Pacific Life Policy Performed 22%

[scagnt83]

Can I get your honest opinion on my idea to stagger 5 different IULs into a bond ladder thereby diversifying amongst different benefits, crediting methodologies, and expirations? The thought process is that they can't all generate zero crediting all the time.

I think its a perfectly sound strategy. Never anything wrong with diversifying. Not only are you diversifying crediting strategies, but you are diversifying carriers and lowering the chance of one screwing you over with low Caps or high Expenses in the future. I would encourage you to do it.

 

[scagnt83]

If I have some glaring blindspot about this I would love it if you pointed it out to me because I genuinely want to learn.

Rising rates could be a factor for the 3rd party issuers of credit. Your IUL Loan Rates are capped around 8%. If the secured line of credit has a variable rate, then you could possibly end up paying more than just loaning it from the policy. (I dont know the specifics of what you plan on using, so this is a hypothetical)

Most IULs have a "wash" loan option as well.... meaning a zero net cost to the policy. That is something you cant find anywhere else.

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Another possible issue is that you used CVAT. If I were a 3rd party lender, I would not accept CVAT IULs unless they are a MEC. I would be surprised if all of them accept CVAT as it carriers a higher risk... same reason carriers dont offer overloan protection riders for CVAT.

 

[scagnt83]

We should also bring up the fact that interest rates can rise which can increase the cap rates, participation rates, fixed interest rates, and lower the spread on uncapped index options. Thereby increasing your probability of averaging 5%, but if you were to get lucky you can potentially earn 10% like my previous example.

Theoretically, rising rates could cause Caps to increase. However, you have to realize that carriers are purchasing long term bonds on the non-equity side of the backroom. I would not count on it to happen for at least a decade... if it does.

Carriers who use a "portfolio rate" for Caps/Spreads/etc. will give increases eventually because they have to in order to still sell new business. (meaning old IULs and new IULs get the same Cap rate)

Carriers who use rates specific to certain blocks of business, have zero incentive to raise rates. They just issue a new product for new sales and keep the old product at the lower rates. I would highly recommend you not use F&G because of this. Penn uses a portfolio rate, so does Columbus life. Not sure about Pac.

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Speaking of interest rates. If you believe they are going up substantially, you should consider diversifying into WL as well. It stands to benefit the most imo from an increasing rate environment.

 

[marindependent]

Speaking of interest rates. If you believe they are going up substantially, you should consider diversifying into WL as well.

Interesting. Why?

 

[scagnt83]

Interesting. Why?

Dividend rates for WL are interest rate sensitive. Back in the 70s/80s when interest rates were high... Dividend rates were 10%+. As interest rates fell, Dividend Rates followed. We are at historic lows for Dividend Rates right now.

I would count on Dividend Rates increasing before IUL Caps increase... jmo.

And unlike IUL, WL carriers announce a dividend for all blocks of WL policies (generally speaking). There are no "new money rates" and "old money rates".... just the Dividend Rate that everyone gets.

 

[ejbarraza]

I gave you three sources, you want a personal referral?

I emailed them and they said they only lend on Whole Life and not Indexed Universal Life which was my overarching point. Only 2 banks that I know lend against IUL and one of them only at 50% Loan to Value with the caveat that the majority of the line of credit ($100k minimum) must be from the cash value in whole life policies. The other bank lends against IULs on a standalone basis with 75% LTV and a minimum line of credit of $25k.

 

[ejbarraza]

If you believe in it this strongly, then do it!

I think what everyone is trying to say is just not to rely on carrier projections.

The economy changes, taxation changes, carriers change, so you have to review the policies constantly.

What you're doing (buying multiple contracts from different companies) is smart.

It would not be at all profitable to run an agency like this, however (focusing on prospects making so little money).

I don't disagree with most of this. Just go out & sell one of these per week for 10 years & report back to me how it plays out, let me know how many complaints to insurance depts happen, how many are still in force, cashed out for way less than paid in, etc.

Seen it from ULs of the 1980s, the VUL of the 1990s, the WL of the 1950-2000 that have reduced dividends. They all looked good at illustration, even better on agent created spreadsheets, but only some panned out & those are those that stuck to it & modified the plan as the product & interest rate underperformed

No doubt things change which is why the emphasis should be to make it abundantly clear to the customer what it is that they own. Otherwise, class action lawsuits are sure to follow. This is what led to Pacific Life deprecating the PDX1 and coming up with the PDX2 as a way to combat the stigma from the lawsuit. Now they guarantee a 2% alternate accumulated value so that even if the index does not perform you at least can be certain to be better off buying and holding rather than not buying the PDX2 at all. I also failed to mention that the cost of the multiplier declines to 3% starting Year 25. And the 5-year index option is contractually guaranteed at no less than a 15% cap. So the multiplier plus the 5-year index should translate into at least 5% returns and even if it doesn't, you still get the 2% minimum. I am not saying that it is the cure to all of life's problems, but it certainly would be helpful to a lot of people to learn all of the ins and outs on their own and either originate the contract on their own or find someone else who is willing to do it for them.

