IUL Questions

[scagnt83]

Well...it looks like the COI stops at 100. You sure you didn't take a crayon and cross out the "W" and put in a "U"?

Yep. Im sure.

But to be fair every carrier is different. Some do it that way and some dont. But most all Mature at 100 and Guarantee coverage until 121.

LFG for example calls the end of Premiums (age 100) the Maturity Date (unlike NA who calls 121 Maturity... same term but different meaning). Coverage is guaranteed to extend to age 121 after age 100 with LFG as well.

And, to be fair (like I said, each carrier is different, especially on the COI issue) COI extends to 121 with LFG.... BUT it is not as much as I know you think it is... for example: at age 105, for a $450k DB, the COI is only $2,800. And there are no other charges or expenses.

I would encourage you to run some UL illustrations and review the expense reports. You will find that a lot of your opinions and assumptions are unfounded. You seem to think that a UL uses true "Term" pricing for the COI because that is how it is often described. The truth is that they do not use the same pricing as Term. The COI does increase, but not nearly as much as you seem to believe. UL COI is in no way comparable to Term in the way of cost.

 

[maxherr]

the failure of AGENTS to perform POLICY AND FINANCIAL REVIEWS is what destroys UL policies

DHK . . . now we're getting a little closer to the heart of the matter. But you cannot continue to beat that one-tune drum to the exclusion of the fact that there is an increasing Cost of Insurance in the design of every form of UL insurance.

I will not disagree that agents should revisit their clients at least at the time they receive their first annual statement for their UL contract. But, why is it that, as you observe, the majority of agents never do? I can think of at least two reasons: 1) they think they don't get paid for such visits, so they only concentrate on writing new business; and 2) they have no clue how to read an annual statement, so how are they going to explain what it means, or review it to make sense of it for the client?

Now, you and I both know that every opportunity we have to visit with a client is another opportunity to ask for referrrals, increase a client's coverage when needed, offer other assistance such as making sure beneficiary designations are up to date, and so on. Each of these opportunities has the potential to lead to a paycheck, so it's never wasted time -- it just may be a bit difficult to fit into one's schedule.

Second, who's fault is it that agents don't know how to read policy statements? The insurance company's, that's who. The same outfit that sends the statement to the policyowner without an iota of explanation as to what each part attempts to show, fails to train its agents in how to read, understand, and explain an annual statement. Even your gas and electric bills come with explanations of how much energy there is in a therm of gas, or kilowatt of electricity and how to see that in the bill.

I think you put far too much emphasis . . . repeatedly . . . on the agent and fail to pin the tail on the real donkey -- the insurance company that has a vested interest in its statements reading like a foreign phone book, which causes policyowners to just toss them into a drawer or, worse, into the trash, because they have no idea what they see or what it means.

You, apparently, make it a practice to revisit your clients, and if that's true, I applaud you, because it puts you in the top 1% of agents who value their clients as something more than a meal ticket. (But I still have trouble with your "philosophy" of income.)

However, your remarks about underfunded UL as a thing of the past is not well taken. Jerard touches on the idea briefly. All forms of UL policies continue to be marketed on the basis of high and/or long-term interest rate assumptions which minimize the premiums -- even you lament that you cannot illustrate the effect of 14% rate caps . . . which would surely result in underfunded contracts if you could.

Properly illustrated, most individuals are not prepared for, and cannot afford the real cost of a UL policy designed to remain afloat to maturity. And they are unprepared for the point in time when the dreaded pre-lapse notice arrives.

Because no one shows them how to read their annual statements, or how to make mid-course corrections when necessary, their first indication that the policy is in trouble is when they get their first pre-lapse notice: Pay up in 60 days, and continue to pay more and more every year thereafter, because your policy has no residual cash value, and is highly unlikely to ever have any in the future, or you will have no life insurance.

There are several state and federal courts that finally figured this out and describe UL policies NOT as "permanent insurance" as the industry would prefer, but as they truly are, "term life insurance with a cash account tied to it." And I would be willing to bet that when you discuss term life insurance with your prospects or clients, you make reference to the fact that eventually the premiums on those policies will have to increase at the next renewal. But do you equate the annual cost of a UL policy with an annually renewing term policy? Probably not, because you refuse to accept the fact that the engine powering UL is ART. And ART perfectly follows Baker's "Pay The Curve" illustration, because it cannot be contained in "The Box."

UL attempts to arbitrage the box vs the curve. It does so initially using the illustrated "current assumptions" which, according to the fine print, "These policy benefits and values are based on non-guaranteed elements that
are subject to change by the insurer. Actual results may be more or less favorable." And change they will. I'm coming back to that statement in bold in a few paragraphs.

So I continue to wonder why you cannot bring yourself to admit what, at least, Jerard and unic.consulting understand alongside me, that the internal cost of a UL policy, driven principally by the monthly Cost of Insurance, increases every year. It can take several years for the external cost -- what the consumer experiences -- to catch up to the short end of the stick. But it most assuredly will in the vast majority of UL policies.

Your cases that you are dealing with, are with agents that have left the business, or are failing to service what they have sold.

That's occasionally true. In reality, however, most of the cases I am involved in are the result of agent misrepresentation, twisting, and simple churning -- selling old clients new products because an agent has no one else to talk to in order to get a commission for something.

