Multi Index Universal Life Insurance

[jzajzz]

The IRR on the non-guaranteed CV after 30 years of $10k premiums is 7.0%....that's amazing.

I think it's more like 5 and change... they have a separate IRR ledger and I'm pretty sure that's what they were showing.. now can you get 7%
?... hell yes.. when the interest rate goes back up.. dividend rates will be highly likely to go back up especially for the major players..there's a famous thread on the boglehead forum of someone posting his numbers from Northwester from 1990 to 2009 ... IRR was over 7% in only 19 years. and taht was after the market crash so that guy was happy.


I'm not that optimistic for the immediate future. Either way I like projecting conservative numbers. I expect the products to do better than illustrated. Although that's tough to do with WL .. many carriers don't let you illustrate smaller dividend rates.

 

[nun]

I think it's more like 5 and change... they have a separate IRR ledger and I'm pretty sure that's what they were showing.. now can you get 7%

Opps sorry I didn't copy and paste correctly, it's 5.1%

I don't know if I can get 7% in the future, but my 30 year average return is a bit over 8%

 

[nun]

With my personal strategy .. I would have a more conservative .. more predictable income stream for retirement with the LI policy .. while I would be more aggressive with the ROth since I have the LI policy to back me up.

Chances are the Roth invested in the market would probably yield you a higher return overtime.. but if 2008 happens the year I"m trying to retire ... I can't really do it over.. even though the odds were that 2008 wouldn't happen that exact same year. I rather be ready for that. there are a lot of people who are worried about another big recession right now .. It might be just panic.. but you know what .. I rather not panic.. especially if I can get a 5-6% IRR in a lower risk vehicle.

Those are valid observations, however, most folks on this forum have been through 2008 and a couple of other downturns so we aren't scared of them; they are just part of the cycle. Retiring into a recession is one of the worst case scenarios and people address that with their withdrawal rates and asset allocation. Insurance of some sort could be part of that allocation. When people buy an SPIA they know the payout and IRR they can expect for a given lifespan, however with WL the uncertainty of the return is a big factor and the guaranteed rate is the one to be used for planning. Uncertainty of return is also an issue with ROTHs etc, but at least you don't have the drag of fees and aren't locked in.

 

[Big_Hitter]

Those are valid observations, however, most folks on this forum have been through 2008 and a couple of other downturns so we aren't scared of them;.

those of us with a WL cash value are less scared - we can draw on the cv while rebuilding the portfolio

 

[Another Reader]

those of us with a WL cash value are less scared - we can draw on the cv while rebuilding the portfolio

IIRC, a couple of major insurance companies were on the ropes during the 2008 crash. What happens to your WL policy if the issuing company fails?

 

[Big_Hitter]

IIRC, a couple of major insurance companies were on the ropes during the 2008 crash. What happens to your WL policy if the issuing company fails?

I doubt NYL will go out of business. State guaranty funds cover insurance companies.

 

[nun]

A guaranteed 4% isn't the worst thing in the world, however, I think it's instructive to look at a simple example of a GUI vs a ROTH plus after tax savings way to pass $1M on to an heir. I bet that the WL policy will be more expensive for the lifetime benefit because of all the added features, loan interest etc.

A 30 year old male can get a $1M GUI policy for $5k/year in premiums. If he lives an average lifespan to age 83 the $1M goes tax free to his heirs and the IRR is 4.14%.

If the $5k goes into a ROTH from age 30 to 65 and then into regular savings how much will he leave. Let's also assume that 20% taxes are paid on the final after tax amount. If the lifetime return is the same as the GUI ie 4.14% then the after tax amount will be $980k. But if the ROTH and after tax return is 5% then the final amount is $1.33M. The small increment in return compounds nicely. Of course the 5% is not guaranteed, and maybe 4.14% looks good in many circumstances.

 

[nun]

those of us with a WL cash value are less scared - we can draw on the cv while rebuilding the portfolio

Yes having the CV is useful and the returns without loans are definitely more than you'd get with CDs and short term bonds....but I'd like to see the actual return on the CV account after interest is factor into borrowing from the CV

 

[MichaelB]

A guaranteed 4% isn't the worst thing in the world, however, I think it's instructive to look at a simple example of a GUI vs a ROTH plus after tax savings way to pass $1M on to an heir.

Passing along wealth is one potential advantage of the insurance product. The question is, how relevant is it to the rest of us who don't have that objective?

