it is a guidline max case and policy will not lapse. almost no insurance left in the policy under level benefit option. LSW offers a guaranteed Loan for life option also. Never lapses.
- 10,806
First, if the policy is designed correctly he wont need to pay premiums past the age he chooses.
With a UL you can always reduce the face amount so the policy is sustainable. But availability of premiums in the future is something to consider.
And you can start taking distributions at any time. Im not sure where you got age 60-65 from...
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In a previous post (if I remember correctly) you claimed you had little knowledge of permanent insurance. If this is true, then why make disparaging remarks about something you admittedly know little about?
An overfunded IUL over a 20 or 30 year period will certainly outperform an IA given the same parameters.
But the parameters fall in favor of the IUL (much higher caps), so its really no competition. Especially when you throw in taxation and withdrawal %s.
Are you aware that a properly overfunded IUL can produce 8%+ income withdrawals?
There is a reason multibillion dollar banks and corporations use UL as a savings vehicle....
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I don't believe I ever said this.
- 10,806
Fair enough... so... whats your take on the IUL vs. IA for a young prospect who has the premiums to contribute on a consistent basis?
How well do you know IUL or UL? Whats your basis for the comments you made?
Why would an overfunded IUL be an unsuitable savings vehicle for a young prospect?
I understand it's not your job to share this info with me, so if you don't want to, I'm fine with that. But can you give me an example, using a real product, and real numbers, how it would play out for a 30 year old prospect, using overfunded UL as a savings vehicle?
If I'm missing something, I'll happily admit that I'm wrong.
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Here are my numbers for the 30 year old:
The WORST 30 year period for the S&P 500 was the 30 years following the crash of 1929. Over those 30 years (end of 29 to end of 59), the S&P 500 returned an ANNUALIZED 8.5%.
If you were dollar cost averaging on a monthly basis, in equal amounts, during that 30 year period, had a total return of over 950%.
This an un-managed return of the S&P 500. Worst 3 decades ever.
Seems like a no-brainer to me (title of thread is "young annuity prospect").
Now if the prospect is older, then I think annuities could/should come into play - but how does an overfunded UL (or IUL) work for a 50 or 60-something?
Again, I may be misinformed, but I don't think it can work then, even in a vacuum.
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Come on do we need to have another conversation about annualized returns and why they are missleading. Also you are right that things don't always work out as planned and that affects your Roth IRA and really Roth 401K recommendations as well...I will assume since the client can pull out contributions without penalty from the IRS your fine with your recommendations leaving them open to market losses at that time....An over funded IUL will have 60-75 percent of the dollars contributed in year one in CSV....Now since it is a UL surrender charges do exist.
An overfunded IUL is not the total solution but don't disregard it especially for a young prospect as the longer you contribute like anything else the better the recommended solution works.
Norway...
I'm not sure when this "ARE YOU REALLY WILLING TO EXPOSE YOUR CLIENTS MARKET LOSS?!?!?!" mantra came from, but absolutely.
You are going to have down years as an investor. That's not the end of the world.
It's like lifting weights? Are you REALLY willing to subject your muscles to soreness and pain?
Well yes, because years down the road, you're going to be glad you did.
I'm not sure when this "ARE YOU REALLY WILLING TO EXPOSE YOUR CLIENTS MARKET LOSS?!?!?!" mantra came from, but absolutely.
You are going to have down years as an investor. That's not the end of the world.
It's like lifting weights? Are you REALLY willing to subject your muscles to soreness and pain?
Well yes, because years down the road, you're going to be glad you did.
- 10,806
Ok I will play..
First, GUL is different than traditional UL, especially accumulation oriented UL.
But here is the thing about your 8.5%.
Is that 30yo rally going to have his money in the market for just 30 years?
Whats the worst 20y return?
More importantly, whats the worst 50 or 60 year return? Will he not need to draw income for the 30 years after the first 35? (assuming retirement at 65)
The 40 year return for the past 40 years (1/1-1/1) is basically 6.5% (gross fees).
For the past 60 years its basically 7% (im rounding up slightly)
But we will go with 8.5%.
And lets say $20k/year over 35 years.
We will use an 8% Indexed Crediting Rate for the IUL.
(the IUL uses a 13% yearly p2p cap, and a yearly 1% floor)
This gives us a 7.3% 35 year annualized return on CV for the IUL.
$3,165,000
The S&P gives us $4,181,000 for 35 years.
But we all know that isnt the whole story.
That S&P Index fund will have expenses, possible loads, etc. (S&P Index funds can have expense ratios as high as 2+% and as low as 20bps)
So lets say it nets out to 8%.
