what the heck is a: flexible premium adjustable life with an index-linked interest crediting feature in LAYMAN's terms?
Total Comments: 8
Posted: Wed Mar 27, 2013 02:49 pm Post Subject:
It's more commonly called "Indexed Universal Life Insurance" or IUL for short. And the chosen index and crediting methods have a huge impact on the future of the policy. Some interest crediting methods can result in no interest being added over one or two years because of one very bad day for the index ("annual point-to-point" or "biannual point-to-point"). And some crediting methods even your CPA won't be able to explain in a way that makes any sense ("market value adjusted"). When it comes to crediting methods, shorter intervals are in your best interest, even if it means a smaller guaranteed interest crediting rate.
Without solid, consistent, and sufficient interest crediting, any UL policy is more likely to crash and burn than soar to lofty heights as the agent predicts (or misrepresents by leading you to believe cash accumulation is guaranteed).
You pay premiums (monthly, quarterly, semiannually, annually), and the insurance company adds interest based on a defined index and crediting method (with a "guaranteed minimum" interest rate, which could be ZERO percent), then deducts all the expenses of maintaining the policy each month. The expenses may include administrative fees ("profit") and sales charges ("profit"), and will always include the cost of insurance and riders ("COI", "mortality and expenses").
In some policies, during the first 12-48 months, you could be subject to an additional expense charge ("profit") that the company collects to recoup some or all of what it paid the agent in commissions.
Every year, your cost of insurance will increase. UL policies are built on a platform of annual renewable term life insurance, and every year as you get older, you are also getting closer to dying, so the risk of paying a death claim to the insurance company is increasing, and they charge you for that.
But don't expect to see a notice from the insurance company asking you to pay more until some number of years down the road when all those various charges and expenses ("profit") and the increasing cost of insurance ("mortality") have eroded all your cash accumulation ("savings"), leaving you faced with the choice of (A) no insurance and no cash accumulation ("policy lapse") or (B) ever increasing monthly payments to keep your policy in force ("annual renewable term") with no significant cash accumulation.
Most UL policies are available with so-called "secondary guarantees" which promise that if you never fail to make your "planned" premium, the policy will not lapse. Missing just one premium payment could cause the entire guarantee to disappear. And it doesn't promise you any of the millions of dollars in cash accumulation that the agent's sales illustration ("pie in the sky") will purport as reality ("hypothetical savings"). In fact, the secondary guarantees all but guarantee you will have no savings, even after 10-30 years of paying premiums.
Most people never see the cash accumulation illustrated because the "current rates" for cost of insurance never remain constant -- they always increase -- and the interest rate cannot be guaranteed, and will never be a straight line as the illustration depicts.
Hope this helps.
Posted: Mon Apr 01, 2013 06:02 pm Post Subject:
Blah, blah, blah
It is term insurance that increases in cost every year combined with a side fund. The side fund gets credited interest based upon a formula tied to an index.
All of the individual's money is in the general account of the insurance company.
Posted: Tue Apr 02, 2013 04:17 pm Post Subject:
Well, it's actually the IUL or Indexed Universal Life Insurance and that's how it's popularly known.
Posted: Mon Apr 08, 2013 02:36 pm Post Subject:
Yes, the Indexed Universal Life Insurance is commonly known as IUL
Posted: Sun Apr 14, 2013 05:07 am Post Subject:
So many inaccuracies, so little time...
And some crediting methods even your CPA won't be able to explain in a way that makes any sense ("market value adjusted")
I'm aware of no IUL products that are subject to MVA, further MVA has nothing to do with indexing.
The expenses may include administrative fees ("profit") and sales charges ("profit"), and will always include the cost of insurance and riders ("COI", "mortality and expenses").
Max, I'm afraid you've confused revenue with profit, two very different accounting concepts.
Every year, your cost of insurance will increase. UL policies are built on a platform of annual renewable term life insurance, and every year as you get older, you are also getting closer to dying, so the risk of paying a death claim to the insurance company is increasing, and they charge you for that.
And now your ignorance is showing. You cannot state that a level premium (and even though they are called "flexible" universal life contracts are level premium products from an actuarial science point of view) life insurance policy will always experience a rising COI. Because COI is based on the net amount at risk, and all level premium products build a reserve, which reduced net amount at risk, and can reduce COI. This can be especially true of a policy that receives a larger premium than the planned premium.
Most UL policies are available with so-called "secondary guarantees" which promise that if you never fail to make your "planned" premium, the policy will not lapse. Missing just one premium payment could cause the entire guarantee to disappear. And it doesn't promise you any of the millions of dollars in cash accumulation that the agent's sales illustration ("pie in the sky") will purport as reality ("hypothetical savings"). In fact, the secondary guarantees all but guarantee you will have no savings, even after 10-30 years of paying premiums.
There's a lot of misleading information here.
First, you're completely neglecting the fact that there are two types of secondary guarantees, one which required an on time premium payment, and one that only requires funding to maintain the shadow account. In the later, missed premiums would not forfeit the guarantee.
