate of Return within a financial vehicle. In other words the pretax rate of return.
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- 10,806
There are multiple expenses on an IUL.
1. Cost of Insurance
2. Premium Load (a type of admin expense)
3. Admin/Expense charges
Cost of Insurance lasts the life of the policy. It starts small and increases with age.
Premium Load only lasts for 10 years, then it goes away.
Admin/Expense charges last the life of the policy. Most policies calculate it as a % of the Cost of Insurance or of the Death Benefit.
Early on the Expenses are large. You can tell since the premiums do not get a positive return until around year 10 or so. Later on in your 70s-90s the expenses are less than 1% of the Cash Value if you have a good health rating. It is a long term contract. The longer it goes the higher the Rate of Return you get.
I have attached an expense report for you to see.
If you look at age 88, the expenses are only 0.45% of the Cash Value.
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