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'?
What happens in M/E fees increase, caps go to guaranteed minimum, cannot fund properly after a couple years in, or do not have help taking distributions when the time comes (surrender instead of loans)? How does this product perform in these situations?
Technically M&E is on VUL, not IUL.
But I know what your saying.
There are three charges within most IUL policies.
1. Premium Load
2. Expense and Admin
3. COI (cost of insurance)
The only variable out of the three is the COI.
An illustration run with max COI (LFGs doesnt do this, they claim to be working on this feature) usually affects the performance by somewhere around 50bps for a person in decent health. This of course varies with the original health rating, but I am assuming about a standard.
You have to remember that with a max overfunded policy the majority of the premium is not going to COI. The COI is 30bps of premium year one. Its 80bps of premium at year 30. Its only 8bps of the CV in year 30.
Premium load is a fixed cost and as the name implies, is only charged when premium is paid.
Expense and Admin is a set cost which usually drops off to a nominal amount after the first 5 or so years.
The IC makes most of their $ on IUL from the expenses charged, not their spread on bond rates.
This allows them to keep a much higher cap than IAs do.
We all know caps are mostly based on Treasuries.
We are at an all time low now for interest rates, and IA caps are at historical lows. Even if cut in half, they would be more than double most IAs.
But I would throw this question back to you:
"What economic conditions would cause that to happen? And how would those economic conditions affect a traditional 50(index)/50(bond) portfolio?
Then you drop the face to make the policy sustainable. With a UL using GPT it isnt a problem.
Premium availability is always a concern (as I addressed in another post). This isnt a product for everybody and very situation by any means.
But at the same time, it can be extremely effective in the right situations. Especially for HNW clients whom max out traditional means of retirement savings, or are excluded from a ROTH (or just not offered one at work).
And professionals in this industry should not make disparaging remarks about a product when they have limited knowledge on the matter, or just because its "not right for everybody"... what product is right for everybody??!
And with a client who has a NQ lump sum, you can always do a period certain annuity and 10pay it. That eliminates premium concerns.
Like all plans, its about the follow through. Fortunately many IUL carriers are educating their office staff about the product more and more.
I always stress that they need to work with an agent to help calculate an appropriate loan amount.
But usually the same thing happens as when a stock brokers client doesnt work with the broker to plan out their income and just randomly withdraws funds.... they usually dont do as well as if they used professional guidance...
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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'?
You used the S&Ps worst 30y return for your 8.5%, so I used the S&P for the comparison.
You never said take 4% withdrawals, but I was merely illustrating a point against the ol "leave it all in the market" mentality.
And I dont think I have to tell you why I used 4%...
But even if you take the lump sum and spia it (the most leverage I know of), at age 65 you are only around a 6.5% income. The IUL is at an 11% income, and its not quite maxed out. Thats still almost double on a percentage basis.
At 6.5% you would need $1.3mill more (more than the 8.5% provided) to match the IUL income. That means you need to earn 9.7% on your money to match.
I used the 8% crediting rate because you used an 8.5% S&P return....
I used a lower number to take into account the cap, but a 13% cap does not impede most years.
-And I would ask you again, what is the worst 40y or 60y return? From 1972-2012 (40 years) the S&P returned 6.48%. So I can argue assumptions with you too...
I normally run illustrations around 7%, depending on time frame.
The current 30 year lookback is 8.22% if I remember right.
So what would you have me use as a crediting rate?
Over 200 30y time periods it hits 7%+ over 90% of the time.
You could say that they can lower caps. But rates are at an all time low and IA caps are at an all time low; IUL caps have actually increased during this time....
If you read my response to njh; they can buy a lot more options per dollar of premium when compared to an IA because of the expenses charged.
And yes, its a long term commitment for both client and advisor.
The sophistication of it does not lend itself to all circumstances, but the important parts can be broken down pretty easily for the client. And any agent working this field needs a system to update and remind clients in an easily understandable fashion, about the policy and its features.
And most any "blow up" scenario can be avoided by consulting with the agent to adjust the policy.
And lastly I totally agree about dividend paying equities.
I posed this argument to you because your comments seemed to totally disregard IUL (and permanent insurance in general) for any situation. And most who do are not fully educated on what the product actually can do.
Like I said before, there is good reason multibillion dollar corporations pour hundreds of millions into these for exec comp plans.
Thanks for posting that. So you are GUARNTEED to...
a) NEVER have CSV that is more than what you've contributed, and
b) have absolutely NOTHING to show for your $700,000 in contributions, if you let the thing run to age 83.
Sure, sure, sure "hypothetically" X, Y, and Z. This is NO BETTER than a SAVER walking into my office telling me they are wanting to SAVE some money in something SAFE and I put them in a 70% stock, 30% bond mutual fund wrap account. No better, whatsoever.
Fixed and Index Annuities and CDs are for SAVERS.
Variable annuities and securities are for INVESTORS.
Term insurance to cover current liabilities for young people.
Permanent (truly permanent) insurance for final expenses and estate tax issues.
It doesn't have to be complicated.
Regular Joe's end up getting blown up by **** like this. Life insurance is a square peg, and savings is a round hole. Stop trying to put one into the other. It's dangerous.
PS - If the market return is 8.50%, I highly doubt any indexed product could be expected to trail by "only" 50 bps. Can it work out that way? Sure. Can the indexed product win? Sure. To plan for the future based on that assumption is reckless.
Not to mention, you're using SPIA rates based on current interest rates, which is probably an unlikely rate environment for a 30 year old today. Even if you do use SPIA rates of today, a 9.6% RoR over the next 35 years is probably not unreasonable.
Rerun those quotes on a product that has a higher rate for the guaranteed column to show these guys what the no-lapse feature can do. Scagnt's quote only lapses in the guaranteed column because the quote assumes worst case scenario of contract 1% guarantees and the actual market returning 0 for those 50yrs.. The min caps for the non-guaranteed column is not 1%, I believe on that product its 3-5% (sorry haven't looked at that Licoln product for awhile).
The concept works if the clients have it as a "part" of their portfolio on not used as their entire portfolio. Also, if the client runs into the inability to pay the full premium you don't have to immediately reduce the death benefit. The same illustration that shows how much you can max fund without creating a MEC also shows what the guideline level premium is, so there's flexibility there without having to liquidate accounts or decrease face amounts..
I love how my original suggestion of an IUL policy starting this great conversation. After IceCold jumped all over the idea, I really didn't want to take the time to educate him on the benefits of that type of policy for a younger person looking to set themself up for retirement down the road. I am very glad someone else did.
Rerun those quotes on a product that has a higher rate for the guaranteed column to show these guys what the no-lapse feature can do. Scagnt's quote only lapses in the guaranteed column because the quote assumes worst case scenario of contract 1% guarantees and the actual market returning 0 for those 50yrs.. The min caps for the non-guaranteed column is not 1%, I believe on that product its 3-5% (sorry haven't looked at that Licoln product for awhile).
The concept works if the clients have it as a "part" of their portfolio on not used as their entire portfolio. Also, if the client runs into the inability to pay the full premium you don't have to immediately reduce the death benefit. The same illustration that shows how much you can max fund without creating a MEC also shows what the guideline level premium is, so there's flexibility there without having to liquidate accounts or decrease face amounts..