Further, your bringing up secondary guarantees vis-å-vis a cash accumulation discussion is awkward at best. You wouldn't rely on a secondary guarantee in a cash accumulation focused scenario because the planned premium would be more than sufficient to build the policies intended reserve.
Most people never see the cash accumulation illustrated because the "current rates" for cost of insurance never remain constant -- they always increase -- and the interest rate cannot be guaranteed, and will never be a straight line as the illustration depicts.
No company illustrates a UL contract be it indexed or otherwise that assumes a fixed cost of insurance--I know you know that. Those "pie in the sky" numbers are run assuming realistic charges. The problem for many agents is in unrealistic assumed crediting rates.
I'm kind of disappointed Max, I'd expect better of you on this.
All of the individual's money is in the general account of the insurance company.
This is incorrect, several universal life carriers use separate accounts for indexed (and even fixed current assumption) universal life insurance. There are two main reasons for this:
1. Under federal banking law, only 50% of cash surrender values in a life insurance policy can be reported on a bank's balance sheet. Cash surrender values in a separate account can be counted 100%.
2. General account asset investment options are way more restricted vs. separate account investment options. While derivatives are allowed, an insurer can make riskier investments in separate accounts. Not a lot do, but it's an option afforded to them.
Posted: Sun Apr 14, 2013 03:42 pm Post Subject:
Bntrs, can you give me an example of a company using separate accounts for a UL product? Wouldn't using a separate account mean that the owner is taking the risk and not the insurance company? Would the use of a separate account force the agent to be securities licensed?
Posted: Mon Apr 15, 2013 12:21 am Post Subject:
Bntrs, can you give me an example of a company using separate accounts for a UL product? Wouldn't using a separate account mean that the owner is taking the risk and not the insurance company? Would the use of a separate account force the agent to be securities licensed?
Sure thing, LFG, all of the Mutuals, Pru, Met, and Hancock all do it.
Separate account would not require you to be securities licensed. The separate account is merely where the money goes when it is at the insurance company. The product isn't a variable product, investment risk is not on the behalf of the client.
Posted: Tue Apr 16, 2013 01:45 pm Post Subject:
BNTRS,
Can you explain this to me further. In this regard, I am not sure what is meant by the term "separate account". Usually, a "separate account" is used for variable products and the money in a separate account is not an asset of the insurance company. A creditor could never access that money.
How would this work for an IUL product? BNTRS, I truly don't understand. I'm pointing that out because sometimes I ask questions to see if the other person understands. In this case, it is truly me who is confused.
Posted: Wed Mar 27, 2013 02:49 pm Post Subject:
It's more commonly called "Indexed Universal Life Insurance" or IUL for short. And the chosen index and crediting methods have a huge impact on the future of the policy. Some interest crediting methods can result in no interest being added over one or two years because of one very bad day for the index ("annual point-to-point" or "biannual point-to-point"). And some crediting methods even your CPA won't be able to explain in a way that makes any sense ("market value adjusted"). When it comes to crediting methods, shorter intervals are in your best interest, even if it means a smaller guaranteed interest crediting rate.
Without solid, consistent, and sufficient interest crediting, any UL policy is more likely to crash and burn than soar to lofty heights as the agent predicts (or misrepresents by leading you to believe cash accumulation is guaranteed).
You pay premiums (monthly, quarterly, semiannually, annually), and the insurance company adds interest based on a defined index and crediting method (with a "guaranteed minimum" interest rate, which could be ZERO percent), then deducts all the expenses of maintaining the policy each month. The expenses may include administrative fees ("profit") and sales charges ("profit"), and will always include the cost of insurance and riders ("COI", "mortality and expenses").
In some policies, during the first 12-48 months, you could be subject to an additional expense charge ("profit") that the company collects to recoup some or all of what it paid the agent in commissions.
Every year, your cost of insurance will increase. UL policies are built on a platform of annual renewable term life insurance, and every year as you get older, you are also getting closer to dying, so the risk of paying a death claim to the insurance company is increasing, and they charge you for that.
But don't expect to see a notice from the insurance company asking you to pay more until some number of years down the road when all those various charges and expenses ("profit") and the increasing cost of insurance ("mortality") have eroded all your cash accumulation ("savings"), leaving you faced with the choice of (A) no insurance and no cash accumulation ("policy lapse") or (B) ever increasing monthly payments to keep your policy in force ("annual renewable term") with no significant cash accumulation.
Most UL policies are available with so-called "secondary guarantees" which promise that if you never fail to make your "planned" premium, the policy will not lapse. Missing just one premium payment could cause the entire guarantee to disappear. And it doesn't promise you any of the millions of dollars in cash accumulation that the agent's sales illustration ("pie in the sky") will purport as reality ("hypothetical savings"). In fact, the secondary guarantees all but guarantee you will have no savings, even after 10-30 years of paying premiums.
