Pacific Life Policy Performed 22%

[Edwardfin]

As someone pointed out, if the insurance company could generate those returns with "minimal risk" they would just do it in their general account but guess what, they don't because they can't.

The historical crediting rates are hypothetical. The one index that you posted didn't even come out until Sept 2021.

These carriers just make up these indices, backtest them with the most favorable allocations, and post "historical" returns. They're the ones who cherry-pick, not me.

It's largely bullshit which you'll eventually find out.

P.S. I believe in IUL and that it can outperform other insurance products. But it's just that, an insurance product so it's stuck with insurance product returns which can have great years but over 20-30 years, the IRR is still going to be 4-6%, no matter what whiz-bang index the carrier claims to have.

So there is a product that performs at 4-6% based upon your understanding with a leveraged death benefit and the ability to make use of positive arbitrage. The guaranteed loan ability at zero percent interest generally after year 10. A retirement income that avoids provisional income tests. The gains are for whatever reasons are sometimes compared to the market so since 2000 the S&P price has earned 5.9% (I didn't take away the tax burden if you do it's less- I also gave an average rate, not the actual rate or return if you use the actual rate it's less) with a front-loaded fee scheduled that when properly structured the customer will pay less in overall fees compared to the market over the life of the product. Oh and based upon the last 23 years it gives market-like gains without any risk of loss to the market. It sounds like I should talk to most if not all my customers about this product. Is that your conclusion?

 

[scagnt83]

So there is a product that performs at 4-6% based upon your understanding with a leveraged death benefit and the ability to make use of positive arbitrage. The guaranteed loan ability at zero percent interest generally after year 10. A retirement income that avoids provisional income tests. The gains are for whatever reasons are sometimes compared to the market so since 2000 the S&P price has earned 5.9% (I didn't take away the tax burden if you do it's less- I also gave an average rate, not the actual rate or return if you use the actual rate it's less) with a front-loaded fee scheduled that when properly structured the customer will pay less in overall fees compared to the market over the life of the product. Oh and based upon the last 23 years it gives market-like gains without any risk of loss to the market. It sounds like I should talk to most if not all my customers about this product. Is that your conclusion?

IUL has been around since the early 2000s. None of those policies issued back then have provided "market like returns".

Decreases in Caps and increases in Internal Expenses are the issue. Especially when a new product line is released and the old existing product is no longer sold and no longer needs to be competitive for the carrier to make sales.

Current Caps are meaningless. Renewals are what make or break IUL products. And renewals have not been kind to most IULs.

It doesnt make it a bad product overall, but what you are describing has not proven true in real life.

 

[Edwardfin]

IUL has been around since the early 2000s. None of those policies issued back then have provided "market like returns".

Decreases in Caps and increases in Internal Expenses are the issue. Especially when a new product line is released and the old existing product is no longer sold and no longer needs to be competitive for the carrier to make sales.

Current Caps are meaningless. Renewals are what make or break IUL products. And renewals have not been kind to most IULs.

It doesnt make it a bad product overall, but what you are describing has not proven true in real life.

Ok, you said the policy should provide a 4-6% return. I assume you are referring to policies that were issued back then. If you were then they in fact have provided market-like returns based on the S&P price returns since 2000. Especially if you understand the tax burden on that investment and what an average return means. You can also take into account that most people don't earn the average s & p returns. If you compare that to all the other benefits of an IUL that would mean this product is in fact superior to the market based on your words. Do you agree?

 

[Allen Trent]

The gains are for whatever reasons are sometimes compared to the market so since 2000 the S&P price has earned 5.9%

Most recent 20 year average of actual S&P 500 is 10.05%, correct?

If in a Roth, tax burden is a non issue

If in an after tax brokerage account, the tax burden is at lower annual dividend tax rate & any sale of shares at capital gains rates.

IUL will be taxed at ordinary income tax of entire loan balance if policy is surrendered, lapsed, 1035 exchanged to life or annuity (if loan not moved to new company)

I think IUL is a great product, I just don't like the constant messaging that IUL has no chance at being taxed but the alternative is always get taxed at the most agregious tax rates.

Why does it have to be an either or? Why not utilize the product along with the other products. Everything in moderation & supplementing each other.