 

[brewer12345]

IIRC, a couple of major insurance companies were on the ropes during the 2008 crash. What happens to your WL policy if the issuing company fails?

Bad things, to put it mildly. There is no FDIC-equivalent for life insurance companies. There are state guaranty funds but they are not backed by the states or anyone else and they don't have the resources to cover the failure of a large insurer. The relatively high capital requirements of the insurance regulatory regime in the US kept the insurers in one piece long enough for the banks to fail and the feddle gubmint to start spiking the economic punch with a tanker load of everclear, but the industry as a whole was lucky that was the sequence of events that went down. So it really, really matters which insurer you do business with.

Fans of insurance products will also want to watch what happens (if anything) with "principles-based reserving." This mumbo-jumbo was adopted last year and will be rolled out over time. Basically this will allow insurers to make up their own rules about how to reserve for insurance liabilities rather than follow rules laid down by their regulators. Theoretically this will all be subject to regulatory oversight, but the history of such schemes does not inspire confidence and frankly neither do many of the state insurance departments.

 

[nun]

Passing along wealth is one potential advantage of the insurance product. The question is, how relevant is it to the rest of us who don't have that objective?

I think it's relevant as an example of the returns you can expect from life insurance. Analyzing WL policies gets complicated when CV and loans are in the mix. You could do something similar by ignoring the CV on the WL and just using the death benefit value. Using the WL illustration provided earlier where $10k is paid in premiums from 30 to 60 and assuming death at age 83 then the guaranteed death benefit is $894k and the non-guaranteed benefit is $2.9M. The IRRs are 2.6% and 5.6%. If CV loans are taken I'd expect the overall IRR to be less.

 

[jzajzz]

IIRC, a couple of major insurance companies were on the ropes during the 2008 crash. What happens to your WL policy if the issuing company fails?

Not true at alll ...

AIG is the one that was in the news .. AIG is the parent company of American General (which also operates under the AIG moniker) .. AIG is a holdings company . their banking division was in the subprime world and as a result in deep doo doo during the 2008 crisis.

Insurance companies are heavily regulated .. they need to have a reserve and show a surplus .. The AM best rating is an indication of how well they're doing... American General has an A rating (excellent) .. I believe they had an A in 2008 as well.


By law.. insurance companies investments are supposed to be low risk.. therefore if a subsidiary of AIG is operating in high risk investments.. it has to be completely separate.

The 2008 crash made a lot money for Life insurance companies ..

Bonds on the other hand affect insurance companies greatly.

 

[jzajzz]

Yes having the CV is useful and the returns without loans are definitely more than you'd get with CDs and short term bonds....but I'd like to see the actual return on the CV account after interest is factor into borrowing from the CV

The numbers I've posted earlier.. is after the interest charge. the illustration HAS to factor in the interest charge by law.

Now of course the illustration is based on current interest rate (in this case 5%) .. the one I posted is an adjustable loan rate .. Other companies do have fixed loan rate but not this one.

 

[respond2u]

IIRC, a couple of major insurance companies were on the ropes during the 2008 crash. What happens to your WL policy if the issuing company fails?

My insurance company went bankrupt in 2010.

It was backed by Virginia, went in to receivership, was taken over, and back in action in about 2 years.

During the interim, the policies were still in force.

They are almost as solid as treasuries.

 

[pb4uski]

IIRC, a couple of major insurance companies were on the ropes during the 2008 crash. What happens to your WL policy if the issuing company fails?

Your premise is totally wrong... there were no major insurers on the ropes in 2008 and certainly none who issue lots of WL.

Most WL is issued by mutuals (NML, NYL, Guardian, MassMu, etc) or former mutuals (for example, MetLife, John Hancock) and they all weathered 2008 very well... there were a few players who were stressed (Lincoln, Genworth and a couple others) but nothing anywhere near some of the banks.

AIG's bailout had to do with stupidity at its unregulated companies... nothing to do with its insurance companies...the insurance companies were its salvation in that AIG sold a number of them and used the proceeds to pay back what they received in the bailout.

 

[meierlde]

IIRC, a couple of major insurance companies were on the ropes during the 2008 crash. What happens to your WL policy if the issuing company fails?

But just like with FDIC insurance you do need to know limits of the funds, and possibly diversify companies.
BTW there are lots of life insurance companies that fall on hardly known list, one might avoid them in favor of the bigger players.