Most people never see the cash accumulation illustrated because the "current rates" for cost of insurance never remain constant -- they always increase -- and the interest rate cannot be guaranteed, and will never be a straight line as the illustration depicts.
Hope this helps.
Posted: Mon Apr 01, 2013 06:02 pm Post Subject:
Blah, blah, blah
It is term insurance that increases in cost every year combined with a side fund. The side fund gets credited interest based upon a formula tied to an index.
All of the individual's money is in the general account of the insurance company.
Posted: Tue Apr 02, 2013 04:17 pm Post Subject:
Well, it's actually the IUL or Indexed Universal Life Insurance and that's how it's popularly known.
Posted: Mon Apr 08, 2013 02:36 pm Post Subject:
Yes, the Indexed Universal Life Insurance is commonly known as IUL
Posted: Sun Apr 14, 2013 05:07 am Post Subject:
So many inaccuracies, so little time...
And some crediting methods even your CPA won't be able to explain in a way that makes any sense ("market value adjusted")
I'm aware of no IUL products that are subject to MVA, further MVA has nothing to do with indexing.
The expenses may include administrative fees ("profit") and sales charges ("profit"), and will always include the cost of insurance and riders ("COI", "mortality and expenses").
Max, I'm afraid you've confused revenue with profit, two very different accounting concepts.
Every year, your cost of insurance will increase. UL policies are built on a platform of annual renewable term life insurance, and every year as you get older, you are also getting closer to dying, so the risk of paying a death claim to the insurance company is increasing, and they charge you for that.
And now your ignorance is showing. You cannot state that a level premium (and even though they are called "flexible" universal life contracts are level premium products from an actuarial science point of view) life insurance policy will always experience a rising COI. Because COI is based on the net amount at risk, and all level premium products build a reserve, which reduced net amount at risk, and can reduce COI. This can be especially true of a policy that receives a larger premium than the planned premium.
Most UL policies are available with so-called "secondary guarantees" which promise that if you never fail to make your "planned" premium, the policy will not lapse. Missing just one premium payment could cause the entire guarantee to disappear. And it doesn't promise you any of the millions of dollars in cash accumulation that the agent's sales illustration ("pie in the sky") will purport as reality ("hypothetical savings"). In fact, the secondary guarantees all but guarantee you will have no savings, even after 10-30 years of paying premiums.
There's a lot of misleading information here.
First, you're completely neglecting the fact that there are two types of secondary guarantees, one which required an on time premium payment, and one that only requires funding to maintain the shadow account. In the later, missed premiums would not forfeit the guarantee.
Further, your bringing up secondary guarantees vis-å-vis a cash accumulation discussion is awkward at best. You wouldn't rely on a secondary guarantee in a cash accumulation focused scenario because the planned premium would be more than sufficient to build the policies intended reserve.
Most people never see the cash accumulation illustrated because the "current rates" for cost of insurance never remain constant -- they always increase -- and the interest rate cannot be guaranteed, and will never be a straight line as the illustration depicts.
No company illustrates a UL contract be it indexed or otherwise that assumes a fixed cost of insurance--I know you know that. Those "pie in the sky" numbers are run assuming realistic charges. The problem for many agents is in unrealistic assumed crediting rates.
I'm kind of disappointed Max, I'd expect better of you on this.
All of the individual's money is in the general account of the insurance company.
This is incorrect, several universal life carriers use separate accounts for indexed (and even fixed current assumption) universal life insurance. There are two main reasons for this:
1. Under federal banking law, only 50% of cash surrender values in a life insurance policy can be reported on a bank's balance sheet. Cash surrender values in a separate account can be counted 100%.
2. General account asset investment options are way more restricted vs. separate account investment options. While derivatives are allowed, an insurer can make riskier investments in separate accounts. Not a lot do, but it's an option afforded to them.
Posted: Sun Apr 14, 2013 03:42 pm Post Subject:
Bntrs, can you give me an example of a company using separate accounts for a UL product? Wouldn't using a separate account mean that the owner is taking the risk and not the insurance company? Would the use of a separate account force the agent to be securities licensed?
Posted: Mon Apr 15, 2013 12:21 am Post Subject:
Bntrs, can you give me an example of a company using separate accounts for a UL product? Wouldn't using a separate account mean that the owner is taking the risk and not the insurance company? Would the use of a separate account force the agent to be securities licensed?
Sure thing, LFG, all of the Mutuals, Pru, Met, and Hancock all do it.
Separate account would not require you to be securities licensed. The separate account is merely where the money goes when it is at the insurance company. The product isn't a variable product, investment risk is not on the behalf of the client.
Posted: Tue Apr 16, 2013 01:45 pm Post Subject:
BNTRS,
Can you explain this to me further. In this regard, I am not sure what is meant by the term "separate account". Usually, a "separate account" is used for variable products and the money in a separate account is not an asset of the insurance company. A creditor could never access that money.
How would this work for an IUL product? BNTRS, I truly don't understand. I'm pointing that out because sometimes I ask questions to see if the other person understands. In this case, it is truly me who is confused.
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