WL to Build Cash Value or Build Dividends?

[kookaburra]

53 yr old male, super preferred, buying Ohio National whole life. Death benefit is secondary to maximizing return on investment. Deciding which policy to pick.

Max funding 1st 5 years, plus funding 7 additional years at base premium.

Comparing the cumulative premiums to cash value, at year twelve Prestige Performance builds cash to 105% (cumulative Dividends are 29% of premiums paid), while Prestige Value III builds cash to 120% of premiums paid (Cumulative Dividends are only 15% of premiums). This trend of Value III performing better in cash value continues until year 31 when Performance begins to yield a higher cash value. Death benefits follow a similar trend although they invert at year 34.

Interestingly, the Performance policy continues to accumulate higher annual dividends throughout, although at a decreasing rate.

While I'm tempted to take the cash, something tells me to go with the higher dividends.

Question:
What matters more, accumulating higher cash value or accumulating higher cumulative dividends? It seems counter intuitive that the lower dividends in the Value III policy yields higher cash value. What am I missing?

 

[scagnt83]

53 yr old male, super preferred, buying Ohio National whole life. Death benefit is secondary to maximizing return on investment. Deciding which policy to pick.

Max funding 1st 5 years, plus funding 7 additional years at base premium.

Comparing the cumulative premiums to cash value, at year twelve Prestige Performance builds cash to 105% (cumulative Dividends are 29% of premiums paid), while Prestige Value III builds cash to 120% of premiums paid (Cumulative Dividends are only 15% of premiums). This trend of Value III performing better in cash value continues until year 31 when Performance begins to yield a higher cash value. Death benefits follow a similar trend although they invert at year 34.

Interestingly, the Performance policy continues to accumulate higher annual dividends throughout, although at a decreasing rate.

While I'm tempted to take the cash, something tells me to go with the higher dividends.

Question:
What matters more, accumulating higher cash value or accumulating higher cumulative dividends? It seems counter intuitive that the lower dividends in the Value III policy yields higher cash value. What am I missing?

1st question: Are you working with an agent?

It sounds like the Prestige Performance is not designed correctly. The Value should not be out performing it.


Why are you max funding for only 5 years?? The policy would be much more efficient if you do a level premium.

The Prestige Max is a Max funded WL that is completely paid up at age 65. It will out perform both of them.

Also, dont discount an IUL.
If you plan to take income from this policy, a UL platform is able to generate a much higher income % based on CV.
This is due to the internal mechanics of it.


And at the end of the day what matters is Cash Value, not Dividends paid, thats what you can get your hands on.
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Well, this is interesting.
I ran illustrations using a $10k premium for those 5 years.
Your numbers are correct.
But the Performance pulls ahead in later years.
Also check out the IUL that blows them all away...


Performance
y12- 112%
y30- 265%
y40- 391%

Value
y12- 120%
y30- 266%
y40- 376%

Max
$107%
y30- 242%
y40- 376%


Lincoln IUL at 6% Crediting, with the same premium as the ON Performance
y12- 116%
y30- 307%
y40- 537%


But here is the thing, it isnt about what it has, it is about what you can get.

What I mean by that is the amount you can loan/withdraw out, and how that policy treats those loans/withdrawals is what really matters.

Using ONs software, I "solved" for the Maximum withdraw/loan available from age 70 to age 100.

I did the same with a LFG IUL using the same premium schedule as the Performance.

Using you calculation method of % of premiums paid; the total amount of money paid out is:

Performance:
146%

Value:
127%

Max:
165%

LFG IUL:
293%


Again, the IUL shines because of the internal mechanics.

 

[Larry Tew]

IUL is not magic, internal mechanics or not. The outcome of any comparison is dependent on the assumed crediting rate chosen. The only definitive comparison is to compare guaranteed to guaranteed, which is as unrealistic as being able to arbitrarily choose an IUL crediting rate. On to the original question...

I agree that cash is what matters, dividends are only a source of cash.

