by sdchargersfan » Thu Nov 26, 2009 01:16 am
Does anyone have Life/Universal Life through USAA? If 'you' do, can you tell me your experiences with it? Do you think they are a 'positive' or 'negative' comapny to work with? Thanks!!!!
Posted: Thu Dec 03, 2009 02:01 pm Post Subject:
Max, I strongly suggest that you post anonymously if you are going to post information that shows your ignorance. Single premium isn't any cheaper than a lifetime premium. It's all identical from an actuary standpoint. Let me give you an example that will show you both why a UL policy with a secondary guarantee makes sense and why it might make sense to use a SPIA as a funding source.
Posted: Thu Dec 03, 2009 02:30 pm Post Subject:
Grandpa is 70 years old and is a standard risk. He has substantial assets. He wants to leave a total of $1,000,000 for his three grandkids. He has used his lifetime gifting exemption (or he doesn’t want to cut into it further). He has $450,000 in an IRA. He has no use for his money for himself. His goal is to leave as much as possible for his grandkids.
Insurance premiums: Whole Life= $74,000/year
UL with no lapse guarantee= $36,000 a year
UL with no lapse guarantee= $450,000 single premium
Let’s assume for a second that his IRA could support a payment of $74,000/year (it can’t). Based upon the current dividend scale, his death benefit would grow to $2,000,000 at age 90. For the same $74,000, he could buy a UL policy that would more than $2,000,000 starting today. If he lives for less than 22 years the UL is the better purchase. His real choice in this situation is $1,000,000 of UL vs. $500,000 of WL.
Why are annuities part of this conversation? $450,000 will buy a SPIA that will pay out $36,000/year. What’s better…paying $450,000 directly for the insurance or making annual premium payments? By a large margin, it is better making the annual payments.
In either case, the money is going to be first gifted to an ILIT and the ILIT will pay the premiums. The three grandchildren will be the beneficiary of the ILIT.
Choice 1: Pay lump sum premium
Result: $450,000 comes out of his retirement account. This will create $200,000 + of taxes (which he’ll cover with some other money). He’ll then gift $450,000 to the ILIT. The first $39,000 will be tax free. The other $411,000 will either be taxable or cut into his lifetime exclusion. At death, the $1,000,000 death benefit will be tax free.
Choice 2: Pay annual premium which will be funded by transferring his IRA to a SPIA which will pay out $36,000/year for as long as he is alive. Result: This will create less than $10,000 in tax. He’ll then gift $36,000 to the ILIT. This will all be tax free. At death, the $1,000,000 death benefit will be tax free.
What’s the net result if death occurs during the first year? The single premium payment results in $200,000 of additional income tax + approximately $200,000 of additional estate/gift tax. If death occurs at some later date, we need to add in the interest that that money would have earned minus the additional future tax liability. Whatever that nets out to be, it tilts the scales even more in favor of a lifetime payment.
Posted: Thu Dec 03, 2009 02:41 pm Post Subject:
Max, you are 100% clueless on how no-lapse guarantees are sold. Let me show you how it is done:
"Mr. Prospect, depending upon underwriting, we expect this $1,000,000 policy to cost $26,000/year. You'll need to pay this premium every year until you are 100. Most likely, the policy will never have any cash surrender value, so this policy is use it or lose it. Pay the premiums every year and your kids will get $1,000,000 at your death. Don't pay the premium and you won't have the insurance any longer."
There is no talk about interest rates or retirement supplementing or anything like that. It is strictly a death benefit sale.
Posted: Thu Dec 03, 2009 02:48 pm Post Subject:
Also, the "estate planning community" hasn't just figured about single premium insurance. In estate planning situations, things are typically not done on a single premium basis because for estate planning, the idea is to remove things from one's estate. Large premiums can't be removed without using up one's gifting limits.
Premium financing is not some cheaper way to get insurance. It's more expensive. It's done for two reasons. 1) The person has lots of assets, but not lots of cash. 2)They have a better use of their money.
Posted: Thu Dec 03, 2009 04:04 pm Post Subject:
A Life Insurance Lesson for Max: Understanding Guaranteed Universal Life 101
Pay the guaranteed minimum premium, keep the insurance. That’s it! An increase of premium will never be necessary. The policy can be structured so that the premium is needed for 1 year or every year up to 121 or anywhere in between.
The policy most likely will never have any material cash build-up.
To understand this product, simply think of it as a level term product to age 121 (instead of for a certain number of years)
Posted: Thu Dec 03, 2009 08:44 pm Post Subject:
OK . . . OK!
I've finally managed to draw out some of the real agent-to-client dialogue, as it is supposed to be heard. When you properly disclose to the client that his policy will never have any cash value, and he understands that, then a no-lapse guarantee may make sense. And look at the cash outlay.
Now talk to the masses of Joe Bluecollars who have been sold UL (with and without NL guarantees) based on cash accumulation, tax-free withdrawals/borrowing, and unrealistic illustrations and you'll gain a different understanding. And they all received the illustrations that show the strings of $0s down the guaranteed columns, alongside the 6% nonguaranteed columns to which the agent directed their attention. Joes who have no ability to fund the kind of premiums that are now being discussed here, and are being sold the wrong product for their need.