$3,722,000
Still a little over a half mill more.
But thats not a true net return.
What about taxes?
You mentioned using a ROTH account.
I am a huge fan of ROTH accounts for younger workers.
And it certainly helps equalize things against the IUL.
But now its Income time for our new retiree.
The S&P account would use a 4% withdrawal giving an income of $148,880 per year.
(Now here is where the IUL really shines)
Hopefully I dont need to tell you that loans from Permanent Insurance are not taxed.
But the IUL uses something called Non-Direct Recognition loans.
This means that funds which are loaned out still act like they are in the account and the amount credited to the policy is based on the loaned funds being part of the account.
So when you take a $1k loan from a $10k account, the account still receives interest crediting based on $10k.
If you think about this concept for a minute, you will realize that it enables the IUL to exceed when it comes to drawing an income.
This example allowed us to take $350k per year out from age 66-100.
And that does not exhaust the policy, it actually leaves a $13mill DB at age 101.
The concept of Non-Direct Recognition is what you are missing from the Permanent Insurance argument.
Also, the taxation issue.
Compare the IULs 7% CV return to a 8.5% traditional 401k return, and after taxes the IUL often comes out on top.
The same can be true for a non tax deferred account after capital gains take a bite each year.
Many people look at the risk vs. return aspect. Do I risk the loss of principle for an extra 0.7% on average (using our example)? This aspect alone turns alot of people on to IUL.
Then throw in the NDR distributions and the tax advantages and plenty see great value in it.
Even if you ratcheted up the equity return to 9% or 10% and kept the IUL at 8% crediting, it would still beat the S&P on distributions.
(I am more and more of the position that equities suck when it comes to retirement income distributions)
So to sum that up:
S&P- $148,880 per year in income
IUL- $350,000 per year in income
And I havent even mentioned how much it would cost in term insurance to replace the IUL DB (before and after retirement). That just decreases the S&P numbers even more.
There is a lot more detail I could go into on the aspects of the IUL policy and UL in general.
There is an illustration to go with my numbers, PM me if you want to see it.
I appreciate the detailed response. My argument is based on this being a "YOUNG annuity prospect." I never said the prospect would stay in the S&P 500 and do 4% withdrawals at age 60 (he would actually hav ea more balanced portfolio than that, I just used the S&P for easy numbers).
At age 60, the portfolio would be liquid, and he could choose whatever distribution method he liked (perhaps use a SPIA for a piece for income, etc.).
Note: I do not know of any SPY index funds with ERs of 2.0%...I do know a few ETFs with ERs under 10 bps.
Here, in the end, is my point...insurance companies do not have access to any investments that I don't have on my own. They cannot create money out of thin air. In fact, they are required to invest their general account very conservatively. With a 30 year time frame, you do not need to be conservative.
Secondly, life insurance as a savings vehicle followed up by retirement income always involves mapping out decades of planning for the client in one sitting. There is very little flexibility (relative to other options), and many "blow up" scenarios for the client.
I'm sure you work with a lot of retail clients...and you know just like I do, getting them to follow a plan for 20 years, is unlikely.
I would like to see the illustration though, it would be interesting to work through the numbers over Easter.
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Also, I would like to see where you got the 8% crediting rate for the IUL policy. The 8.5% worst historical 30 year return on the S&P was fact, not assumption. I think 8.50% crediting rate is generous.
Another note: I think dividend paying equities can be a very solid way to handle retirement income. Are you familiar with the 'Divident Aristocrats'?
At age 60, the portfolio would be liquid, and he could choose whatever distribution method he liked (perhaps use a SPIA for a piece for income, etc.).
Note: I do not know of any SPY index funds with ERs of 2.0%...I do know a few ETFs with ERs under 10 bps.
Here, in the end, is my point...insurance companies do not have access to any investments that I don't have on my own. They cannot create money out of thin air. In fact, they are required to invest their general account very conservatively. With a 30 year time frame, you do not need to be conservative.
Secondly, life insurance as a savings vehicle followed up by retirement income always involves mapping out decades of planning for the client in one sitting. There is very little flexibility (relative to other options), and many "blow up" scenarios for the client.
I'm sure you work with a lot of retail clients...and you know just like I do, getting them to follow a plan for 20 years, is unlikely.
I would like to see the illustration though, it would be interesting to work through the numbers over Easter.
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Also, I would like to see where you got the 8% crediting rate for the IUL policy. The 8.5% worst historical 30 year return on the S&P was fact, not assumption. I think 8.50% crediting rate is generous.
Another note: I think dividend paying equities can be a very solid way to handle retirement income. Are you familiar with the 'Divident Aristocrats'?
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