The Value can outperform the Performance especially early assuming equal premiums using the level API rider for premium at the MEC limit. Value is a high guarantee - low dividend product compared to Performance. The lower the dividend scale, the better Value looks compared to Performance, Xcel, and Max. Alternately, if the dividend scale were to substantially increase, the Performance would walk away from the Value after the first 10 years or so.

The Max will NOT outperform the other policies on the accumulation side assuming max non-MEC premium (unless you miss the 250k band), and unless the dividend scale is really low (as Max is very much dividend driven) but it absolutely will outperform them all once you start taking an income stream.

 

[scagnt83]

The Value can outperform the Performance especially early assuming equal premiums using the level API rider for premium at the MEC limit. Value is a high guarantee - low dividend product compared to Performance.

I did not realize the Value was that strong.
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IUL is not magic, internal mechanics or not. The outcome of any comparison is dependent on the assumed crediting rate chosen. The only definitive comparison is to compare guaranteed to guaranteed, which is as unrealistic as being able to arbitrarily choose an IUL crediting rate.

To say that any chosen Crediting Rate is arbitrary is basically saying that all it will ever do is the guaranteed rate, which you go on to claim is unrealistic.

Are you in a roundabout way insinuating that 6% is an unrealistic Crediting Rate?
If so, what would you consider realistic?

If you take 40 different 20 year historical lookbacks; 6% or more occurs over 98% of the time.
5.5% occurred 100% of the time

But just for Larry lets drop the IUL Credited Rate to just 5%, which I believe is 1% below ONs WL Dividend Rate.


Year 12- 108% of Premiums
Year 30- 230%
Year 40- 365%

So at 1% less, it produces close to the same performance as the WL polcies.

Then with Income:
It produces 195% of premiums paid.

So with a lower CV, it actually outperforms on Income!!


Im not against WL. But IUL is not by any means a crap shoot like you make it out to be Larry.

And the potential design of UL (using gpt & a changing DB option), is superior to WL when Income is the main goal.

 

[Larry Tew]

I did not realize the Value was that strong.
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To say that any chosen Crediting Rate is arbitrary is basically saying that all it will ever do is the guaranteed rate, which you go on to claim is unrealistic.

Are you in a roundabout way insinuating that 6% is an unrealistic Crediting Rate?
If so, what would you consider realistic?

If you take 40 different 20 year historical lookbacks; 6% or more occurs over 98% of the time.
5.5% occurred 100% of the time

But just for Larry lets drop the IUL Credited Rate to just 5%, which I believe is 1% below ONs WL Dividend Rate.


Year 12- 108% of Premiums
Year 30- 230%
Year 40- 365%

So at 1% less, it produces close to the same performance as the WL polcies.

Then with Income:
It produces 195% of premiums paid.

So with a lower CV, it actually outperforms on Income!!


Im not against WL. But IUL is not by any means a crap shoot like you make it out to be Larry.

And the potential design of UL (using gpt & a changing DB option), is superior to WL when Income is the main goal.

Value is exceptionally strong on the guaranteed side, but if dividend interest rates were in the 7-8% range, it wouldn't look as good unless you're only concerned with guarantees.

Concerning my take on IUL, I don't necessarily think it's a crapshoot, but I know that I was around when UL, VUL, and now IUL hit the market, all of which were proclaimed to be the game changer for the insurance industry.

When IUL has more than a few years under its belt, I may view it differently.

I did a quick search on the history of IUL and one of the first sites that came up was a planner's site whose slogan was "Capture the GAINS, Never take LOSSES". On the site, it read as follows:

"Only a few companies offered indexed universal life products in 1997. Nine companies offered the product by 2005, and in the past couple of years the number of providers has ballooned to 46. Sales approached $800 million in 2011 alone, quite a contrast to the $667 million sold over the six-year period from 2000 through 2005..."

Bottom line for me is that I don't believe that the product has enough time on its side, and that the variables that make the product tick (caps, participation rates, mortality costs) are established enough to say with certainty that the product will be there a decade or three down the road.

I'm not taking anything away from your expertise on the product, but I've been this path before, and the path always leads me back to the same place.