That VULs are not typically sold with no-lapse guarantees, is also correct as far as I know. But with the variety of other "guarantees" now being sold along with a product that inherently has no guarantees, who's to say some company hasn't started.
dgoldenz -- the EIUL illustration I tried to send was from Indianapolis Life, produced in Oct 2007 (it does not mention a no-lapse guarantee). But it shows 8.63% to 9.0% in years 1-5 and a 9.1% straight line interest crediting rate in all later years. It's for a $3,624,738 policy with a $50,000 term rider (who could make up numbers like that?). It calls for $200,000 in annual premium for 5 years ($1,000,000 total, non-smoker, age 47) and the Agent's cover page claims that: "after 10 years, cash value = $1,491,939", "premium stops" [aka: vanishing premium / outlawed language in California and many other states], "at age 60 cash value approx. $1,951,864" And then comes the real kicker, beginning "at age 61, you borrow $270,184 per year from the cash value of TAX-FREE MONEY FOR LIFE, while still retaining a death benefit. This loan is never repaid. If you die at age 90, there will still be a death benefit of $9,033,410." The numbers are supported by the illustration. I can only attach the cover page I refer to here.
Now, you and I know this will never happen. But what about the client who sinks in his $1,000,000 over five years? The agent pockets somewhere in the neighborhood of $600,000 in commissions, maybe more, and because we know the S&P500 won't do 9.1% straight line, the client stands to lose most, if not all, they have paid in. The 2% Guaranteed columns show that cash value starts at $734,955 and declines every year thereafter, and is $0 after the first withdrawal of $270,184.
The agent got their commission, the company invested the cash flow, and the client gets $270,184 in return before the policy lapses (at the 2% guaranteed rate) in year 10.
This is the kind of stuff that actually happens. It's not the kind of business I do, and I'm sure it's not the kind of business anyone in this thread does. But it's still being done, and the rest of us all suffer the same black eyes as a result.
When no-lapse UL is sold on any basis other than no cash value over the long haul, that's wrong. Because, as all the response posts indicate, it's going to be written with an absolute minimum premium. And you can bet that some actuary has figured out how many premiums will be missed in oh so many policies, losing their guarantees, that the insurer will make a profit.
The majority of people coming to this site for advice are not those in need of estate planning as we're discussing, they are the Joe and Jane Bluecollars looking for help.
Posted: Thu Dec 03, 2009 08:58 pm Post Subject:
Single premium is less costly in terms of actual dollars. What client asks "Is this acutarily identical?" Client's pay with actual dollars not actuarial TVM.
A premium financing arrangement done using a form of arbitrage (yes, confusing, complex) is highly cost-efficient.
Posted: Thu Dec 03, 2009 09:28 pm Post Subject:
Max,
That cover letter is a complete joke and just asking for someone to lose their license and get sued. There are s-hitty agents everywhere, and the person who wrote that cover letter and proposed that policy certainly seems to be one of them. They probably didn't get $250k in commissions because the target premium is probably around $50-60k on that policy, but it's still a very large commission case. I hope that guy had the elusive $5 million E&O policy because a lawyer would have a field day with that case.
As I said, you are confusing the other types of UL that require cash value to stay in force with no-lapse UL. No-lapse is not designed for cash value, it's designed to keep the death benefit to age 120 (or 105 or 100 on some of the newer, watered-down ones). Even on the non-guaranteed side of the illustration, the cash value is usually $0 once you get past age 70 or so, sometimes earlier.
No-lapse might not be around that much longer though.....lots of companies pulling their products, raising rates, and reducing age guarantees.
Posted: Thu Dec 03, 2009 09:31 pm Post Subject:
I've been in this business for a long time and understand all of the problems with UL. The secondary guarantees of UL are almost always sold as is being presented to you in this thread. If you don't believe me, go ahead and get illustrations from your favorite companies. They'll all show virtually no build-up of cash. The funding every single year is done at the minimum possible. There is no benefit to paying more.
It's a completely different conversation than having one about the pros and cons of UL. None of the pros and cons of the UL conversation make sense in the context of selling a UL policy based upon the secondary guarantee.
Posted: Thu Dec 03, 2009 09:39 pm Post Subject: darevse
Single premium is less costly in terms of actual dollars. What client asks "Is this acutarily identical?" Client's pay with actual dollars not actuarial TVM.
A premium financing arrangement done using a form of arbitrage (yes, confusing, complex) is highly cost-efficient.
With actual dollars, we can't tell the client which is cheaper since it depends upon his year of death. In the example, the cost in actual dollars is virtually identical since the money is disappearing into either a SPIA or a life insurance policy. The difference is that the SPIA/Life insurance combo in the example is much more tax efficient.
Premium financing isn't some special secret confusing arbitrage situation. It's simply a question of what else would we done with the assets. It's usually about leverage. Sometimes it makes sense. Sometimes it doesn't.
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