I'm 53 yrs. olds and want to build up some cash and protection for myself what should i do?
Total Comments: 1
Posted: Fri Sep 28, 2012 04:30 pm Post Subject:
First, there is no difference between EIUL and IUL. The term "Equity" has generally been dropped by the insurance industry when it comes to life insurance and annuities because of the entanglement it created several years ago with the Securities and Exchange Commission (SEC) which wanted to regulate equity indexed annuities in the same manner it does variable annuities.
Today, such products are simply called INDEXED. Indexed universal life insurance and annuities are very popular products these days, given the past performance of the stock markets over the past 10-12 years. They are not perfect products. No one insurance product is perfect for the needs of all persons. An IUL policy can make perfect sense today and be perfectly wrong for the future. Anything is possible. Future problems are preventable or avoidable.
Universal life is a type of contract in which the owner pays the cost of insurance and other monthly expenses necessary to cover the amount of death benefit chosen. Any premium paid in addition to that minimum which is required will ultimately end up in the policy's cash accumulation component (called "cash value" by most people).
A non-variable UL policy pays a fixed rate of interest on the cash accumulation. The contract will specify a minimum interest rate, such as 2% or 3%. The insurance company, at its own discretion, may voluntarily pay a higher rate, but never less than the minimum guaranteed rate.
An indexed UL policy takes the discretion away from the insurance company by tying the interest rate to a known, trackable index, such as the S&P500 Index or the LIBOR (any index may be used -- some contracts offer a one-time choice between two or more indexes). Based on a crediting formula that involves a "participation rate" and "rate cap", as well as when the rate will be measured and adjusted (monthly, annually, biennially, or some other method), the insurance company may be forced to pay a higher than minimum rate of interest.
The singular advantage of Indexed UL policies is the fact that market declines resulting in negative market performance will not, by themselves, have a negative effect on the cash accumulation. The policy must credit the minimum interest stated in the contract (0%, as seen in some contracts, is a guarantee, it just won't add anything to the cash accumulation). Positive performance of the Index simply means a higher rate of interest will be paid on the cash accumulation -- it does not guarantee that the interest itself or in addition to premiums being paid will be sufficient to increase the cash accumulation after the COI and other expenses have been paid.
The particular hazard with any form of UL (including a variable UL) policy is the fact that the Cost of Insurance (COI) is based on annual renewable term insurance rates. The COI rate goes up every year, based on the age of the insured. Over the life of the policy, the increase in guaranteed COI per $1,000 of death benefit can increase by 100,000s of percent (a first year rate of $0.06/$1,000 for example, will increase to $83.33/$1,000 in the last one or two years of the contract -- an increase of 138,783.33%).
To avoid being forced to pay increasing premiums, the cash accumulation must increase at least as fast as the annual increase in the cost of insurance. This can be accomplished in one of several ways.
First, it is always best to overfund the policy in the early years. A computer illustration can be generated to show the maximum funding possible without creating a "Modified Endownment Contract" (a policy that would "mature" or be fully endowed prior to age 95 based on the premiums paid in the first 7 years of the policy). Although this amount of premium, if paid for the first 7-10 years, cannot guarantee a successful outcome in the event no additional premiums are paid, it is more likely to keep the policy in force for a very long period of time.
Second, if a person cannot afford to pay those very high premiums for the relatively short period of time, significantly higher premiums may still be paid for a longer period of time. That, together with interest crediting, can also keep a policy in force for a very long time.
Paying minimum premiums, the ones most agents are likely to discuss, will keep the policy in force . . . as long as the actual interest crediting rate is never less than the "illustrated current interest rate" (a non-guaranteed value) that was "assumed" for the purpose of creating the minimum premium.
The minute the interest crediting rate falls below that, the policy is off track. Only sufficiently higher interest the next year will put the policy back on track by itself. This possibility is always uncertain. The longer a policy remains off track, the further off track it will become, and this eventually results in markedly higher COI charges being taken from the cash accumulation.