In the matter of the 90+ year-old-veteran, the selling agent was his own son -- who was not new to the business in 1986, but no longer is with the same insurance company (hasn't been for years), and has admitted that he had no idea at the time what could happen to the policy, and the current agent of record -- under whose name the insurance company sent dozens of pre-lapse notices to its policyowner -- never lifted a finger to help the client, despite the opening words in the company-issued correspondence: "I'm concerned that we haven't had any response to my recent letter regarding your [Insert Name of Insurance Company Here] Universal Life policy."

And my best guess is, why (in his mind) would he want to? He's not going to get paid a dime to meet with the fellow (but he's going to catch hell for what's happening in the policy if he does), there is no blemish on his persistency rating because this is not a policy for which he wrote the application. He has no concern for the client -- the words of the letter are not his.

Here's the difference (that I suppose needs to be spelled out for you) is that the liability of WL costs of insurance are on the insurance company (stronger guarantees) - as long as the minimum fixed premium is paid.

The liability of UL costs of insurance are on the policy holder (less guarantees) because of the flexibility of premium payments and the varying of interest crediting rates.

Perhaps we're finally getting to the point. You bring up the term "liability" which is kind of interesting. When I review WL and UL policies with clients, prospects, and attorneys, I don't use the word "liability," I use the word "responsibility" and, many times, "policy management." Others sometimes use the word "risk."

But let's dwell on the term "liability" for a moment. Liability is a third-party matter that normally involves negligence. Life insurance is a two-party contract. So where/how does "liability" enter into the equation?

The promise of a WL policy is, like term life insurance, quite simple: YOU PAY -- YOU DIE (while the policy is in force) -- WE PAY. The only real difference between term and WL is the cash account that the policyowner funds which reduces the amount the insurance company must pay when a death occurs, and the duration of the policy determines, in part, the amount of risk the insurance company assumes -- shorter duration (like 10-year term for a 25-year old vs. a 96-year term for a WL/UL policy issued to the same 25-year-old) means lower premium because there is less likelihood of death during the term of the contract.

You are correct, essentially, in your explanation of WL. The insurance company retains the risk of paying a death claim. It promises to credit the policy with a certain amount of interest each year based on the timely payment of all premiums, and it retains the risk of having to credit that much interest. Paying premiums is the only responsibility imposed on the policyowner. And they can stop anytime they want -- they just can't have the "permanent" life insurance forever if they do.

Failure to pay premiums can impair the policy to the point of lapse (and borrowing money from the policy sets up a potential chain of events which can destroy it, too). It's up to the insurance company to figure out how to manage its future liability for a death (the "liability" is to the beneficiary -- a third party), which is, in part, mandated by statutory reserve laws, and is, in reality, paid for primarily with new dollars flowing into the insurance company, rather than from invested reserves.

But just as in WL, you cannot apply the word "liability" to the policyowner of a UL contract. The policyowner has no control over the monthly Cost of Insurance, which has absolutely nothing to do with the "flexibility" of the policy (the policyowner's choice of frequency, timing, and amount of payments) or the interest crediting rates. The insurance company can alter the Cost of Insurance on a whim, or it can do so based on real mortality experience, or on "projected" mortality experience (such as ebola comes to America and runs amok for 24 months, killing persons of all ages -- outside the boundaries of normal life expectancies). What it cannot do is discriminate against a single policyowner. If it wants to raise the COI on Mr. Jones, a standard non-tobacco risk, it must raise rates for all the other standard non-tobacco risks the same age in the exact same manner for a specific policy form.

If the UL policyowner has a liability, he must be given control over the variables. Unfortunately, the policyowner has only two controls: 1) the amount and timing of premium payments, and; 2) the face amount of insurance (within the limits imposed by the contract.) The insurance company, on the other hand, retains those controls which are in its own best interests: Cost of Insurance deductions, monthly expense deductions, interest crediting rates (in an IUL policy, where the insurance company assumes the risk of market volatility, it limits its exposure to upside risk by the imposition of rate caps and strategies, participation rates, and rate spreads -- it cannot create a separate account to mirror the S&P 500(r) Index.

Now we return to the bolded words above: values are based on non-guaranteed elements that are subject to change by the insurer

Given that the most important controls in a UL policy are still the dominion of the insurance company, the policyowner can only react after fact -- at the end of the policy year. But you continue to ever so delicately dance around the words "Cost of Insurance" careful not to tread on the fact that the COI increases every year, and yet want to blame that fact on the policyowner. If it were true, there would have to be explicit language in the contract alerting the policyowner. Remember your words "only more disclosure."

But there is nothing in the contract that says the policyowner has "liability" for the Cost of Insurance as the consequence of being given the minor freedom to determine when and how much premium he/she may pay (the ever-benevolent insurance company will, it says, attempt to prevent a MEC by refusing too much premium) or how much death benefit he/she wants to pay for.

It is, however, the policyowner's responsibility to make sure there is enough cash value in the contract in addition to any premiums he/she chooses to pay, to cover ALL of the deductions the insurance company promises to take from the cash accumulation in the contract. Failure to do so will cause the beneficiary to lose the death benefit proceeds the insurance company otherwise originally promised to pay.

