Taking A Hard Look At Indexed UL Returns

[lachjs789]

Let's Take A Hard Look At Indexed UL returns and see if we can make an argument for this product being a part of your client's porfolio.

I recently received an eye opening analysis from a popular provider of Indexed UL products regarding the performance of their indexing options over the past 5 1/2 years. The analysis provides 56 rolling one year cells starting in mid-June 2007 through mid-January 2013.

Of the 56 cells 19 returned 0%. Yes, Indexed UL products offer contractual guarantees usually ranging from 1-3% depeding upon the carrier, but those guarantees typically only apply at surrender or death. For this analysis they assumed the cash values would be loaned to provide a future income stream. The guarantee with this carrier did not apply for loan purposes. That means the yearly cells where the corresponding index return was negative equated to a 0.00% return to the insurance policies cash value.

That being said and with 19 of 56 yearly cells (34.00%) returning 0.00%, the annual S&P 500 point-to-point Index bucket averaged 6.851% over this time period. The corresponding Index (S&P 500 w/o dividends) averaged 2.562%. The annual point-to-point cap rate for this indexing option during the analysis period ranged from 15.00% to 13.50%. The higher 15.00% cap was available during the early stages of the analysis where 16 of the 19 cells offering a 0.00% occurred.

I found the analysis relevant because it included several periods of horrible market performance followed by relatively strong market performance. A reasonably realistic timeframe to measure. Along with the postive returns you of course get tax-free death benefits and with this carrier a slew of living benefits built-in including chronic, critical and terminal illness features.

Do I think Indexed UL products over a 30-40 year period are priced to perfom at 6.851%? Probably not, but a well-funded IUL with a carrier who is fair on expenses and renewal rates can offer a viable outlet for prospects seeking additional tax havens for their cash or cash equivalent assets. Those clients should Take a Hard Look at IUL if they seek tax favored savings and/or income.

 

[Larry Tew]

I agree that IUL has strong potential.

The historical lookbacks make a very strong argument for it.

I posted this earlier in this thread but accidentally deleted it. Your comment reminded me to re-post.

After reading the OP's initial post, I said in my deleted post that everything he ascribed to IUL (primarily growing in value even in declining markets) over the time frames he mentioned could also be said about WL over those same times, but that where IUL had been doing it for a decade, WL had been doing it for a century.

It occurred to me that in every IUL vs WL comparison that the IUL assumed rate moving forward was based on a reasonable expectation based on the "look back", so even a supposed conservative illustrated rate of 6% should be fine... whether recent (5-10 years) supported it or not.

WL illustrations, however, do not enjoy the benefit of a historical "look back". The WL illustration is based on TODAY'S dividend scale, which is at a 30+ year low. There is no assumed dividend rate moving forward based on history. If there were, I suspect the comparisons would be more balanced.

It shows how difficult it is to make an apples-to-apples comparison between product types.

 

[Justin Bilyj]

Larry why you dont have a blog with scagnt is beyond me, Im sure you guys would have a ton of traffic.

If Sam was smart (he is) he would offer blogging by agents on his site to display expertise and split a portion of traffic profits.

Keep the wisdom coming larry!

 

[lachjs789]

I posted this earlier in this thread but accidentally deleted it. Your comment reminded me to re-post.

After reading the OP's initial post, I said in my deleted post that everything he ascribed to IUL (primarily growing in value even in declining markets) over the time frames he mentioned could also be said about WL over those same times, but that where IUL had been doing it for a decade, WL had been doing it for a century.

It occurred to me that in every IUL vs WL comparison that the IUL assumed rate moving forward was based on a reasonable expectation based on the "look back", so even a supposed conservative illustrated rate of 6% should be fine... whether recent (5-10 years) supported it or not.

WL illustrations, however, do not enjoy the benefit of a historical "look back". The WL illustration is based on TODAY'S dividend scale, which is at a 30+ year low. There is no assumed dividend rate moving forward based on history. If there were, I suspect the comparisons would be more balanced.

It shows how difficult it is to make an apples-to-apples comparison between product types.

Larry,

I am glad you re-posted. I wanted to reply but couldn't find you initial post the next day. I agree with you regarding whole life. If someone wants an option with fewer moving parts and more guarantees, then whole life is an excellent option. I have found in some comparisons to IUL where the cash values are similar, that whole life is not always as efficient as IUL on the income stream even if you use a traditional loan within the IUL. My guess is that has to do with the COI's in the whole life in the later years to support the guarantees. It certainly is hard to accomplish an apples to apples comparison between product categories. I look at the WL vs. IUL as a comparison between flexibility vs. guarantees. The client should be presented with both options and then make an informed decision.

 

[scagnt83]

It occurred to me that in every IUL vs WL comparison that the IUL assumed rate moving forward was based on a reasonable expectation based on the "look back", so even a supposed conservative illustrated rate of 6% should be fine... whether recent (5-10 years) supported it or not.

It is just a different style of product.

It isnt always "either or".

Imo, it is a way to diversify.

WL has a stable track record. That is well documented.

IUL is linked to positive market gains. We all know that some years the market will be great, others not. And that it usually annualizes out to around 8% give or take.



As everyone points out, the question lies in Index Cap Renewal Rates.

