Insurance Pro Blog Podcast | Life Insurance and Annuity Insights

The DOL Fiduciary Rule is dead.  It went out with an unceremonious whimper last week.  Financial media sources covered the news almost no one cares about through short articles noting the progress that led to the death of the Rule sprinkling in a comment or two from sources who cared to opine on the subject. […]

Today’s topic is not so much about the mechanics of everyday life insurance but diverges into the seedy underbelly of the industry and the problems that certain transactions have caused. Well, one particular transaction is in the news as we speak and rightfully so. We’re revisiting a topic that we covered six years ago, and […]

Today’s topic is not so much about the mechanics of everyday life insurance but diverges into the seedy underbelly of the industry and the problems that certain transactions have caused. Well, one particular transaction is in the news as we speak and rightfully so. We’re revisiting a topic that we covered six years ago, and […]

It occurred to me recently that 2018 marks a milestone anniversary for me.  I've now worked professionally in the financial services/insurance industry for 10 years.  That's 10 years of being paid to assist people to navigate various financial mazes.  Most usually the primary topic at hand is life insurance, but there are plenty of circumstances […]

It occurred to me recently that 2018 marks a milestone anniversary for me.  I've now worked professionally in the financial services/insurance industry for 10 years.  That's 10 years of being paid to assist people to navigate various financial mazes.  Most usually the primary topic at hand is life insurance, but there are plenty of circumstances […]

There are so many questions floating around the internet that center around indexed universal life insurance pros and cons. Indexed universal life insurance is the hottest thing going in the life insurance industry at the moment, tough to deny that.  Sales continue to lead all other categories, and it's safe to assume this product is now a mainstay in the quiver of most U.S. life insurers.

Given the apparent interest, you're probably wondering if this product is right for you?  To help you drive further at an answer to that question, we prepared a comprehensive pros and cons list for indexed universal life insurance.

The Pros of Indexed Universal Life Insurance

There are six key benefits for IUL that everyone should understand; the benefits are:

* Potential for above average interest earnings

* Principal protection

* Interest rate swap protection

* Anytime access to your cash value

* Solid income producing potential

* Incredible tax efficiency

Very High Potential Interest Earnings

Indexed universal life insurance is a fixed insurance product.  This means that you pay your premium to the insurance company and they promise some sort of benefit in return.  Besides the death benefit, indexed universal life insurance policies promise to pay interest on cash values held inside the life insurance policy.

This interest rate has the potential to be very high by today's standards in any given year.  For most indexed universal life insurance policies, that potential is low double digits.  We're talking 10-12% paid on cash value annually.

It’s possible because the interest rate paid depends on the movement in an index. Usually, a stock index like the S&P 500.  The interest rate paid is the movement (or percentage change) in the index for a given period (most commonly a one year period).

So, if the S&P 500 (for example) increases by 10% this year, the interest rate paid on your cash value is 10%. You’re asking yourself, “how’s that possible?”.

There are no other fixed savings options (issued by insurance companies or otherwise) available in the United States that offer that same level of potential with any guarantees. This definitely puts a checkmark in the “pro” column for indexed universal life insurance.

Principal Protection

The interest rate paid on the indexed universal life insurance policy may come from the movement of a stock index, but indexed universal life insurance does not participate in stock market crashes or declines.  Instead, indexed universal life insurance policies have a floor, which is the lowest amount of interest the insurer can pay on the cash value in your policy.  For most policies, this floor is zero.

This means no matter how bad the stock market gets; your indexed universal life insurance policy will never earn anything less than zero.

Even better, some indexed universal life insurance policies have a floor that pays a small guaranteed interest rate on the cash value, perhaps 1%.  In this case, no matter how bad the stock market, your indexed universal life insurance policy can do no worse than 1% interest paid on your cash value.

Interest Rate Swap Option

While the indexing feature of indexed universal life insurance can provide, superior interest earning in today's economy, you'd be wise to wonder how this might work long term if interest rates rise.

There are so many questions floating around the internet that center around indexed universal life insurance pros and cons. Indexed universal life insurance is the hottest thing going in the life insurance industry at the moment, tough to deny that.  Sales continue to lead all other categories, and it's safe to assume this product is […]

Last week we discussed the probability of achieving various returns on a passive investment in the S&P 500.  This week I want to take a similar analysis and direct it to indexed universal life insurance.  Pursuing this information comes from two primary motivations.  On the one hand, I'm intrigued by the answer.  On the other, we, of course, received questions about how indexed universal life insurance looks when running through a similar analysis.

So let's feed our intellectual curiosity and review the results.

The Design

The design in this analysis is similar (but not identical) to the one I used for last weeks blog post.  Using rolling monthly average data I took S&P500 data spanning the 1920's through 2017 to generate several 10, 20, and 30-year tranches (over 60 for each category) used to compute the compound annual growth rate of a hypothetical investment for each observable timespan.