WHY CAN'T YOU BRING YOURSELF TO ADMIT THE TRUTH ABOUT UL? THE COST OF INSURANCE INCREASES EVERY YEAR AND IS ENTIRELY OUTSIDE THE CONTROL OF THE POLICYOWNER.

where the agent set up the policy properly

Once again, I think you give the typical agent just a bit too much credit. The agent does not "set up" the policy, the agent checks a button in the illustration software that either (a) "solves for face amount" or (b) "solves for premium". In (a), the agent assumes the client is willing to pay a certain amount of premium, and in (b) the agent indicates how much death benefit the client wants or how much death benefit he will tell the client he needs.

The resulting illustration will show the planned premium, the seven-pay premium, the guideline annual premium, and the "target" premium (which is the most money the company will pay a first-year commission on). How many agents "set up the policy properly" based on the seven-pay premium? When I worked at Mullin Consulting/MullinTBG, that was the only way we sold UL policies to our corporate clients for their deferred comp plans. And our clients paid premiums annually, not monthly, because we told them that was the way life insurance premiums were meant to be paid.

Why? Because Peter Mullen understood that it was the only way UL should be sold, and that was the philosophy behind the business. My role there was to perform policy analysis to make sure each contract was properly funded to minimize the annual COI deduction in addition to calculating the amount of annual increase in insurance amounts per policy to match as closely as possible the participant liabilities in the DCPs, which, beginning in about 2004, became harder to do without adding significant money to the policies because of declining interest crediting rates (in the non-VUL contracts).

The typical agent is unlikely to tell a prospect that the best way to pay for a UL policy is to pay the seven-pay premium in each of the first seven years, and, of course, fails to inform them of their need to monitor the policy performance each year, regardless of the amount of premium being paid.

Why? Because the typical life insurance prospect would choke on the amount of money a seven-pay premium actually meant. It's also one of the reasons I get so much junk email encouraging agents to find the wealthiest clients -- and to stop fooling around with the middle income people who have the greatest need for life insurance.

It appears that we're probably going to have to shake hands and agree to disagree on the subject of increasing COI. So I'll let it end here. Unless you want to continue the debate.

----------

Maturity and Endowment can vary by carrier & product

With certain qualifications, I have to agree with scagent on this. All states have adopted the NAIC CSO 2001 Mortality Tables. California, for example, got around to that in 2004, and gave insurance companies until January 1, 2009 to fully implement the tables in their rate making. Since then, all policies issued in California must factor mortality to age 121, but the law does not prevent them from ending premium payments at age 100 (or any other age for that matter, other than the IRC "prohibition" on MECs (testing policies for endowment earlier than age 95).

Of course, for the insurance company, retaining a "paid up at age 100" policy forces the premiums higher in those contracts, even if the monthly deductions cease at age 100.

But one must be careful and not apply scagent's excerpt from one contract to all UL contracts, because each company IS different. Some policies have language which says, "Premiums payable throughout the lifetime of the insured" but don't have any explicit language that would end the premiums at any specific upper age. So "Methuselah II" might have to pay premiums for about 900 years.

A UL policy I am currently reviewing from John Hancock matures at age 125, but premiums end at age 121, and COI and other deductions end at age 121, but interest will continue to be credited on cash value assuming someone actually survives this lifetime beyond age 121, but not beyond age 125.

I won't argue too much about "agents designing" UL policies -- as I explained above. I just don't like the use of that phrase. It's analogous to the sound of fingernails on a chalkboard (showing my age here, because most children don't know what a chalkboard is, or what that scraping sound sounds like). It is contrary to the language of the contract that says "no agent has the authority to waive or modify the terms or provisions of this contract."

Agents run illustrations on which policy premiums are determined. Not quite the same as "designing a policy". Actuaries do that according to the demands of company executives.

 

[DHK]

Max, you're going to end up forcing me to buy a new set of glasses to read all this. I'll probably end up doing quite a few posts on this... and I bet we'll end up strangely agreeing on a few points.

Sometimes I think I just excel at agreeing with people in a disagreeable way.

DHK . . . now we're getting a little closer to the heart of the matter. But you cannot continue to beat that one-tune drum to the exclusion of the fact that there is an increasing Cost of Insurance in the design of every form of UL insurance.

I'm sure we'll get to this later.

I will not disagree that agents should revisit their clients at least at the time they receive their first annual statement for their UL contract. But, why is it that, as you observe, the majority of agents never do? I can think of at least two reasons: 1) they think they don't get paid for such visits, so they only concentrate on writing new business; and 2) they have no clue how to read an annual statement, so how are they going to explain what it means, or review it to make sense of it for the client?

Now, you and I both know that every opportunity we have to visit with a client is another opportunity to ask for referrrals, increase a client's coverage when needed, offer other assistance such as making sure beneficiary designations are up to date, and so on. Each of these opportunities has the potential to lead to a paycheck, so it's never wasted time -- it just may be a bit difficult to fit into one's schedule.

Agreed! You and I both wholeheartedly agree on this.

Second, who's fault is it that agents don't know how to read policy statements? The insurance company's, that's who. The same outfit that sends the statement to the policyowner without an iota of explanation as to what each part attempts to show, fails to train its agents in how to read, understand, and explain an annual statement. Even your gas and electric bills come with explanations of how much energy there is in a therm of gas, or kilowatt of electricity and how to see that in the bill.

Wrong. I completely 100% disagree with you.

Why? The agent is licensed. Licensing does not equal competence, but it does mean that they are held liable by their state. It is the AGENT'S responsibility to learn how to read statements.