 

[nun]

The numbers I've posted earlier.. is after the interest charge. the illustration HAS to factor in the interest charge by law.

Now of course the illustration is based on current interest rate (in this case 5%) .. the one I posted is an adjustable loan rate .. Other companies do have fixed loan rate but not this one.

The 5.6% non-guaranteed rate will provide $741k of income and leave just over $1M as a death benefit. However, the guaranteed rate of 2.6% would only produce $800k in death benefit even without any income. I would not sign a contract to give $10k a year for 30 years on the promise of an average 5.6% return at the end of 53 years. It would obviously be a lot more if I died early.....but now we are back to term insurance again.

 

[jzajzz]

The 5.6% non-guaranteed rate will provide $741k of income and leave just over $1M as a death benefit. However, the guaranteed rate of 2.6% would only produce $800k in death benefit even without any income. I would not sign a contract to give $10k a year for 30 years on the promise of an average 5.6% return at the end of 53 years. It would obviously be a lot more if I died early.....but now we are back to term insurance again.

Not sure where you get the 5.6% .. but I'm getting about 5.1% but that's including the distribution until the person's 83 years old.
The return in the market will most likely be higher for over time.. but the timing can't be controlled. you're not getting 6% every year.. the market is going up and down and you can't control the timing. If it happens to have a severe drop on your last years of retirement or in your first couple of years .. that's a risk that can't be explained by looking at numbers on a sheet of paper. Some of us might stay level headed when that happens ... but the emotional toll and the anxiety that may cause is real....
Other things to consider when look at that IRR ..
- it is based on current dividend rate which is low.. but I llike it because it's a conservative plan
- that's return after tax and after distribution
- That income you withdraw .. does not affect your social security taxation (similar to Roth.. but again you also have a portion in your example that has to be taxed and also counts again your SS tax)
- the guaranteed death IRR of 2.6% is a great for a guarantee.. where else will you get the guarantee.. the guarantee on your Roth strategy is close to losing everything .. it's not a fair comparison. Another thing that should be noted is that once that guarantee goes up .. it doesn't go down for example.. if you reach age 60 and you kept with the non guaranteed side.. that non guaranteed side is now your guarantee. you don't lose money you did not take out.
- if you want to chase higher return with LI.. you can get an IUL (not VUL .. that's a lot more diceY) .. the guarantees are a lot less but the knowing how the products work .. I would definitely do an IUL almost all the time for myself.

 

[brewer12345]

- if you want to chase higher return with LI.. you can get an IUL (not VUL .. that's a lot more diceY) .. the guarantees are a lot less but the knowing how the products work .. I would definitely do an IUL almost all the time for myself.

So the ability of the insurer to reduce participation rates, lower caps, etc. does not concern you with indexed products? [MOD EDIT]

 

[jzajzz]

So the ability of the insurer to reduce participation rates, lower caps, etc. does not concern you with indexed products? [MOD EDIT]

The ability for the insurer to reduce caps on an IUL .. is similar to a Par whole life insurer not paying a dividend .. you stick with a company with strong financials .. again like I said .. out of the 100's of companies selling life insurance .. there's about 10 or worthwhile players in IUL ..

You want to stick with companies with strong financials and who are focused on IUL .. not a company that has a product just because IUL is the 'in" thing right now. Furthermore , just like dividend rates are the low side now.. cap rates are on the low side because of the interest rate environment and the volatility of the market (which drives options prices) ..but even with that .. I like to do a Monte Carlo on the last 16 years ..(which had 4 down years) with the current cap .. and project out the return of the 90th - 100th percentile... that makes it a conservative projection. I'm not to make the IUL look better than the SandP returns ...Of course I could use the 30 year Monte Carlo but that would make it look much better.. I' like to be more conservative.


The insurers are in the competitive market.. the ramification of a par insurer not paying any dividend .. or an IUL insurer .. lowering caps beyond industry trends will be more damaging than keeping their cap at the industry standards. people who can 1035 will 1035 .. Agents will stop selling their products ..etc..

 

[samclem]

There is no FDIC-equivalent for life insurance companies. There are state guaranty funds but they are not backed by the states or anyone else and they don't have the resources to cover the failure of a large insurer.