The way to avoid that is to begin paying higher premiums immediately to offset the reduced interest credits. But this method is always "behind the curve" because one cannot know how much to pay this year to avoid this year's shortfall, we can only make up last year's (or the last several years') shortfall that we know about. But it works.
What makes things worse, at this point, is not paying premiums at all and/or borrowing against the cash accumulation in the contract. Both, ultimately, have a negative effect on the future of the policy.
Every year, the policyowner will receive a statement showing premiums paid, interest credited, and expenses deducted. If the monthly cost of insurance has risen over the past year, it is because there is insufficient cash value to obtain enough interest, together with premiums being paid, to keep the Net Amount at Risk (NAR) the same as the previous year (or, better, to lower the NAR). The NAR is the difference between the cash accumulation and the death benefit -- the amount of insurance company money that must be added to the cash accumulation when a death claim is paid to equal the stated death benefit. Ideally, the NAR will reduce every year (as it does in a true whole life policy) enough to avoid an increase in the COI.
So the third, and final, way to keep a UL policy in proper balance is to make up any shortfall in cash accumulation this past year by paying additional money into the contract in the future years -- paying higher premiums and/or depositing lump sums. Paying the unmet need as soon as possible keeps the extra cost down to a minimum. Allowing things to progress unpaid for many years (five to seven or more), will cause the shortfall to grow to the point that it may not be affordable, and the policy is in danger of lapsing (terminating due to insufficient value) -- which can also lead to adverse income tax consequences.
Policyowners MUST learn to read their statements and understand what they are being shown. And then they need to make any necessary corrections immediately to prevent the policy from remaining off track. This is the only way to assure that one's UL policy is both BUILDING UP CASH VALUE and PROVIDING THE PROTECTION of the death benefit desired for one's beneficiaries.
There are UL policies with certain "guarantees" that can assure the policyowner that a death benefit will be paid when the insured dies. But they tend not to guarantee the accumulation of cash value. You get one or the other, but not both, unless you are using procedures 1, 2, or 3 above.
UL policies are not inherently "bad" -- they are complex and they do not work exactly like term or whole life policies that guarantee that when "you pay, you die, we pay" will come true according to the terms of those two types of contracts.[/u]
Posted: Fri Sep 28, 2012 04:30 pm Post Subject:
First, there is no difference between EIUL and IUL. The term "Equity" has generally been dropped by the insurance industry when it comes to life insurance and annuities because of the entanglement it created several years ago with the Securities and Exchange Commission (SEC) which wanted to regulate equity indexed annuities in the same manner it does variable annuities.
Today, such products are simply called INDEXED. Indexed universal life insurance and annuities are very popular products these days, given the past performance of the stock markets over the past 10-12 years. They are not perfect products. No one insurance product is perfect for the needs of all persons. An IUL policy can make perfect sense today and be perfectly wrong for the future. Anything is possible. Future problems are preventable or avoidable.
Universal life is a type of contract in which the owner pays the cost of insurance and other monthly expenses necessary to cover the amount of death benefit chosen. Any premium paid in addition to that minimum which is required will ultimately end up in the policy's cash accumulation component (called "cash value" by most people).
A non-variable UL policy pays a fixed rate of interest on the cash accumulation. The contract will specify a minimum interest rate, such as 2% or 3%. The insurance company, at its own discretion, may voluntarily pay a higher rate, but never less than the minimum guaranteed rate.
An indexed UL policy takes the discretion away from the insurance company by tying the interest rate to a known, trackable index, such as the S&P500 Index or the LIBOR (any index may be used -- some contracts offer a one-time choice between two or more indexes). Based on a crediting formula that involves a "participation rate" and "rate cap", as well as when the rate will be measured and adjusted (monthly, annually, biennially, or some other method), the insurance company may be forced to pay a higher than minimum rate of interest.
The singular advantage of Indexed UL policies is the fact that market declines resulting in negative market performance will not, by themselves, have a negative effect on the cash accumulation. The policy must credit the minimum interest stated in the contract (0%, as seen in some contracts, is a guarantee, it just won't add anything to the cash accumulation). Positive performance of the Index simply means a higher rate of interest will be paid on the cash accumulation -- it does not guarantee that the interest itself or in addition to premiums being paid will be sufficient to increase the cash accumulation after the COI and other expenses have been paid.