 

[Edwardfin]

Most recent 20 year average of actual S&P 500 is 10.05%, correct?

If in a Roth, tax burden is a non issue

If in an after tax brokerage account, the tax burden is at lower annual dividend tax rate & any sale of shares at capital gains rates.

IUL will be taxed at ordinary income tax of entire loan balance if policy is surrendered, lapsed, 1035 exchanged to life or annuity (if loan not moved to new company)

I think IUL is a great product, I just don't like the constant messaging that IUL has no chance at being taxed but the alternative is always get taxed at the most agregious tax rates.

Why does it have to be an either-or? Why not utilize the product along with the other products. Everything in moderation & supplementing each other.

No that is not correct.

Since "2000" the growth rate of the S&P Price is 5.9% actual rate of return is 4.26%
The S&P total return is 7.94% the actual rate of return is 6.26%

In the last 20 years, the S&P price average rate of return is 7.57% the actual rate of return is 5.92%. The total return S&P is 9.70% the actual rate of return is 8.02% ... in non of those time periods has the S&P been 10.05%. This is also the gross rates so you would have to reduce the returns by the fees they paid on those investments, by the taxes due, and assume that the average person did not perform at the market standard because the average person never makes what the market makes.

This also makes me think...IULs are a lot closer to market-like returns than people who don't understand them think. If you pair that with the other benefits then you should definitely have a conversation with most clients about them--Lol.

Roths are limited by the amount you can put into Roth's income and a paycheck so many people would not benefit. They are limited.

No IUl that a competent professional would sell would not have a provision that would avoid an over loan... it's called an over loan provision. There is very little reason to move the cash value to an annuity as the payouts are extremely similar in an IUL.. also you would be taxed on funds that you have designated not to be taxed... you would also have it count in your provisional income which literally doesn't make sense ... If you design an IUL the goal is to use the money for the loans later. If done as planned there will not be any tax burden it will truly be a tax-free retirement.

 

[Allen Trent]

No that is not correct.

Since "2000" the growth rate of the S&P Price is 5.9% actual rate of return is 4.26%
The S&P total return is 7.94% the actual rate of return is 6.26%

In the last 20 years, the S&P price average rate of return is 7.57% the actual rate of return is 5.92%. The total return S&P is 9.70% the actual rate of return is 8.02% ... in non of those time periods has the S&P been 10.05%. This is also the gross rates so you would have to reduce the returns by the fees they paid on those investments, by the taxes due, and assume that the average person did not perform at the market standard because the average person never makes what the market makes.

Roth's are limited by income and a w-2 paycheck so many people would not benefit. They are limited

No IUl that a competent professional would sell would not have a provision that would avoid an over loan... it's called an over loan provision. There is very little reason to move the cash value to an annuity as the payouts are extremely similar in an IUL.. also you would be taxed on funds that you have designated not to be taxed... you would also have it count in your provisional income which literally doesn't make sense ... If you design an IUL the goal is to use the money for the loans later. If done as planned there will not be any tax burden it will truly be a tax-free retirement.

Is Overloan contractually guaranteed & can you find in writing where carriers guarantee it avoids taxation by the IRS? I have yet to see this, and many carriers have disclaimers on illustrations & contracts that the IRS hasn't ruled on Overloan. Lastly, Overloan only applies to lapses, not when a person out of ignorance in their 80s or 90s surrenders the contract as they see bad news on an anniversary statement they dont understand & can't remember details from a policy from 50 years prior or loan from 3-4 decades prior they don't recall taking. These happen every year at carriers today where people ignorantly surrender or a new overzealous agent ignorantly 1035 exchanges to a new contract & the carrier extinguishes the outstanding loan they gave the client by taking the cash from the clients policy.

In regard to S&P500, is this Calculation of S&P500 below with dividends reinvested incorrect in showing most recent 20 year is 10.13%. The stocks of the S&P 500 pay dividends unlike index annuity or index life. Honest question, even if you were correct at 7.94%, where do you get actual is 6.26%? Are you saying 1.65% is lost to fees or combination of fees & taxes?

Sure, there is expenses with the average S&P 500 index fund. Many S&P500 ETF have expense ratios of .03 to .10%, that wont impact it as much as taxes, but again, neither long term capital gains rates or dividends tax rates in an after tax account will eat up near the amount of returns you are suggesting.