 

[scagnt83]

Concerning my take on IUL, I don't necessarily think it's a crapshoot, but I know that I was around when UL, VUL, and now IUL hit the market, all of which were proclaimed to be the game changer for the insurance industry.

When IUL has more than a few years under its belt, I may view it differently.

I did a quick search on the history of IUL and one of the first sites that came up was a planner's site whose slogan was "Capture the GAINS, Never take LOSSES". On the site, it read as follows:

"Only a few companies offered indexed universal life products in 1997. Nine companies offered the product by 2005, and in the past couple of years the number of providers has ballooned to 46. Sales approached $800 million in 2011 alone, quite a contrast to the $667 million sold over the six-year period from 2000 through 2005..."

Bottom line for me is that I don't believe that the product has enough time on its side, and that the variables that make the product tick (caps, participation rates, mortality costs) are established enough to say with certainty that the product will be there a decade or three down the road.

I'm not taking anything away from your expertise on the product, but I've been this path before, and the path always leads me back to the same place.

VUL is a totally different animal imo. I am not a fan. A life policy needs a guarantee of something positive to cover costs. I classify it the same as VAs, an expensive way to invest in Crappy Mutual Funds.

And unscrupulous agents can miss-market and over exaggerate any product. Its been done with WL too. That has nothing to do with the product itself.


There is one big difference between the UL projections of the 80s and current IUL projections. That is historical evidence.

UL projections of the 80s were not based on historical evidence of interest rates. They were based on current market conditions.

If an IUL was illustrated at current market conditions it would be shown at 13%. I used less than half of that.

And the same economic conditions that would cause IUL caps to drop to minimums would also cause WL policies to have half the dividend rate.

Lots of WL policies back in the 80s were overprojected too, it wasnt just UL. But many ULs did not have the guarantees that the WL did. Still lots of unhappy WL clients though.. of course not as unhappy as the UL clients!


But if you drop the Cap down to the Guaranteed Min (3%) the policy actually outperforms the WL at the Guaranteed rate.
If you compare the actual guaranteed columns then the WL does win. But the CV is actually very close for the first 30 years.
But if the WL doesnt ever receive dividends the chances of a client keeping it (assuming they expected dividends) is slim.
And same for the IUL. But if the IUL only does the guaranteed 1% per year for the life of the policy, well, you know what Im going to say next...
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and that the variables that make the product tick (caps, participation rates, mortality costs) are established enough to say with certainty that the product will be there a decade or three down the road.
.

Thats were we mainly disagree. Run some illustrations at the minimum cap rate. The policy does not fall apart.
Even at 2.5% it lasts until age 97 and does not start loosing CV until age 87.


I came from NYL, and over there UL is bad and Indexed anything is the devil!
It took me a while to come around to IUL. But once I truly understood how the product worked I was won over.

I sell WL too, and dont preach that IUL is the cure all or the only good option out there.

But the mechanics of Guideline Premium Testing compared to Cash Value Accumulation Testing within a Policy make the UL a better chassis to grow and access money. That is a fact.

 

[0b1kanobee]

Again, the IUL shines because of the internal mechanics.

When you get a chance, could you explain the internal mechanics in Layman's terms? I'm trying to get a better grasp of this product.
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To say that any chosen Crediting Rate is arbitrary is basically saying that all it will ever do is the guaranteed rate, which you go on to claim is unrealistic.

Are you in a roundabout way insinuating that 6% is an unrealistic Crediting Rate?
If so, what would you consider realistic?

If you take 40 different 20 year historical lookbacks; 6% or more occurs over 98% of the time.
5.5% occurred 100% of the time

I love it! Still want the simple easy to understand version of the internal mechanics as well as the internal mechanics of the other for comparison for transparency.
THANKS!!!

 

[scagnt83]

When you get a chance, could you explain the internal mechanics in Layman's terms? I'm trying to get a better grasp of this product.
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I love it! Still want the simple easy to understand version of the internal mechanics as well as the internal mechanics of the other for comparison for transparency.
THANKS!!!