The particular hazard with any form of UL (including a variable UL) policy is the fact that the Cost of Insurance (COI) is based on annual renewable term insurance rates. The COI rate goes up every year, based on the age of the insured. Over the life of the policy, the increase in guaranteed COI per $1,000 of death benefit can increase by 100,000s of percent (a first year rate of $0.06/$1,000 for example, will increase to $83.33/$1,000 in the last one or two years of the contract -- an increase of 138,783.33%).
To avoid being forced to pay increasing premiums, the cash accumulation must increase at least as fast as the annual increase in the cost of insurance. This can be accomplished in one of several ways.
First, it is always best to overfund the policy in the early years. A computer illustration can be generated to show the maximum funding possible without creating a "Modified Endownment Contract" (a policy that would "mature" or be fully endowed prior to age 95 based on the premiums paid in the first 7 years of the policy). Although this amount of premium, if paid for the first 7-10 years, cannot guarantee a successful outcome in the event no additional premiums are paid, it is more likely to keep the policy in force for a very long period of time.
Second, if a person cannot afford to pay those very high premiums for the relatively short period of time, significantly higher premiums may still be paid for a longer period of time. That, together with interest crediting, can also keep a policy in force for a very long time.
Paying minimum premiums, the ones most agents are likely to discuss, will keep the policy in force . . . as long as the actual interest crediting rate is never less than the "illustrated current interest rate" (a non-guaranteed value) that was "assumed" for the purpose of creating the minimum premium.
The minute the interest crediting rate falls below that, the policy is off track. Only sufficiently higher interest the next year will put the policy back on track by itself. This possibility is always uncertain. The longer a policy remains off track, the further off track it will become, and this eventually results in markedly higher COI charges being taken from the cash accumulation.
The way to avoid that is to begin paying higher premiums immediately to offset the reduced interest credits. But this method is always "behind the curve" because one cannot know how much to pay this year to avoid this year's shortfall, we can only make up last year's (or the last several years') shortfall that we know about. But it works.
What makes things worse, at this point, is not paying premiums at all and/or borrowing against the cash accumulation in the contract. Both, ultimately, have a negative effect on the future of the policy.
Every year, the policyowner will receive a statement showing premiums paid, interest credited, and expenses deducted. If the monthly cost of insurance has risen over the past year, it is because there is insufficient cash value to obtain enough interest, together with premiums being paid, to keep the Net Amount at Risk (NAR) the same as the previous year (or, better, to lower the NAR). The NAR is the difference between the cash accumulation and the death benefit -- the amount of insurance company money that must be added to the cash accumulation when a death claim is paid to equal the stated death benefit. Ideally, the NAR will reduce every year (as it does in a true whole life policy) enough to avoid an increase in the COI.
So the third, and final, way to keep a UL policy in proper balance is to make up any shortfall in cash accumulation this past year by paying additional money into the contract in the future years -- paying higher premiums and/or depositing lump sums. Paying the unmet need as soon as possible keeps the extra cost down to a minimum. Allowing things to progress unpaid for many years (five to seven or more), will cause the shortfall to grow to the point that it may not be affordable, and the policy is in danger of lapsing (terminating due to insufficient value) -- which can also lead to adverse income tax consequences.
Policyowners MUST learn to read their statements and understand what they are being shown. And then they need to make any necessary corrections immediately to prevent the policy from remaining off track. This is the only way to assure that one's UL policy is both BUILDING UP CASH VALUE and PROVIDING THE PROTECTION of the death benefit desired for one's beneficiaries.
There are UL policies with certain "guarantees" that can assure the policyowner that a death benefit will be paid when the insured dies. But they tend not to guarantee the accumulation of cash value. You get one or the other, but not both, unless you are using procedures 1, 2, or 3 above.
UL policies are not inherently "bad" -- they are complex and they do not work exactly like term or whole life policies that guarantee that when "you pay, you die, we pay" will come true according to the terms of those two types of contracts.[/u]
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