IUL Questions

Mar 26, 2014

  1. scagnt83
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    scagnt83 Worldwide Expert of Everything

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    You wouldnt tell a client that the Contractually Guaranteed illustration is not Contractually Guaranteed? :1eek:

    Seriously Vol we are basically just arguing semantics here. I was calling it that with Jerard because he claimed in previous threads that a UL can not be Guranteed to never lapse unless it is a GUL.

    The way I explain it to a client is that the Guaranteed Illustration is the Guaranteed Minimum that the policy will do. The Current is the Maximum it could possibly do. Their policy will most likely perform somewhere in between the Guaranteed and the Current Illustration.


    But we are not talking about explaining this to a client. I am explaining it to an agent who does not know a whole lot about how ULs work (no offense Jerard, I didnt mean that in a bad way).


    The Guaranteed Illustration is what that policy is Contractually Guaranteed to never be less than. It is not Contractually Guaranteed to be exactly that, just never less than that... feel better dude?
     
  2. VolAgent
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    VolAgent Guru

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    It is semantics, but I would never do it the way you said. To me, contractually guaranteed means that is exactly what will happen. I certainly don't want someone looking at the guaranteed column of a UL illustration and thinking that. I want them thinking that is the worst case, that is as bad as it can get, guaranteed to be that or better.

    Just like I don't want anyone looking at the current column and thinking that is what will happen. As you have often said, at least I think it is you, after the first year, both columns are wrong.
     
  3. maxherr
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    maxherr Expert

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    Precisely correct. And sort of wrong. A UL policy comes with very few, if any "contractual guarantees."

    There is no guaranteed cash value in any year, there is no guaranteed minimum cost of insurance, there is no guarantee that a death benefit will be payable in the future even if all premiums are paid on time, no money is ever borrowed, and no withdrawals are taken. The only real guarantee (other than the maximum COI rate, sales loads, and admin fees) in a UL policy is this: This policy will lapse without value if, on any premium due date, there is, together with premiums paid, insufficient cash value available to pay the sum of monthly deductions due.

    A UL "Basic Illustration" set of "Guaranteed Values" is a depiction of the worst case scenario. It shows the effect of the Maximum COI and other contractual deductions and Minimum Interest crediting in action on/against the Planned Premium. In the 40+ year history of UL, I am not aware of any company that has gotten into this much trouble with its policies.

    The problem with UL, as both scagent and vol recognize, is found in the Current Assumptions/Nonguaranteed columns. In the 40+ year history of UL, I am not aware of any company that has managed to match those numbers, and THAT has gotten most of the companies into big trouble at some point along the way -- mostly in the 1990s, but it continues to this day, and keeps me busy enough.

    The truth about UL is that the answer to the question, "How will this policy perform?" lies between the two sets of numbers. The problem with that is the Guaranteed columns run to ZERO sometime between year 1 and year 15 or so (could be a few years more or less, but that's a good middle ground for discussion purposes). The Nonguaranteed columns will go to age 121 -- however many years that may be. Those same illustrations sometime depict a "midpoint scale" -- a happy medium between the two extremes. Look closely at those numbers, and you will, more often than not, see ZEROS just like the guaranteed columns, only further down the road to policy maturity. So let's assume a new policy written on a 40-year-old.

    With 81 years to maturity, there is a whole lot of room for trouble to brew. "Get into a temporary financial bind, Mr. Policyowner, and your flexible policy permits you to reduce or even stop paying your premiums." Perfectly correct statement to make, but incomplete. It can also cause any no-lapse guarantees to die.

    Every month no premium is paid, the COI and other deductions are taken from the cash accumulation after any interest is added. If the interest is not enough to offset these charges, the net cash accumulation declines and the Net Amount at Risk (NAR) increases. The next month's COI deduction will be higher by a few cents to a few dollars that the previous month's. And this will continue until either premiums are paid again or the policy runs out of money. Except that, as each policy year passes, the COI rate per $1,000 NAR increases with the insured's age, and the difference between the Year 1 COI and, let's say the Year 30 COI can be several hundred percent -- perhaps even into the thousands of percent.