How can the agent get help? Every insurance company as an 800# for agents to call. Even more have a "contact us" function on their website so you can even ASK someone a question and get an answer sent to you.

I think you put far too much emphasis . . . repeatedly . . . on the agent and fail to pin the tail on the real donkey -- the insurance company that has a vested interest in its statements reading like a foreign phone book, which causes policyowners to just toss them into a drawer or, worse, into the trash, because they have no idea what they see or what it means.

Which is why I believe that it's the fault of the agent to not find out how to help "decode" the statement for the client.

Insurance companies aren't the only financial services industry that does this. Ever look at a merchant card services statement? Those things are damn near impossible and have VERY LITTLE (if any) regulation on them. And it's the way they like it.

And no, they didn't teach me how to read the statement, even though I asked. However, I wouldn't be held liable if the customer had an issue, as I would with selling insurance with my insurance license.

You, apparently, make it a practice to revisit your clients, and if that's true, I applaud you, because it puts you in the top 1% of agents who value their clients as something more than a meal ticket. (But I still have trouble with your "philosophy" of income.)

Fair enough.

However, your remarks about underfunded UL as a thing of the past is not well taken. Jerard touches on the idea briefly. All forms of UL policies continue to be marketed on the basis of high and/or long-term interest rate assumptions which minimize the premiums -- even you lament that you cannot illustrate the effect of 14% rate caps . . . which would surely result in underfunded contracts if you could.

My issues with illustrations is the confusion of turning an "average" rate of return into an "actual" rate of return. I'd love to show 14% for 2-3 years, then 0% for 2 years. I want to show the affect of volatility in the policy performance.

I know other IUL carriers allow for this. Scagnt83 often refers to Midland and NA and their software does do this. ANICO doesn't at this time. Maybe they'll adjust it one day.

Properly illustrated, most individuals are not prepared for, and cannot afford the real cost of a UL policy designed to remain afloat to maturity. And they are unprepared for the point in time when the dreaded pre-lapse notice arrives.

Because no one shows them how to read their annual statements, or how to make mid-course corrections when necessary, their first indication that the policy is in trouble is when they get their first pre-lapse notice: Pay up in 60 days, and continue to pay more and more every year thereafter, because your policy has no residual cash value, and is highly unlikely to ever have any in the future, or you will have no life insurance.

Agreed. It is a problem that consumers can't understand their statements. Which creates problems... which also stems from the lack of agent's taking care of their clients.

There are several state and federal courts that finally figured this out and describe UL policies NOT as "permanent insurance" as the industry would prefer, but as they truly are, "term life insurance with a cash account tied to it." And I would be willing to bet that when you discuss term life insurance with your prospects or clients, you make reference to the fact that eventually the premiums on those policies will have to increase at the next renewal. But do you equate the annual cost of a UL policy with an annually renewing term policy? Probably not, because you refuse to accept the fact that the engine powering UL is ART. And ART perfectly follows Baker's "Pay The Curve" illustration, because it cannot be contained in "The Box."

UL attempts to arbitrage the box vs the curve. It does so initially using the illustrated "current assumptions" which, according to the fine print, "These policy benefits and values are based on non-guaranteed elements that are subject to change by the insurer. Actual results may be more or less favorable." And change they will. I'm coming back to that statement in bold in a few paragraphs.

All life insurance is priced based on ART - including whole life. But by "filling the box", you can prepay these costs up front and let the money grow to help offset the future liability of the insurance costs of later years.

If you don't put anything into the box, then all you've got is term.

If you minimally fund the box, then you may have a hybrid policy, such as ROP term, NLGUL, or even a minimally funded UL/IUL.

If you maximum fund the box, you can greatly reduce your lifetime costs of insurance.

So I continue to wonder why you cannot bring yourself to admit what, at least, Jerard and unic.consulting understand alongside me, that the internal cost of a UL policy, driven principally by the monthly Cost of Insurance, increases every year. It can take several years for the external cost -- what the consumer experiences -- to catch up to the short end of the stick. But it most assuredly will in the vast majority of UL policies.

Because all life insurance is based on the same kind of pricing. The difference, is that the "curve" is incorporated into the premiums of WL, so no additional disclosure is necessary.

With UL policies, the curve is "unbundled", and has other moving parts, therefore additional disclosure is required.

That's occasionally true. In reality, however, most of the cases I am involved in are the result of agent misrepresentation, twisting, and simple churning -- selling old clients new products because an agent has no one else to talk to in order to get a commission for something.

Agreed. That's a problem.

In the matter of the 90+ year-old-veteran, the selling agent was his own son -- who was not new to the business in 1986, but no longer is with the same insurance company (hasn't been for years), and has admitted that he had no idea at the time what could happen to the policy, and the current agent of record -- under whose name the insurance company sent dozens of pre-lapse notices to its policyowner -- never lifted a finger to help the client, despite the opening words in the company-issued correspondence: "I'm concerned that we haven't had any response to my recent letter regarding your [Insert Name of Insurance Company Here] Universal Life policy."

That really sucks... that the AOR couldn't bother to try to pick up the phone, or send his own personally written letter of introduction, drop by his house to introduce himself... SOMETHING in order to make contact.

Company statements are cryptic... so if the agent had any sense of how consumers think, he'd do something more pro-active.

