VUL information

[Prakash Gaonkar]

Here is what you are missing? Will your client have the discipline to continue with their contributions when the market falls and the cash value of their VUL declines 50%. What happens if it declines just before they plan to need it? VULs are a riskier option.

Certainly not all clients. That is why, VUL is not a Suitable for all the clients. But that does not mean it is not suitable for some knowledgeable clients. And trust me, Knowledgeable clients are increasing every year. The cloud is bringing more info and knowledge to masses which was Protected/Guarded all along to keep Job security of many White collars.
The 80s era of wall street OR Insurance is gone.

 

[Allen Trent]

May be some VUL licensed agent can clarify this please

I no longer hold securities licenses but did for 20+ years. I also currently do not sell any products to consumers.

However, you will have a hard time getting anyone with the proper securites licenses needed to sell VUL to answer your questions. Not because they want to avoid you or not answer, but many will not answer because it may violate their broker dealer compliance rules or even FINRA rules on what can or cannot be put in writing without including prospectus or other materials

 

[DHK]

Thanks DaKine. why do you think fees (or overheads) will be higher in VUL than IUL?
in VUL, the cash value account will be managed by the owner. so it should be just a like a Term life insurance plus a investment account that is managed by Owner. where as IUL the cash value account is managed by Provider, which provides a floor (by hedging the s&p Index or Vix may be), invest in different ETFs etc. there is more work and responsibility in IUL. Am I missing something?

The cash value account is NOT "managed by the owner". They are limited based on the allowed securities and/or model portfolios designated by the insurance company. It's not a brokerage account where you can choose from "hundreds" of mutual funds. It will (or should be) a limited selection based on one's portfolio risk tolerance.

It's essentially a savings with market risk of loss.


As for the IUL, the cash values are invested in the general investment account of the insurance company. The insurance company is using the anticipated yield to purchase call options at whatever strike price and underlying indexes they choose. They will either be exercised... or expire worthless. All of this is in the general investment account, NOT the policy. (The VUL has mutual fund sub-accounts and all the returns are IN the policy itself, not the general investment account.)

 

[DHK]

Certainly not all clients. That is why, VUL is not a Suitable for all the clients. But that does not mean it is not suitable for some knowledgeable clients. And trust me, Knowledgeable clients are increasing every year. The cloud is bringing more info and knowledge to masses which was Protected/Guarded all along to keep Job security of many White collars.
The 80s era of wall street OR Insurance is gone.

And if they study the underlying mechanics of how life insurance works... they'll steer clear of it as a primary method of funding retirement OR as a protection policy.

Read this and commit it to memory:

Net death benefit = Cash Values + Net Amount At Risk - Any Outstanding Loans

Now, let's assume that you have a $1 million death benefit and $250,000 in cash values.

What's the net amount at risk? $750,000.

The net amount at risk has a cost to it depending on underwriting and current age. (Which can also vary each year towards maximum charges, but that's an additional consideration.)

Now, what happens to the net amount at risk if the cash values (investments) drop 50% in one year? The $250,000 dropped to $125,000... and the net amount at risk increased to $825,000.

What will happen to the internal policy costs when the net amount at risk has increased AND the insured is older? It will be a higher erosion of the cash values against a SMALLER investment balance.

Now, look below at the following chart:

What rate of return do you need to get back to even after a 50% loss?

You'd need a 100% return PLUS offset the costs of insurance on a wider net amount at risk.


VUL has a place, but it's not a place that I would put client's primary protection OR retirement. I think it's best used as a supplemental executive bonus program for companies... and even then, I'd pick either IUL or a limited pay WL to offset these risks that aren't necessary to have a successful retirement using life insurance as an asset.

 

[DHK]

May I ask you, if you are authorized to sell VUL products? many times I see strong criticism on one particular Insurance product from People who are not authorized to sell it.

I used to be. However, through in-depth analysis (as shown above), I can prove why I wouldn't sell it and the inherent risks with the product.

Here's a graphic from The American College course on Individual Life Insurance about ALL UL products:


Now add market risks to the equation.

Licensing does not equal competence. Education and study creates competence.

