What % of Premiums do you direct to Fixed interest account to cover COI/Fees, etc

[Allen Trent]

Hi there.

For those of you most experienced with writing IUL, how much of the Premiums do you direct to the fixed account to cover COI/Fees, etc? Allocating 100% to index accounts seems to short-change the clients growth as COI/Fees are taken out monthly but Index credits are general annual or 2 years. Fixed account (similar to UL) credits interest monthly. Just trying to figure out if 10 or 15% is best in the first few years so that the client doesn't forfeit making any index credit on potentially 11 months of COI/Fees deducted that wont be in the CV at end of index cycle to receive an index credit.

Also, if you do advise on X% of initial premiums, do you then advise client to later back down the allocation to fixed account as the CV account grows as the COI/fees may not be as high in later years as a ratio to total CV.

Lastly, I am a believer in Dollar Cost averaging into the index accounts any annual premiums or lump sums/1035 to create the most buckets & avoid risking 1 single day for the index credit to live or die by. Anyone out there against DCA of annual/lump sums?

Thank you in advance

 

[scagnt83]

Imo, it all depends on expectations of market returns. From a historical basis, over the long term, I have never found the numbers to have any advantage doing that. Assuming even a moderate Index return, the higher index return is more beneficial financially.

But that doesnt mean in the future it might have a positive effect doing that. If you had 3 or 4 flat or negative years in a row, obviously it would have been a good thing to have some allocated to Fixed. So tell me when the Index will be negative, and for how long, and I will tell you how much to put in the Fixed Allocation... LOL.

Seriously though, going back to 1970, the S&P 500 has been negative 2 years in a row only once. It has been negative 3 years in a row just once. It has never been negative 4 years in a row. (that is calendar year return obviously)

The flip side to that, is it has been 18 years since we have had multiple negative years in a row. It has been 7 years since the last flat year. But the "great recession" back in 2008, only saw 1 negative year. So how much will it matter in the next 5 years? No telling. If the client is concerned about it allocate some to fixed.

What I mainly consider when/if allocating to Fixed, is if they are taking out CV any time soon.

 

[Allen Trent]

Imo, it all depends on expectations of market returns. From a historical basis, over the long term, I have never found the numbers to have any advantage doing that. Assuming even a moderate Index return, the higher index return is more beneficial financially.

But that doesnt mean in the future it might have a positive effect doing that. If you had 3 or 4 flat or negative years in a row, obviously it would have been a good thing to have some allocated to Fixed. So tell me when the Index will be negative, and for how long, and I will tell you how much to put in the Fixed Allocation... LOL.

Seriously though, going back to 1970, the S&P 500 has been negative 2 years in a row only once. It has been negative 3 years in a row just once. It has never been negative 4 years in a row. (that is calendar year return obviously)

The flip side to that, is it has been 18 years since we have had multiple negative years in a row. It has been 7 years since the last flat year. But the "great recession" back in 2008, only saw 1 negative year. So how much will it matter in the next 5 years? No telling. If the client is concerned about it allocate some to fixed.

What I mainly consider when/if allocating to Fixed, is if they are taking out CV any time soon.

Exactly how I have always thought about it. Only reason I asked as I had an internal Wholesaler promoting the topic of the need to place 10-15% in the fixed to avoid not having the policy fees portion deducted from the CV that will receive index crediting at the end of the index. He spent a fair amount of time making a case for why it will improve net returns & illustrated values. Said he does it with his own contracts & could have competitive analyst call with more specifics.

I changed a $12k per year illustration to be 15% in fixed & it only added $300 CV in on $100k+ CV projection & then $100 less on $450k CV projected at age 65. makes almost no difference in illustrated values that I can see. I could see if illustrating 11% returns was allowed, it might make a greater difference.

Thanks for the reply

 

[AboutThatLife]

Only use I know for it is to increase the guarantee column.

 

[Allen Trent]

Only use I know for it is to increase the guarantee column.

not sure why that would happen. Many IULs have a guarantee of no less than 2% (floor of 0%) worst case credited as an average rate from time bought until death or surrender. Putting 10-15% in the fixed account or all of it shouldn't impact the guaranteed column unless the fixed account has greater than a 2% guarantee & many don't.

 

[ATM]

I don't ever direct any $ to the fixed account.