And my best guess is, why (in his mind) would he want to? He's not going to get paid a dime to meet with the fellow (but he's going to catch hell for what's happening in the policy if he does), there is no blemish on his persistency rating because this is not a policy for which he wrote the application. He has no concern for the client -- the words of the letter are not his.

He has no concern for the client... because he isn't getting paid. Some agents really need to wake up and help take care of clients, instead of trying to just take care of themselves.

John Savage said it best: "Serve, not be served."

Perhaps we're finally getting to the point. You bring up the term "liability" which is kind of interesting. When I review WL and UL policies with clients, prospects, and attorneys, I don't use the word "liability," I use the word "responsibility" and, many times, "policy management." Others sometimes use the word "risk."

But let's dwell on the term "liability" for a moment. Liability is a third-party matter that normally involves negligence. Life insurance is a two-party contract. So where/how does "liability" enter into the equation?

The promise of a WL policy is, like term life insurance, quite simple: YOU PAY -- YOU DIE (while the policy is in force) -- WE PAY. The only real difference between term and WL is the cash account that the policyowner funds which reduces the amount the insurance company must pay when a death occurs, and the duration of the policy determines, in part, the amount of risk the insurance company assumes -- shorter duration (like 10-year term for a 25-year old vs. a 96-year term for a WL/UL policy issued to the same 25-year-old) means lower premium because there is less likelihood of death during the term of the contract.

You are correct, essentially, in your explanation of WL. The insurance company retains the risk of paying a death claim. It promises to credit the policy with a certain amount of interest each year based on the timely payment of all premiums, and it retains the risk of having to credit that much interest. Paying premiums is the only responsibility imposed on the policyowner. And they can stop anytime they want -- they just can't have the "permanent" life insurance forever if they do.

Failure to pay premiums can impair the policy to the point of lapse (and borrowing money from the policy sets up a potential chain of events which can destroy it, too). It's up to the insurance company to figure out how to manage its future liability for a death (the "liability" is to the beneficiary -- a third party), which is, in part, mandated by statutory reserve laws, and is, in reality, paid for primarily with new dollars flowing into the insurance company, rather than from invested reserves.

Yes, we agree on this.

But just as in WL, you cannot apply the word "liability" to the policyowner of a UL contract. The policyowner has no control over the monthly Cost of Insurance, which has absolutely nothing to do with the "flexibility" of the policy (the policyowner's choice of frequency, timing, and amount of payments) or the interest crediting rates. The insurance company can alter the Cost of Insurance on a whim, or it can do so based on real mortality experience, or on "projected" mortality experience (such as ebola comes to America and runs amok for 24 months, killing persons of all ages -- outside the boundaries of normal life expectancies). What it cannot do is discriminate against a single policyowner. If it wants to raise the COI on Mr. Jones, a standard non-tobacco risk, it must raise rates for all the other standard non-tobacco risks the same age in the exact same manner for a specific policy form.

Which brings up the adverse selection problem that I mentioned earlier. The good risks (and they know it) won't keep a policy that has increased its costs. They will go to another company and be approved with them. This leaves the poor risks.

Yes, the insurance companies CAN increase the costs of insurance to the maximums allowed... but would be stupid to do so.

If the UL policyowner has a liability, he must be given control over the variables. Unfortunately, the policyowner has only two controls: 1) the amount and timing of premium payments, and; 2) the face amount of insurance (within the limits imposed by the contract.) The insurance company, on the other hand, retains those controls which are in its own best interests: Cost of Insurance deductions, monthly expense deductions, interest crediting rates (in an IUL policy, where the insurance company assumes the risk of market volatility, it limits its exposure to upside risk by the imposition of rate caps and strategies, participation rates, and rate spreads -- it cannot create a separate account to mirror the S&P 500(r) Index.

Since this is an IUL thread, let's focus on that. Markets go up and markets go down. Interest is credited when markets go up - per correlation with the underlying index option... and no interest is credited when markets are flat or negative. (Aside from policy costs.)

So, we have to ask ourselves... how likely is it that we have an extended period of no upward market volatility?

Now we return to the bolded words above: values are based on non-guaranteed elements that are subject to change by the insurer

Given that the most important controls in a UL policy are still the dominion of the insurance company, the policyowner can only react after fact -- at the end of the policy year. But you continue to ever so delicately dance around the words "Cost of Insurance" careful not to tread on the fact that the COI increases every year, and yet want to blame that fact on the policyowner. If it were true, there would have to be explicit language in the contract alerting the policyowner. Remember your words "only more disclosure."

But there is nothing in the contract that says the policyowner has "liability" for the Cost of Insurance as the consequence of being given the minor freedom to determine when and how much premium he/she may pay (the ever-benevolent insurance company will, it says, attempt to prevent a MEC by refusing too much premium) or how much death benefit he/she wants to pay for.

It is, however, the policyowner's responsibility to make sure there is enough cash value in the contract in addition to any premiums he/she chooses to pay, to cover ALL of the deductions the insurance company promises to take from the cash accumulation in the contract. Failure to do so will cause the beneficiary to lose the death benefit proceeds the insurance company otherwise originally promised to pay.

WHY CAN'T YOU BRING YOURSELF TO ADMIT THE TRUTH ABOUT UL? THE COST OF INSURANCE INCREASES EVERY YEAR AND IS ENTIRELY OUTSIDE THE CONTROL OF THE POLICYOWNER.