    Don't believe it? Just look at the Table of Maximum COI in any UL contract. I'm looking at the numbers for a John Hancock Protection UL policy for a 70-year-old female. Year 1 COI is $0.106290 per $1,000 per month. But Year 30 (age 100) is $26.49420 per $1,000 per month. On a $5,000,000 policy, that makes the COI deduction about $132,000 per month or $1,589,000 per year. The current year increase in the COI rate in Year 32 compared to Year 1 is a mere 22671%.

    With a planned premium of only $72,000, where will the rest of the COI come from? From the Cash Accumulation. Whether the premium is paid or not. If the interest credited to the cash accumulation is not $1,589,000 for the year, the policy cash value will continue to decline.

    Now, let's take a deep breath. This is an example of a worst-case scenario. The same illustration's nonguaranteed values for Year 30 show a current COI deduction of "only" $637,038 for the year, and a cash surrender value of $1,350,888 at year end. But how does the policy get there if only $72,000 is being paid in premiums? A look at "optional" illustration pages that most agents would never print out (if they even know they're available for this policy form) reveals that the interest credited for the year was $$624,768.

    So the interest credited (according to the illustration) is less than $14,000 lower than the COI deduction. Seems reasonable, doesn't it? Only until you look at the interest crediting rate. That $624,000 in interest was credited on a prior year's cash value of $1,324,354. Simple math (624,768 / 1,324,354 = 0.4625 -- or 46.25%. What insurance company is going to credit a "plain vanilla" UL policy, let alone an IUL with a 14% annual cap, with 46% interest?

    That's how they manage to show cash value growth at about a 5% rate.

    That's why the policy is not likely to perform as illustrated.

    That's why the answer lies somewhere between the Guaranteed and Nonguaranteed values in an illustration, and why UL policies have a higher than average lapse rate than WL or Term policies.

    The phrase "caveat emptor" -- let the buyer beware -- hardly applies to the sale of UL policies. Their complexity makes it nearly impossible for a non-insurance person to understand them, and even most agents can't explain them properly. They avoid any discussion of the Guaranteed columns, and joyfully point to the bottom line of the Nonguaranteed columns, creating the impression that Guaranteed doesn't matter, and Nonguaranteed is as good as 100% promised.

    I don't have a problem with the premise of IUL. I think the product has far more to offer than any VUL policy, despite the fact that VUL "offers all of the upside of the market" (as most RR/Agents tell their prospects, while convenient omitting the other side of the coin, that says, "You get all of the downside of the market, too"). But I understand UL differently than most other agents, and that means when I discuss it with a client, there has to be a conversation about COI, NAR, and how the NAR must decrease every year by at least as much as the COI is increasing, otherwise the policy will fall off track. The longer the policy is off track, the harder it is to get it back on track when it completely derails. The solution is money -- lots of it -- and often times more than a person can afford, resulting in an individual forced to give up his/her life insurance at the worst possible time in life . . . shortly before death.

    UL - IUL - GUL - VUL . . . they are all products that work exactly as the contracts say they do. It's nothing that money cannot solve. But insureds unprepared to pay more money if push comes to shove are never happy about it, and some of them go looking for attorneys to take their case to court. And an attorney looking to collect 30%-40% of a jury damages award with two commas in the dollar amount, will have a very nice payday at the expense of one or more agents and the insurance company(ies) they represent.

    The cases are a bit harder to win these days compared to 20 years ago, but they are still quite winnable when a person is represented by competent legal counsel who either fully understands how UL works, or who hires an expert witness who can explain it in layman's terms.
     
    Last edited: May 6, 2015
    maxherr, May 6, 2015
    #63
  4. scagnt83
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    scagnt83 Worldwide Expert of Everything

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    Yes I have said that before. But again, I was speaking to an agent, not a consumer. Jerard knows that the policy can and likely will do better than the Guaranteed Column.

    I have already described how I explain it to consumers; Guaranteed is worst case, Current is absolute best case, in reality it will fall somewhere inbetween.