In other words, I used real historical data to create a boatload of 10, 20, and 30 year periods of hypothetical investments and calculated the growth rate for each one to arrive at the probability of achieving various rates of return with the cash value of an indexed universal life insurance policy.

I chose an indexed universal life insurance policy with a one-year point-to-point index option where the cap rate was 11%, the floor 1%, and the participation rate 100%.

I then used the expense report generated by the indexed universal life insurance product to plug in expense deduction to accurately capture the cost of owning the life insurance policy.  All expenses are accounted for in all scenarios.

The Results

Before I discuss the actual results, I'll note my assumptions coming into this analysis.

I hypothesized that the 10-year scenarios would all reflect uninspiring results in the sense that rate of returns would be low by most standards.  Since the index universal life insurance policy must overcome a set of early expenses, returns are never stellar for the first decade.

I also assumed that 5% returns would exceed 50% probability in the 20 and 30-year scenarios since that level of return has always been our target for success with indexed universal life insurance.

10 Year Scenario

As predicted 10-year results were not great for sure.  But, they were all positive.

This caught me a little by surprise.  I figured surely a scenario or two would exist where market returns were bad for such a span that insurance expenses would cause the cash value to see a loss. Not the case.

Further, there was one observation within the 10 year tranches, and only one, where the return fell below 1%.  And this sub 1% result was 0.77% annual growth per year.  In other words, extremely close to 1%.

More fascinating was the fact that 57% of the 10-year tranches resulted in annual returns of 3% or better.  This was not at all something I anticipated.  I assumed much lower results.

Most fascinating of all was the 12 incidences (nearly 19% of the time) where the return came out to 4% or better–there was even one observation that came out above 5%.

CAGR 10 Years

Probability of CAGR

0

100%

1

98%

2

86%

3

57%

4

18%

5

2%

6

0%

7

0%

20 Year Scenario

The 20-year scenario validated my prediction that 5% would occur 50% of the time (62% to be exact).  It also had no observations under 3%.  Very interesting if you remember that last weeks direct investment in the mark...

Last week we discussed the probability of achieving various returns on a passive investment in the S&P 500.  This week I want to take a similar analysis and direct it to indexed universal life insurance.  Pursuing this information comes from two primary motivations.  On the one hand, I'm intrigued by the answer.  On the other, […]

When you start your career in the financial services industry you pretty quickly figure out that you must bow at the altar of the average return on investment in the stock market. Well, that and a couple of other things like…

* Compliance runs the show–resistance is futile.

* 8% is the return we assume people will earn on their investments because…

Finishing tenant #2 often involves reference to a vague statistic that's tricky to track down exactly.  The 8% assumption on investments became so sacrosanct that I estimate many gave up on trying to prove its legitimacy and decided instead it must be true because everyone else uses it.

I've spent a good deal of time over the years trying to locate the source that validates this assumption (8% average return on investments).

Surely there is an air-tight academic paper somewhere that gives credence to this ubiquitous assumption?

After hours of research, on separate occasions, I'm NOT here to tell you that the supporting stats don't exist.  I am, however, going to tell you that I have yet to find them.

So, I set out on my own number crunching endeavor to validate the 8% assumption and what I discovered is quite interesting. What you read below may cause you to re-think “reasonable assumptions.”

Research by Accident

While I have, I promise, spent a good amount of time trying to locate the research mentioned above that validates an 8% compound annual growth in stock market investments I did not come to the research/number crunching that I'm going to discuss today because of the lack of locatable evidence to support the practice.  Instead, I got here mostly by accident.

I was on the phone with Brantley.  I don't remember the details of the day or the conversation all that well.  If I did I could detail the story with a tad more dramatic pizzaz–regretfully that won't be the case.

He was going off on a point that I was admittedly only half listening to at the time, but then he made a point that set off a sequence of thought processes that turned on my unrelenting research mind.  His point was simply that to accomplish some goal (again, I can't remember exactly the topic of conversation) one would need to achieve a 9-ish percent rate of return.

And then he said something that set my mind into hyperdrive.  His comment was something to the effect of “and we know how much more practically impossible that would be to accomplish.”

That comment immediately made me wonder.  Has anyone ever attempted to calculate the probability of various returns in the market as targeted rates of return increase?  Let me clarify because I know this is a bit obtuse and loaded with semantics.

The Probability of Achieving an 8% Average Return on Investment in Stock Market

We know that there are several possible results of your investment portfolio over the course of several years.  We even suspect that the probability of getting a return no worse than say 4% is much higher than a return no worse than 10%.

But how do these probabilities stack up as we move up the line for the rate of return?  In other words, how much less likely is that 9% effective return versus an 8% rate of return?

And I suppose it's also fair to address the question: why do I care?

I'd argue it's a vital consideration because it establishes an understanding of the task you undertake should you attempt to achieve higher returns to reach various financial goals.  One of the resulting recommendations financial advisors, et al. give clients who are falling short of accumulation goals is to take on additional risk in hopes to capitalize on the risk/reward assumption that goes along with general investing.