We have seen rates go down (As Howard pointed out in his post). But not drastically.
Certainly not like Index Annuity Rates have fallen.

The reason behind this is that an IUL makes most of its money for the Insurance Company from the Expenses within it. Not from Interest Rate Arbitrage like an IA.
This is why IUL Caps are so much higher than IA caps.

The 1% guaranteed rate on an IUL is really nothing to the IC.
Think, on an IUL it is just 1% Crediting to the policy, not a true 1% CV gain like an IA.
So it takes less Premium dollars to buy the underlying Bonds to secure the Guarantees of IUL. That leaves more Premium dollars available to buy Index Options.

The WL illustration is based on TODAY'S dividend scale, which is at a 30+ year low. There is no assumed dividend rate moving forward based on history. If there were, I suspect the comparisons would be more balanced.

Because of Interest Rates.

And Interest Rates dictate the Caps & Guaranteed Minimums of IUL.

So if you assume that WL Dividends will rise along with Interest Rates, you must also assume that IUL Caps & Fixed Rates will Rise as well.

Of course, rising rates do not guarantee a rising market for the IUL to benefit from. But if you backtest the Policy structure during times of high rates, it still shows strong results.

WL illustrations, however, do not enjoy the benefit of a historical "look back". ..... There is no assumed dividend rate moving forward based on history.
.

WL assumes the current rate. And I agree that it will likely have higher dividends in the future and most likely perform a bit better than illustrated (assuming the Fed eventually raises rates).

But the historical lookbacks are based on current policy conditions as well.

When IUL first came out it had 15% caps.
Now it is 12% or 13% depending on the company.

If IUL had been around in the 90s it would likely have had even higher caps if you look at rates and market conditions.

So those lookbacks are actually conservative in a similar way that current WL Dividends are conservative.

To show a WL with a Dividend Rate moving forward based on history, to be fair, you would need to show an IUL with Caps based on history. And I would guess that the ratios of one vs. the other would stay about the same.
- - - - - - - - - - - - - - - - - -

I look at the WL vs. IUL as a comparison between flexibility vs. guarantees. The client should be presented with both options and then make an informed decision.

Good way to put it.

And in an overall portfolio, most people want both Guarantees and Flexibility.

Which is why having a portion in WL as well (or vice-versa) can make sense.
- - - - - - - - - - - - - - - - - -

Larry why you dont have a blog with scagnt is beyond me, Im sure you guys would have a ton of traffic.

Kinda working on it (not with larry) (nothing against larry, just never crossed my mind)

 

[Larry Tew]

Great comments, and thanks for the kind words, Empty. It's funny you mentioned that, because I've had an epiphany of sorts lately about how much time I'm spending all combined on posting, answering questions, etc.

It can become quite easy to get out of balance. It's safe and easy (and maybe fun) to blog and "color commentate" with other agents about the business, but before you know it you've moved way past the point of "sharing and giving back to the industry" and you've forgotten that none of this stuff matters beyond what you need to know for your clients.

I'm in re-balancing mode.

 

[Full Throttle]

What rate do most of you run on IUL illustrations? One carrier I use has a default of 8.5%, but I have been running them at 6%. Too conservative? I ideally would show something that has an 85% or better odds of happening. Anyone done (or seen) the research to know historically what that number would be?

Also, for anyone who uses IUL's with a 0% floor, how much do you typically put in the fixed bucket? I've been targeting around a 1% return on down years, which has been about a 20% allocation. Anyone have some insight to share?

 

[BNTRS]

Larry's point is an excellent one (about whole life dividends being at a historical low) and Scagnt's counter point is also well warranted (if rates go up, we could anticipate higher caps, which could mean higher average credited IUL rates).

I'd also suggest that if rates rise, there may come a time when it makes more sense to leave the index account and stick with the fixed account. This will be very product specific as some companies may choose to compete with this idea and others not so much.

What rate do most of you run on IUL illustrations? One carrier I use has a default of 8.5%, but I have been running them at 6%. Too conservative? I ideally would show something that has an 85% or better odds of happening. Anyone done (or seen) the research to know historically what that number would be?

We pretty much run everything at 6%. There's an exception we make for Midland since they have a higher cap than most, and this would realistically result in a higher rate. Historically it's about 30 basis points, I cap it at an extra 10 basis points so 6.1% to account for it.

I did some stuff in Monte Carlo about a year ago that placed 6% as the average crediting rate over a 30 year period in the 95+ probability range. There is some other stuff that Penn Mutual and LFG have done that agrees with my math. I'm happy at that number at this point.

 

[Full Throttle]

Good info, thanks. Under promise, over deliver.

 

[seeknulfind]

Thanks for bringing this up. I learn so much from these discussions. All this brought to mind a "what if".

What if interest do rise significantly? If my understanding is correct UL came into being as an answer to the devastating effect high rates had on WL policy performance.

So would an increase in rates be deja vu (pardon my French) all over again with clients in "underperforming" WL contracts?

Or would a well designed WL contract hold its own with a similarly well designed UL counterpart?

While it seems reasonable to expect interest rates to rise at some point, my own crystal ball is a bit cloudy on the details.

Thus, taking that hard look at IUL might be just the ticket as they seem to perform well now and could do very well in all but a severely wounded market.

Any thoughts on this?

Andy