    Basically we disagree on what Contractually Guaranteed means in life insurance terms. Had I put "Minimum" at the end of that statement we would have saved ourselves this back and forth... again, semantics. You knew what I meant and so did the person I was speaking to. We are not talking about explaining this to a consumer.

    ----------

    This is 100% incorrect. Anyone who has read a UL Contract knows this. It is scary that you hold yourself out to be an expert and testify in trials.

    If the Scheduled Premium is paid, and no loans or withdrawals are taken, the Guaranteed Illustration is Guaranteed. Even the CV in it. It is written in the legally binding insurance contract. You pay the Scheduled Premium and dont touch the CV, you are guaranteed at a bare minimum the Guaranteed Illustration.
     
  5. DHK
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    DHK "YOU CAN'T HANDLE THE TRUTH!"

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    I stole the saying from Marvin Feldman who advised agents to remember the rule "1 to 100".

    "In one year, 100% of your illustrations will be wrong."

    Which is to remind clients - when agents actually DO meet with them - about WHY they bought, not necessarily WHAT they bought.
     
    DHK, May 6, 2015
    #65
  6. scagnt83
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    scagnt83 Worldwide Expert of Everything

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    Another incorrect statement... well... half incorrect and half misleading.

    LIMRA has studied lapse rates extensively. Term has a much higher Lapse rate vs. UL or WL. UL only has a 2% higher lapse rate than WL.

    Term- 9.5%
    UL- 5.1%
    WL- 3.3%

    Again, it is scary that you are an expert witness. I could make a good living testifying against you and proving you wrong.
     
  7. VolAgent
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    VolAgent Guru

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    Which was exactly my point. I don't want them walking away with a false impression.

    That said, I'm not a huge fan of current assumption UL. Ignoring immediately liquidity for business purposes, just get a WL. You'll be happier in the long run.

    Now, I do see IUL or VUL as more interesting products. There is more risk involved, but you also have more upside potential. Obviously the VUL having more risk and reward.
     
  8. Jerard
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    OK...so I was looking at the GUL on their website. Now it makes sense on why the lady said there's no CV. "Doh"

    Now...regarding the bold text, if one was to illustrate a plan that extends to age 100, and the company has told me that the higher the paid up age the more the premium is, wouldn't that cause the premium to be higher than a WL, and thus, defeat the lower premium benefit that agents sell it for in the first place?

    If the answer is 'yes' to that, then it seems to me that most agents would sell it for the lowest premium they can to get the sale (present company excluded). So then (not knowing what NA's endowment age is for a 'paid up' age of 81) if the client lives past the endowment age he has nothing. No DB, no CV, not even a thank you card.

    And we know 'most' agents sell UL's because they are cheaper than WL and also the client gets told they "can skip a payment now and then" and the policy won't lapse. Now combine that with the agent turnover rate and it would be rare for a client to get a review of their policy.

    I do agree that if one is sold with the guaranteed side lasting to a grand ol' age, and the client understands that if he lives beyond that he has nothing, and if the agent does a review every year, then that would make the UL as safe as it can be. But not safe enough for my satisfaction.

    Have a good night, all.....have to go watch my grandson play in a baseball tournament. Root for the Pirates (not the Pittsburgh ones). :yes:
     
    Jerard, May 6, 2015
    #68
  9. benefitguy
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    benefitguy New Member

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    There is a good book I would suggest you pick up and read. It is by Patrick Kelly called tax free retirement. This will help answer most of your questions.
     
  10. mgoodin08
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    mgoodin08 New Member

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    OK, this thread is a few years old but I first want to say THANKS! A lot of very good information here. For a licensed agent newly independent this thread has taught me that what I DON'T know about properly structuring WL, IUL, FIA's FAR OUTWEIGHSwhat I do know. So, I'm thinking I need to contract with a company and BD that will have good agent support and assistance/mentoring so that I will not do wrong by clients and can learn by doing, so to speak. And I am thinking that Pacific Life and Penn Mutual are probably the places to go for that.

    Any other advice/direction that you all who appear to know a lot more than I can offer is greatly appreciated.
     
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