{"id":5879,"date":"2019-05-22T10:38:20","date_gmt":"2019-05-22T15:38:20","guid":{"rendered":"https:\/\/www.figmarketing.com\/blog\/?p=5879"},"modified":"2023-09-06T18:57:48","modified_gmt":"2023-09-06T23:57:48","slug":"credit-vs-cost-understanding-iul-in-the-aftermath-of-ag49","status":"publish","type":"post","link":"https:\/\/www.figmarketing.com\/blog\/credit-vs-cost-understanding-iul-in-the-aftermath-of-ag49\/","title":{"rendered":"Credit vs. Cost: Understanding IUL in the Aftermath of AG49"},"content":{"rendered":"\n

Going into effect late in 2015, Actuarial Guideline XLIX (AG49)<\/strong><\/a> was supposed to level the playing field for indexed universal life (IUL). <\/p>\n\n\n\n

This piece of regulation prohibited carriers from showing outrageously\nhigh crediting rates and created a foundation for an honest comparison of\nproducts. It set up boundaries that were designed to simplify IUL and put an\nend to the illustration game once and for all.<\/p>\n\n\n\n

But did it?<\/p>\n\n\n\n\n\n\n\n

IUL products are as complex today as they\u2019ve ever been. In four short\nyears, that level playing field has become a battle zone, and the illustration\ngame has become an all-out war. Finding ways to get around the boundaries set\nup by AG49, carriers are pulling out the big guns with illustrations that\neasily outperform the high rates they were once allowed. Crediting strategies\nare getting more and more creative; utilizing multipliers, bonuses,\nparticipation rates, and the like to illustrate effective rates well over their\ndefined index caps. <\/p>\n\n\n\n

Related: What are the Charges Deducted from Indexed Universal Life Policies?<\/a><\/h4>\n\n\n\n

Given these new aggressive features, the difficult question we\u2019re left\nasking is whether the projections we see on paper are realistic or purely\nimaginary. To come to a reasonable answer, first you must understand what goes\ninto these life insurance illustrations. <\/p>\n\n\n\n

For every one of these credit-boosting features, there\u2019s an inherent cost associated with its implementation. Added cost doesn\u2019t necessarily mean added benefit, nor does it imply less efficiency. In an IUL, an increase in cost more accurately translates into an increased risk, and often an increase in potential reward as well.<\/p>\n\n\n\n

Here\u2019s an Example<\/strong><\/h2>\n\n\n\n

Let\u2019s look at Carriers A<\/strong>, B<\/strong>, and C<\/strong>. <\/p>\n\n\n\n

In this scenario, a 45-year-old male puts $10,000 a year into an IUL for 20 years. After those 20 years, he plans to take out the maximum annual income allowable until age 100. Each carrier is going to produce a wildly different number for that income. Why? Because each product has drastically different internal costs.<\/p>\n\n\n\n

Carrier A<\/strong><\/h3>\n\n\n\n

Starting at age 66, the insured could take out a projected $26,412\nassuming a crediting rate of 7.39%. While he would\u2019ve only put in $200,000 over\nthe life of the policy, by age 80 they would\u2019ve taken out $396,180, and they\nwould still be able to take out income for the next 20 years. If all goes well,\nthat sounds like a pretty good deal.<\/p>\n\n\n\n

But then you see the cost summary. By age 100, the total charges paid to the carrier out of the cash value of the policy totals $99,851 \u2013 50% of your total premium paid would have gone to the house. That comes down to well below 1% per year, making this a fairly low-cost structure. It would seem reasonable to assume that this is a product poised to perform given that it is not heavily weighed down by internal cost.<\/p>\n\n\n\n

Related: 5 Features a Life Insurance Policy Should Have<\/a><\/h4>\n\n\n\n

Carrier B<\/h3>\n\n\n\n

Given the same scenario with Carrier B, the total charges at age 100\ncome out to $163,355. Assuming a crediting rate of 6.90%, that would generate\n$39,216 of income annually from age 66 to 100. <\/p>\n\n\n\n

How’s that possible? How can a lower crediting rate<\/em> and a higher cost structure<\/em> result in more income for the client?<\/p>\n\n\n\n