I hate to go even more off of what the OP asked.
But the 2 min version is this:

Most people think that the MEC test (7 pay Test) is the only test that effects a policy.
If a policy fails the MEC Test it is basically treated/taxed as a Deferred Annuity. (10% penalty before 59.5, lifo, earned income taxation)


But there is also a totally different test; the test that determines if the policy is actually classified as Life Insurance or not.
If a policy fails the Life Insurance Test, then it is treated as a taxable investment.

The good news is that policies have a built in test/adjustment mechanism that adjusts the values of the policy to keep it a "Life Insurance Policy".
This is called CVAT (cash value accumulation test) & GPT (guideline premium test).
You have probably seen this option on UL illustration systems.
(keep in mind UL also gives you the option of a level DB or increasing DB)


WL uses CVAT. (it also uses an increasing DB)
UL gives you the option of using the Guideline Premium Test.


CVAT measures the CV to DB ratio.
It raises the Death Benefit when the CV gets too high in relation to the DB.

GPT measures the ratio of Premiums to DB.
It limits the Premium when it gets too close to the DB.


So your asking what does all of this means right???

Well, if CVAT kicks in and raises the DB, it costs money to do so.
So gains to the policy that could have gone to the CV, go to the DB.

When GPT kicks in and limits Premiums, it costs nothing.
Again, the Illustration System helps you out here and shows when the GPT reduces Premiums.
So you can structure Premiums so the GPT doesnt kick in.


Then UL Policies offer the ability to have an Increasing DB, or a Level DB.
If you start with an Increasing DB, you can always switch to a Level DB.

If you use the Increasing DB along with GPT (remember it limits Premium in relation to DB), the test allows more Premiums into the policy.

Then once Premiums stop, you switch the DB Option to Level.
This allows more of the policy gains to go towards CV.

In a WL, it uses CVAT along with an Increasing DB.
So gains have to continually go towards increasing the DB along with the CV.
Then when the CVAT kicks in, even more gains have to go to raising the DB.


In the UL, once the premiums stop, the gains only have to keep the DB level, so there is more to go to CV.


If you think of it as 2 buckets being fed by premiums and gains; #1 is CV, #2 is DB.
In WL Gains have to continually raise both bucket 1 & 2.
In UL Gains only have to raise bucket #1, and just have to keep bucket #2 level.

 

[0b1kanobee]

Thanks! Right now that's a lot of info to process but I'll figure it out. I'm hoping to do this IUL university thing. Not sure how I'll process the info. Some people just explain things in a manner that clicks with me. For me it's 'for instance' or 'for example' type of stuff. I try to take what I learn and compare it to like minded things I already know to get the concept. Fresh stuff sometimes takes a while to sink in but once the lightbulb goes off.....

 

[scagnt83]

Thanks! Right now that's a lot of info to process but I'll figure it out. I'm hoping to do this IUL university thing. Not sure how I'll process the info. Some people just explain things in a manner that clicks with me. For me it's 'for instance' or 'for example' type of stuff. I try to take what I learn and compare it to like minded things I already know to get the concept. Fresh stuff sometimes takes a while to sink in but once the lightbulb goes off.....

Yeah, I know its a lot.

I have heard people talk about the IUL university thing... maybe im in the wrong line of business.. lol


Think of the difference between how a WL treats gains and how an IUL is able to treat gains like this:

An Increasing DB costs more money to maintain than a level DB.

The WL has an increasing DB, so gains not only increase CV, but increase DB too.

The UL has a level DB after premiums stop.
So gains just have to keep the DB level, not pay more to increase it.
That allows the most gains possible to go towards the DB.


On top of that.
WL uses CVAT. So if the CV gets too close to the DB; it raises the DB even more than it normally would.
That means even more gains than normal, have to go towards the CV.

UL uses GPT, which adjusts Premiums if the Cash becomes to great; it does not allocate Gains to raise the DB like WL/CVAT.


A UL with a level DB and gpt means less gains to DB, more to CV.