I'm going to end up repeating myself again, and it's late, so I'll pass.

Once again, I think you give the typical agent just a bit too much credit. The agent does not "set up" the policy, the agent checks a button in the illustration software that either (a) "solves for face amount" or (b) "solves for premium". In (a), the agent assumes the client is willing to pay a certain amount of premium, and in (b) the agent indicates how much death benefit the client wants or how much death benefit he will tell the client he needs.

The resulting illustration will show the planned premium, the seven-pay premium, the guideline annual premium, and the "target" premium (which is the most money the company will pay a first-year commission on). How many agents "set up the policy properly" based on the seven-pay premium? When I worked at Mullin Consulting/MullinTBG, that was the only way we sold UL policies to our corporate clients for their deferred comp plans. And our clients paid premiums annually, not monthly, because we told them that was the way life insurance premiums were meant to be paid.

Why? Because Peter Mullen understood that it was the only way UL should be sold, and that was the philosophy behind the business. My role there was to perform policy analysis to make sure each contract was properly funded to minimize the annual COI deduction in addition to calculating the amount of annual increase in insurance amounts per policy to match as closely as possible the participant liabilities in the DCPs, which, beginning in about 2004, became harder to do without adding significant money to the policies because of declining interest crediting rates (in the non-VUL contracts).

The typical agent is unlikely to tell a prospect that the best way to pay for a UL policy is to pay the seven-pay premium in each of the first seven years, and, of course, fails to inform them of their need to monitor the policy performance each year, regardless of the amount of premium being paid.

Why? Because the typical life insurance prospect would choke on the amount of money a seven-pay premium actually meant. It's also one of the reasons I get so much junk email encouraging agents to find the wealthiest clients -- and to stop fooling around with the middle income people who have the greatest need for life insurance.

It appears that we're probably going to have to shake hands and agree to disagree on the subject of increasing COI. So I'll let it end here. Unless you want to continue the debate.

I will agree with you that the average agent doesn't know squat about anything that you've written. Like I mentioned before - we know that licensing doesn't mean that one is competent. Only that one can be held liable.

I agree to disagree with you, but the exchange has been good!

 

[Golfnut2112]

"Firing the client" is your way to give an ultimatum, or "wash your hands" of the client. If you have done everything you should do - send an email, make a call, send something in writing, to meet with your client... and your client is unresponsive... then really, the client "fired you" without telling you.

All you get to do in "firing the client" is put documentation on your side.

Are you liable for the contract REGARDLESS of what the client does? I don't think so.

Why Clients Win Lawsuits Against Their Advisors - Best Practices

Taking Notes May Insulate Your Business - Best Practices

An Engagement Letter May Protect You - Best Practices

What is an agent liable for? Being pro-active in giving good and accurate advice and ASSISTING the client in managing their policies. If a mistake is made, then making a good faith effort to fix it.

***

Now, will companies raise the costs of insurance to the MAXIMUM that was illustrated? Not without notification to the policyholder.

What will that cause? Adverse Selection. The good risks will find new policies and those with bad health will continue to pay... and the company will go BK.

We can see the same thing already happening in the LTC markets right now. Good LTC risks that are alerted to rising premiums, look for other policies. Bad LTC risks will continue to pay the premiums.


BTW, I like referencing videos from experts other than myself. Sometimes videos more clearly and more articulately explain things than I can do or that a text-based median, like a forum, can do.

----------

Let me add another perspective that hits home for me.

My father had purchased quite a few policies from a particular agent through the 90's. Then he hit financial trouble. That agent left this captive firm, and my father didn't bother to ask an agent for professional advice on his policies - even from the local agency.

He called customer service instead. Customer service is great at giving options and doing what policyholders want, but they do NOT give advice.

Instead of taking out loans, he CANCELLED 3 out of 4 of his policies and took out the cash. That 4th policy... is a key man policy that's a Variable Whole Life. He stopped making payments on that policy for 8 years.

Today, that policy is on "life support", but he's been making more consistent payments when I was with MassMutual, and I still help him manage that policy today.

If he had talked to a trained and skilled agent that would've reviewed all his options... he's have a lot more protection in place today.

His health isn't great. Any policy he applies for is heavily rated, but not declined. But I can see first-hand how having a good agent that can be relied on for ongoing consultation and advice can impact a family's financial security.

Liable may have been the wrong term. If you signed the app and something goes wrong with the policy (whether you fire the client or not) and the client decides to go to court you WILL get sued, you may not lose but you will end up in court.

Who said anything about raising the COI to the maximum? I have had two companies over the years raise the cost of insurance and neither one went bankrupt. When a company does this its not like a LTC policy because the premium stays the same and unless the agent calls nothing is usually done about it. The effects of the increase usually will not be seen until they are older and the COI gets out of control then, like your dad , they cash out so the company wins by never having to pay a claim.

I think some of the things you say are right, they are just to simplified a point A to B kind of thing, when its really more complicated then that.

Your video and its gone explains some UL's perfectly

 

[pfg1]

Wow, quite a bit of info here! Thanks guys for the lively debate.

Since I was the one who started this thread (last year) I'll put my .02 in on how I feel today after doing quite a bit of research on IUL (and selling some). Full disclosure, I am not an IUL guru....still learning every day. But I have learned a ton in the past year.