While you are correct, some cant contribute to a Roth due to income. (over $225k for married couple), some can get into a back door roth (more difficult), others can contribute to employer Roth, etc.

Again, not saying IUL doesnt have a great place in a clients portfolio, especially HIHNW already saving substantially in other plans, I just dont believe it should get shown with only the absolute perfect scenario on a spreadsheet compared to the worst case scenario of the other plans with assumptions of highest fees, highest taxes while ignoring that an IUL can have lower caps/participation rates & internal charges & COI can go up & people can experience taxes on loan balance if extinguished by the carrier

 

[PrivClientSG]

Statistics don't lie...but statisticians do! LOL.

 

[1reason]

Is Overloan contractually guaranteed & can you find in writing where carriers guarantee it avoids taxation by the IRS? I have yet to see this, and many carriers have disclaimers on illustrations & contracts that the IRS hasn't ruled on Overloan. Lastly, Overloan only applies to lapses, not when a person out of ignorance in their 80s or 90s surrenders the contract as they see bad news on an anniversary statement they dont understand & can't remember details from a policy from 50 years prior or loan from 3-4 decades prior they don't recall taking. These happen every year at carriers today where people ignorantly surrender or a new overzealous agent ignorantly 1035 exchanges to a new contract & the carrier extinguishes the outstanding loan they gave the client by taking the cash from the clients policy.

In regard to S&P500, is this Calculation of S&P500 below with dividends reinvested incorrect in showing most recent 20 year is 10.13%. The stocks of the S&P 500 pay dividends unlike index annuity or index life. Honest question, even if you were correct at 7.94%, where do you get actual is 6.26%? Are you saying 1.65% is lost to fees or combination of fees & taxes?

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Respectfully, your 10.13% return is misleading somewhat. That's pre-tax, and pre-tax each year, so someone paying dividend tax is realizing a cumulative reduction of return. Unless it's in a tax deferred/avoid vehicle, it becomes nearly worthless as an example of what can be earned through investment.

Better to strip out the dividends, calculate the return for any given year, then add in each year of after tax dividend increase in the process. Plus, for most, they're in the highest marginal rate when the returns are largest.

 

[Allen Trent]

Respectfully, your 10.13% return is misleading somewhat. That's pre-tax, and pre-tax each year, so someone paying dividend tax is realizing a cumulative reduction of return.
Unless it's in a tax deferred/avoid vehicle, it becomes nearly worthless as an example of what can be earned through investment.

Better to strip out the dividends, calculate the return for any given year, then add in each year of after tax dividend increase in the process. Plus, for most, they're in the highest marginal rate when the returns are largest.

Fair enough. But if in Roth, tax deferred, then tax free. If in after tax brokerage acct, dividends are currently taxed at much lower tax rate than ordinary income tax bracket. If in a variable NQ annuity, the growth & dividends will be tax deferred & compounding until distributed & taxedc as ordinary income.

I can see your point of stripping out dividend & adding back after tax rate after low taxes on dividend .......but why doesn't anyone want to do the similar math on IUL after expenses & also show the ordinary income tax ramifications on money taken out or loan balance that are extinguished at lapse/surrender/etc

 

[1reason]

Fair enough. But if in Roth, tax deferred, then tax free. If in after tax brokerage acct, dividends are currently taxed at much lower tax rate than ordinary income tax bracket. If in a variable NQ annuity, the growth & dividends will be tax deferred & compounding until distributed & taxedc as ordinary income.

I can see your point of stripping out dividend & adding back after tax rate after low taxes on dividend .......but why doesn't anyone want to do the similar math on IUL after expenses & also show the ordinary income tax ramifications on money taken out or loan balance that are extinguished at lapse/surrender/etc

I don't know the answer to that question regarding what agents do or don't do with IUL, albeit it wouldn't surprise me if many life agents doesn't fully understand the product and/or are willing to put up any numbers they legally can in order to make a sale. So your point is taken as well and I like how you're thinking this through.

Life insurance isn't my primary focus (commercial insurance and tax planning is), albeit it's increasingly becoming one, so that's why I stumbled upon the thread.