It\u2019s simple. Carrier B has a crediting strategy that utilizes underlying multipliers and bonuses that Carrier A doesn\u2019t. The added cost that the client would pay in Carrier B\u2019s product goes into features that drastically improve the performance of the policy. <\/p>\n\n\n\n

While this may seem counterintuitive, when purchasing an IUL it often makes sense to go with a higher cost model to see a greater return on your cash value. However, that is not always the case.<\/p>\n\n\n\n

Carrier C<\/strong><\/h3>\n\n\n\n

Carrier C shows the highest income of all three products. Assuming a\ncrediting rate of 7.10%, Carrier C projects $51,771 of income. Along with that\ncomes a much higher cost structure. By age 100, the total charges paid would\nequate to $5,043,355. That’s 25 times the total premium paid into the policy\nand 50 times the cost associated with Carrier A’s product.<\/p>\n\n\n\n

In truth, given that each of these products hits their projected\ncrediting rate each year, they should all perform as illustrated. If that\u2019s the\ncase, then Carrier C would likely be the best option. But what happens if your\nindex returns don\u2019t match that illustrated rate? How can you tell which of\nthese products is built for the ups and downs and which is smoke and mirrors?<\/p>\n\n\n\n

Related: Two Main Issues with the Life Insurance Underwriting Process<\/a><\/h4>\n\n\n\n

Try reducing that crediting rate to see how it affects the illustrated income. For our purposes, reducing each carrier\u2019s rate by 30% (showing 70% of their maximum rate) should do the trick. For Carrier A, a 30% reduction in rate takes the projected income from $26,412 to $11,556 \u2013 a 56% decrease. Carrier B, on the other hand, sees income drop 55% from $39,216 to $17,664<\/p>\n\n\n\n

Not surprisingly, that same rate reduction has the greatest impact on Carrier C, decreasing the income 86% from $51,771 all the way to $7,224. <\/p>\n\n\n\n

Bottom Line<\/strong><\/h2>\n\n\n\n

Which of these products would you feel comfortable owning? Carrier A\nclearly has the lowest cost structure, but it also generates the least income,\nand a 30% rate reduction comes out to a 56% reduction in income. Carrier B has\na higher associated cost, but ultimately it handled the rate reduction equally\nas well as Carrier A. Finally, Carrier C produced the highest income, at the\ngreatest cost, and was also impacted the greatest by the decreased crediting\nrate.<\/p>\n\n\n\n

If you ask me, it\u2019s all based on your personal risk tolerance. If you\ncan stomach the higher cost and believe the illustrated crediting rate to be\nfair, Carrier C just might be the pick for you. If you think current\nillustrated rates are a bit high, but you still want to see maximum performance,\nCarrier B might suit your liking. Or, if you just want a bare-bones option that\nyou feel you can depend on, maybe Carrier A makes sense.<\/p>\n\n\n\n

The good news is that this post-AG49 IUL war hasn\u2019t resulted in bad products. What it\u2019s produced is more complexity. If you can break down that complexity and understand the moving pieces, you\u2019ll find that many of these products are incredibly powerful for you and your clients. <\/p>\n\n\n\n

Figure out which strategy you believe in and help your clients plan for their financial future. <\/p>\n\n\n\n

Keep Reading: Comprehensive Analysis & Review Program Overview<\/a><\/h4>\n\n\n\n
\n\n\n\n
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\"financial<\/a><\/figure><\/div>\n\n\n\n

The content within this document is for informational and educational purposes only and does not constitute legal, tax or investment advice. Customers should consult a legal or tax professional regarding their own situation. This document is not an offer to purchase, sell, replace, or exchange any product. Insurance products and any related guarantees are backed by the claims-paying ability of an insurance company. Insurance policy applications are vetted through an underwriting process set forth by the issuing insurance company. Some applications may not be accepted based upon adverse underwriting results. The examples shown herein are hypothetical. Rates can and do change often. Rates may depend on your age, health, and gender. Your results will vary. Please be sure to ask your financial professional to run an illustration based on your specific information for any product that you are considering prior to purchase. <\/em><\/p>\n","protected":false},"excerpt":{"rendered":"

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