First, I am a huge fan of WL (from a div paying mutual), and feel it is probably a great fit for most folks desiring permanent covg. It will do what it says it will do, period. No surprises. You'll never have to go back to a WL client and try to explain what happened.

Someone said that WL is not a "set it and forget it", and while I agree that its much better for a client to have continuous involvement/reviews from an agent - the set it and forget it can absolutely work with WL, provided the client just pays the premiums due. We have a tiny plain jane WL policy - (not max funded, all base w/ div's purchasing PUA's) - that my mother in law bought on my wife when she was 6. All she's done is pay the premium for 37yrs, and its done amazingly well. She knows ZERO about finances at all, and even less about insurance or the policy she bought. The Cash Value today is more than the original death benefit was, and DB is now about triple what it was originally. All she did was mail in the payments. She just recently gave this policy to us, we are now making the premium payments. Just paid the annual premium of $62, cash in policy grew by $178 with that payment. Wish I had 10 of those, or the premium was 10x what it is!

I also have a few clients with 40 & 50 year old WL policies. Before they met me they knew nothing about them, other than they make a premium payment when due. A couple are pretty impressive, strictly due to time they've been in force.


IUL is or can be a good fit for many folks, provided a few things happen, imo.

1. The policy is designed for max cash accumulation, min db. Meaning it is max funded / overfunded, whatever you'd like to call it...not a mec.
2. Client has an agent that works with them each year, analyzing the policy in detail, helping them understand how it works and what is going on.
3. Client does NOT reduce payments, or quit making payments - if they are on a level pay. (Obviously if they pay the policy up to the 7pay limit, they can't make addl payments for some time.)

My opinion is this - one of the biggest potential problems is client behavior, not the policy itself. Because of the flexibility of these products, if clients KNOW they can reduce the premiums, the first time they get in a financial bind, they will look to cut costs will likely cut the payment to the ins policy (because they can). And my guess is that they are unlikely they will ever increase it back up to where it should be....at least not voluntarily. Once they get used to lower premiums, they will stay there (especially if no agent is involved). This can (and probably will) cause a problem down the road. I feel this is one of the biggest downsides to a IUL - the super flexible premiums. It can also be one of the biggest upsides for clients that use it properly. On good years, pay alot in, bad years you have the option to lower or sit out.

The other issue I see, alot of marketing organizations are touting IUL as the Holy Grail, and jamming it down the throats of every client - whether its the right fit or not. Some even design with max commission, min premium. Sorta like what was mentioned earlier of the idea "whole life at half the premium, or alot more covg than WL with the same premium". This will certainly get ugly down the road. I've bumped into this a few times with clients/prospects I've met with. Also, most will run illustrations at max returns they can, which is likely to be way off, causing the client to see huge gains on paper that will likely not be achieved. This is obviously a point of interest these days by regulators, and will likely change in the near future. I run mine at 6%. I'd rather under promise and over deliver.

I feel that if an IUL is overfunded, and the agent manages the policy with the client (annual reviews) there is a great chance for it to do very well. Its especially a good fit for more financially fit clients, or clients with varying income streams.

I sell both and offer both to my clients. I lean more towards WL because of the guarantees. And heck, 4-5% IRR over the long haul is a great return imo, in the no-risk asset category.

 

[Jerard]

Yep. Im sure.

But to be fair every carrier is different. Some do it that way and some dont. But most all Mature at 100 and Guarantee coverage until 121.

LFG for example calls the end of Premiums (age 100) the Maturity Date (unlike NA who calls 121 Maturity... same term but different meaning). Coverage is guaranteed to extend to age 121 after age 100 with LFG as well.

And, to be fair (like I said, each carrier is different, especially on the COI issue) COI extends to 121 with LFG.... BUT it is not as much as I know you think it is... for example: at age 105, for a $450k DB, the COI is only $2,800. And there are no other charges or expenses.

I would encourage you to run some UL illustrations and review the expense reports. You will find that a lot of your opinions and assumptions are unfounded. You seem to think that a UL uses true "Term" pricing for the COI because that is how it is often described. The truth is that they do not use the same pricing as Term. The COI does increase, but not nearly as much as you seem to believe. UL COI is in no way comparable to Term in the way of cost.

North American does have a unique product. I talked to a lady in their marketing department for quite awhile. It does have a maximum of age 100 "paid up" guarantee with an endowment age of 121. Now, that paid up age is dependent on the agent's illustration, the minimum is age 81. If an agent were to show the minimum of age 81, and I forget what she said the endowment age was for the 81 paid up age, and if the client lives beyond the related endowment age then the policy terminates with no value.

We also discussed the product itself in relation to how many other companies have this type of UL. I was told that there were a few that had them in the past but most have discontinued them (ie: UL's that can be "paid up" at a certain age). It seems that North American is pretty much unique in offering this type of UL.

We also discussed the construction of the product itself whereas she said that the UL does not have any cash value. The product itself reminds me of a "to age 100" no lapse term product that a now defunct Mid-Continent Life sold back in the early '90's. We discussed how a UL can not be term but carry that long with no cash value and she was rather vague on that answer.

Before calling I found this page that discussed a 5 year no lapse guarantee, note the disclaimers of "1" and "2". I asked if a client were to miss, let's say, one payment a year would it still have that "paid up" feature and she said "yes". But think about it....there has to be some point where if you skip too many payments then that guarantee is voided.