So judge the justifications based on their explanation, not their licensing.

If you want to know:
- Current Insurance license(s) since 2004.
- Former Series 7 & 66
- Current Series 65 registration
- CLU, ChFC, and RFC designations with Ethics Approved status from IARFC
- Invited to be the Registered Business Consultant (RBC) designation chair from the IARFC association
- Article on Ethics.net regarding Misrepresentation and Ignorance.
- Prolific poster here on Insurance-Forums
- Admin of the Facebook Groups: Professional Life Insurance Agent Discussion, Advanced Whole Life Insurance Agent Discussion.
... and that's enough on that.

 

[DHK]

VUL need not have only mutual funds. Mutual Funds as well Index (based) funds are similar products. in VUL one should be able to buy individual stocks such as TSLA or AAPL. also It should allow top trade futures of s&p, oil, gold etc. It should not allow any margin products. It will not allow leveraged products such as forex. I am not any Insurance agent. I am just studying the stuff. May be some VUL licensed agent can clarify this please. I could be totally wrong too.

You need to read a prospectus sometime.

And no, you cannot buy individual stocks in an VUL. Only mutual fund sub-accounts. That's why you only need a Series 6 securities license to sell it. (Which is for selling mutual funds and variable insurance contracts.)

 

[DHK]

Does not make sense again. If the client is managing the individual Subaccount (self managed), then the fees should be nothing. If it is Insurer managed subaccount (active managed) then the fees will be higher than similar IUL plan.

As already discussed - the client is not managing it. They can choose from a pre-selected selection and/or model portfolios made available.

Read a prospectus.

All mutual funds have management expense fees. Even Vanguard.

Read a prospectus.

There is NEVER a non-fee product of any kind. Even ETFs being traded have a transaction fee in a brokerage account (no ETFs are not available in VUL contracts as they are considered individual securities and would require either a Series 7 OR a Series 65 - and still aren't available in VUL contracts.)

 

[DHK]

That is called as Hedge. In IUL i have heard they call it "the Floor". For a knowledgeable financial person, it is simply a hedge, which can be automatically programmed for any account easily using a tiny amount of the cash value. (consider it as insurance on the cash value).

No, it's not a 'hedge' of any kind.

https://www.investopedia.com/terms/h/hedge.asp

IUL is a FIXED insurance contract that happens to get interest credited based on the underlying movement in an index, according to an indexed strategy. Could be month-to-month point-to-point, annual point to point, two years point to point, etc. Just depends.

The entire premium minus costs of insurance and taking the surrender charge schedule into account... is all working to earn indexed interest. Policy design and funding structure is KEY here in order to maximize rate of return AGAINST the ongoing charges of the contract.

I wish you were asking more about funding these contracts than trying to take them apart and analyze them as some kind of exotic investment.

Keep it simple and structure the premiums properly for the IUL to maximize earnings and minimize costs eroding against the remaining cash values.


At this time, you are NOT yet ready to sell VUL to anyone. You need to learn far more young grasshopper.

 

[DHK]

What i am struggling to understand is the fees and Overheads of different products. I mean detail breakup. That is actually the price of the product (service in this case).

Read a prospectus and get an illustration based on whatever underwriting class you choose. I'd recommend standard, non-smoking.

I usually run my sample illustrations for male, age 35, standard non-smoking. Typically I find that an $10,000 annual premium buys around $300,000 of coverage when max-funded. For UL/IUL/VUL, that's death benefit option B (increasing).

 

[Allen Trent]

For UL/IUL/VUL, that's death benefit option B (increasing).

I was expecting to see you with death benefit option A Level based on your earlier definition of Net Amount at Risk which was definitely based on Option A.

I had always seen or shown Option B on Max funded IUL/UL. But in recent months, especially with 7702 change, I am seeing illustrations when Option A with a higher initial face to fit the premium ends up looking as good or better long term. I had thought the agents were doing it as a commission play because Target commissionable premium is based on intial face amount & Option A needs higher face to fit sane premium that a lower initial face would on Option B. Downside is surrender schedule is also based on face amount, so that will be higher too.