Another reason I don't think it is at all comparable to whole life, universal life, or variable universal life is that those products do not use options. As such, they do not have the asymmetric upside versus downside that an IUL can offer with very little interest earned on the general account. Also, VULs are taking on downside risk whereas IULs never take any downside from the stock market. I mentioned tokenization earlier because I believe that blockchain technology can greatly improve life insurance contracts. If anyone could pull up an NFT at any time they could easily detect that a policy had too much death benefit relative to cash value such that it will eventually cannibalize itself. By creating transparency in in-force policy illustrations, you not only increase the revolving door of business going to good agents, carriers, options, etc. You also create a competition for your premiums by pitting the insurance carriers against one another on a level playing field. If every contract is designed for max accumulation, then we will know quickly who the best of the best is. And if they increase charges to the max that will show in the quarterly statements. Wouldn't you like to have access to that kind of information? It would also benefit big banks to package all of the loans into one giant CLO that has all of its loans on the blockchain that anyone can audit.

 

[Allen Trent]

No doubt things change which is why the emphasis should be to make it abundantly clear to the customer what it is that they own. Otherwise, class action lawsuits are sure to follow. This is what led to Pacific Life deprecating the PDX1 and coming up with the PDX2 as a way to combat the stigma from the lawsuit. Now they guarantee a 2% alternate accumulated value so that even if the index does not perform you at least can be certain to be better off buying and holding rather than not buying the PDX2 at all. I also failed to mention that the cost of the multiplier declines to 3% starting Year 25. And the 5-year index option is contractually guaranteed at no less than a 15% cap. So the multiplier plus the 5-year index should translate into at least 5% returns and even if it doesn't, you still get the 2% minimum. I am not saying that it is the cure to all of life's problems, but it certainly would be helpful to a lot of people to learn all of the ins and outs on their own and either originate the contract on their own or find someone else who is willing to do it for them.

Another reason I don't think it is at all comparable to whole life, universal life, or variable universal life is that those products do not use options. As such, they do not have the asymmetric upside versus downside that an IUL can offer with very little interest earned on the general account. Also, VULs are taking on downside risk whereas IULs never take any downside from the stock market. I mentioned tokenization earlier because I believe that blockchain technology can greatly improve life insurance contracts. If anyone could pull up an NFT at any time they could easily detect that a policy had too much death benefit relative to cash value such that it will eventually cannibalize itself. By creating transparency in in-force policy illustrations, you not only increase the revolving door of business going to good agents, carriers, options, etc. You also create a competition for your premiums by pitting the insurance carriers against one another on a level playing field. If every contract is designed for max accumulation, then we will know quickly who the best of the best is. And if they increase charges to the max that will show in the quarterly statements. Wouldn't you like to have access to that kind of information? It would also benefit big banks to package all of the loans into one giant CLO that has all of its loans on the blockchain that anyone can audit.
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Some carriers are announcing cap & participation rates lowered for August. 1 was showing .75% lower cap & 10% lower participation rate. This will confuse agents as many agents will wonder how can those be lower when fixed interest rates like Treasuries & mortgage rates are up the last few months.

I am guessing increased volatility has increased cost of the options and/or inflation eroding bond values, etc.

 

[scagnt83]

Some carriers are announcing cap & participation rates lowered for August. 1 was showing .75% lower cap & 10% lower participation rate. This will confuse agents as many agents will wonder how can those be lower when fixed interest rates like Treasuries & mortgage rates are up the last few months.

I am guessing increased volatility has increased cost of the options and/or inflation eroding bond values, etc.

Its not a portfolio rate. They bought long term Bonds to back those contracts. Got to wait the 10 years for them to renew the Bonds at higher rates. Difference in Options pricing only goes so far. Bond rates are the main dictator of how much in Options the carrier can purchase.

And rising rates only make the Bonds they are holding worth less and less. So no real chance to trade them or rearrange the portfolio to help support Caps.

It will be interesting to see what happens with the carriers who use portfolio rates for all blocks of IUL. My guess is that newly issued products will carry a higher internal expense. Penn just released a new one, I have not compared it yet though.

If you want an interest sensitive life product, get WL.

 

[Allen Trent]

Its not a portfolio rate. They bought long term Bonds to back those contracts. Got to wait the 10 years for them to renew the Bonds at higher rates. Difference in Options pricing only goes so far. Bond rates are the main dictator of how much in Options the carrier can purchase.

And rising rates only make the Bonds they are holding worth less and less. So no real chance to trade them or rearrange the portfolio to help support Caps.

It will be interesting to see what happens with the carriers who use portfolio rates for all blocks of IUL. My guess is that newly issued products will carry a higher internal expense. Penn just released a new one, I have not compared it yet though.

If you want an interest sensitive life product, get WL.

very true & agree.

But most agents I have heard explain IUL talk of it being ripe to have much higher cap & par rates because of the rising Treasury & Mortgage rates. Hell, even some wholesalers & carriers have alluded to that the last few years as Treasury & mortage rates were dropping for the reason for lower caps & par rates.