Bottom line is that if an agent were to create an illustration on the minimum age of 81 and the client lives past the endowment age, then the policy still terminates with no value, just like term does.

Still, it seems like a pretty good product, though not your run of the mill UL that the most other agents are showing. If I ever had a desire to put a UL in my bag, this would be the one I'd look closer at.

 

[scagnt83]

North American does have a unique product. I talked to a lady in their marketing department for quite awhile. It does have a maximum of age 100 "paid up" guarantee with an endowment age of 121. Now, that paid up age is dependent on the agent's illustration, the minimum is age 81. If an agent were to show the minimum of age 81, and I forget what she said the endowment age was for the 81 paid up age, and if the client lives beyond the related endowment age then the policy terminates with no value.

We also discussed the product itself in relation to how many other companies have this type of UL. I was told that there were a few that had them in the past but most have discontinued them (ie: UL's that can be "paid up" at a certain age). It seems that North American is pretty much unique in offering this type of UL.

We also discussed the construction of the product itself whereas she said that the UL does not have any cash value. The product itself reminds me of a "to age 100" no lapse term product that a now defunct Mid-Continent Life sold back in the early '90's. We discussed how a UL can not be term but carry that long with no cash value and she was rather vague on that answer.

Before calling I found this page that discussed a 5 year no lapse guarantee, note the disclaimers of "1" and "2". I asked if a client were to miss, let's say, one payment a year would it still have that "paid up" feature and she said "yes". But think about it....there has to be some point where if you skip too many payments then that guarantee is voided.

Just to clarify, you were talking about the GUL. But what I stated and the paragraph I showed the screenshot of had to do with the normal Current Assumption UL, not the GUL.

The normal Current UL is Paid Up at age 100 and after that coverage is guaranteed to 121. Same with the IUL. Same with LFGs Current UL and IUL... same with many other carriers ULs/IULs/GULs.

If the following is telling you what you already know I apologize... but when you design a UL and run the illustration it shows a Guaranteed Rate Illustration along with the "Current Rate" Illustration. The Guaranteed Illustration is Contractually Guaranteed. The Current Rate Illustration of course is not.

So given the correct Premium level, a normal (non GUL) traditional style Current UL can be 100% Contractually Guaranteed. All you need to do is fund it enough so that the Guaranteed Illustration extends to age 100.
No GUL needed.

 

[VolAgent]

I wouldn't say the guaranteed side is contractually guaranteed. It is the worst case scenario. In all likelihood, the policy will perform better than guaranteed minimum interest and maximum charges.

If you say it is contractually guaranteed, it means that is exactly what will happen, and it is almost certain that it won't.

 

[scagnt83]

Bottom line is that if an agent were to create an illustration on the minimum age of 81 and the client lives past the endowment age, then the policy still terminates with no value, just like term does.

Still, it seems like a pretty good product, though not your run of the mill UL that the most other agents are showing. If I ever had a desire to put a UL in my bag, this would be the one I'd look closer at.

Again, just to clarify you are talking about their GUL. Not the traditional Current UL.

NA, along with a few others offer what is often casually called a "dial a term" style GUL. You can choose to have a lifetime (Guaranteed to 100) policy, or you can choose to have basically a Term policy that just extends beyond what a normal Term policy would extend to.

But what I am talking about is a Traditional UL. Not a dial a term GUL. A Traditional Current Assumption UL can be Contractually Guaranteed to age 121.

----------

I wouldn't say the guaranteed side is contractually guaranteed. It is the worst case scenario. In all likelihood, the policy will perform better than guaranteed minimum interest and maximum charges.

If you say it is contractually guaranteed, it means that is exactly what will happen, and it is almost certain that it won't.

It is Contractually Guaranteed.

If you want to get technical it is Contractually Guaranteed to be the worst case scenario. It uses the Contractually Guaranteed Minimum Interest Rate along with the Contractually Guaranteed Maximum Expenses.

It is Contractually Guaranteed. Anything above and beyond that is not Contractually Guaranteed.

Contractually Guaranteed in Permanent Life Insurance does not mean that is exactly what something will do. It means that the policy will never do worse than that. It is called the GUARANTEED illustration for a reason...

 

[VolAgent]

Again, just to clarify you are talking about their GUL. Not the traditional Current UL.

NA, along with a few others offer what is often casually called a "dial a term" style GUL. You can choose to have a lifetime (Guaranteed to 100) policy, or you can choose to have basically a Term policy that just extends beyond what a normal Term policy would extend to.

But what I am talking about is a Traditional UL. Not a dial a term GUL. A Traditional Current Assumption UL can be Contractually Guaranteed to age 121.

----------



It is Contractually Guaranteed.

If you want to get technical it is Contractually Guaranteed to be the worst case scenario. It uses the Contractually Guaranteed Minimum Interest Rate along with the Contractually Guaranteed Maximum Expenses.

It is Contractually Guaranteed. Anything above and beyond that is not Contractually Guaranteed.

Contractually Guaranteed in Permanent Life Insurance does not mean that is exactly what something will do. It means that the policy will never do worse than that. It is called the GUARANTEED illustration for a reason...

I would never tell someone the Guaranteed Column is Contractually Guaranteed. To easy for them to walk away thinking that is exactly what would happen. I would tell them it is the Guaranteed worst case scenario, and then tell them the current side is what is projected using current values, but that it can and will change and may be higher or lower.