+1. The insurance companies pay into the state guaranty funds, and the companies are required to deposit less than 2% of the value of the policies they have sold (far less than 2% in some states). That tells us right there that these guaranty funds are small compared to the promises the companies have made to policyholders. The guaranty fund might help if there's some type of malfeasance or misjudgement at a single company, but they will be no use at all in an industry-wide crisis.
So, if we buy a WL policy (or annuity, etc), we are pretty much counting on the continued financial health of that single company. For the rest of our life.

 

[brewer12345]

The ability for the insurer to reduce caps on an IUL .. is similar to a Par whole life insurer not paying a dividend .. you stick with a company with strong financials .. again like I said .. out of the 100's of companies selling life insurance .. there's about 10 or worthwhile players in IUL ..

You want to stick with companies with strong financials and who are focused on IUL .. not a company that has a product just because IUL is the 'in" thing right now. Furthermore , just like dividend rates are the low side now.. cap rates are on the low side because of the interest rate environment and the volatility of the market (which drives options prices) ..but even with that .. I like to do a Monte Carlo on the last 16 years ..(which had 4 down years) with the current cap .. and project out the return of the 90th - 100th percentile... that makes it a conservative projection. I'm not to make the IUL look better than the SandP returns ...Of course I could use the 30 year Monte Carlo but that would make it look much better.. I' like to be more conservative.


The insurers are in the competitive market.. the ramification of a par insurer not paying any dividend .. or an IUL insurer .. lowering caps beyond industry trends will be more damaging than keeping their cap at the industry standards. people who can 1035 will 1035 .. Agents will stop selling their products ..etc..

Considering how trivially easy it is to replicate a bull call spread on top of a pile of corporates in an IRA, Roth or taxable account, I would never be a potential buyer of this silly product. I cannot imagine why anyone buys this stuff.

 

[brewer12345]

+1. The insurance companies pay into the state guaranty funds, and the companies are required to deposit less than 2% of the value of the policies they have sold (far less than 2% in some states). That tells us right there that these guaranty funds are small compared to the promises the companies have made to policyholders. The guaranty fund might help if there's some type of malfeasance or misjudgement at a single company, but they will be no use at all in an industry-wide crisis.
So, if we buy a WL policy (or annuity, etc), we are pretty much counting on the continued financial health of that single company. For the rest of our life.

Yup.

 

[nun]

Not sure where you get the 5.6% .. but I'm getting about 5.1% but that's including the distribution until the person's 83 years old.
The return in the market will most likely be higher for over time.. but the timing can't be controlled. you're not getting 6% every year.. the market is going up and down and you can't control the timing. If it happens to have a severe drop on your last years of retirement or in your first couple of years .. that's a risk that can't be explained by looking at numbers on a sheet of paper. Some of us might stay level headed when that happens ... but the emotional toll and the anxiety that may cause is real....

I think you need to understand your audience here, the folks on this tread are mostly not "Young Dreamers" and are a self selected bunch that have done well through multiple economic cycles; many by simply indexing, rebalancing and keeping costs down

Other things to consider when look at that IRR ..
- it is based on current dividend rate which is low.. but I llike it because it's a conservative plan
- that's return after tax and after distribution
- That income you withdraw .. does not affect your social security taxation (similar to Roth.. but again you also have a portion in your example that has to be taxed and also counts again your SS tax)

Yes I understand, I took taxes into account. Your "conservative" plan is not something I'd sign up for as I'd rather trust in myself to invest and get market returns than being at the mercy of a life insurance company and it's non-guaranteed return. My low overhead is also a big factor.

The statistical variation of return that you mention is a big factor and I cannot know the future, but I can use historical data to work out the distribution of possible returns from a particular asset allocation and I like those odds. It's worked well for me as 30 years at and IRR of 8.5% allowed me to retire early.

Having a guaranteed income floor is important for many people I just see WL as a very expensive way to do that.

- the guaranteed death IRR of 2.6% is a great for a guarantee.. where else will you get the guarantee.. the guarantee on your Roth strategy is close to losing everything .. it's not a fair comparison.

EE bonds are guaranteed to double in value after 20 years...that's 3.5%. The one insurance product I do own is TIAA-Traditional and that guarantees 3% although it is crediting at 4.8% today and I just treat it as part of my fixed income allocation.

Another thing that should be noted is that once that guarantee goes up .. it doesn't go down for example.. if you reach age 60 and you kept with the non guaranteed side.. that non guaranteed side is now your guarantee. you don't lose money you did not take out.
- if you want to chase higher return with LI.. you can get an IUL (not VUL .. that's a lot more diceY) .. the guarantees are a lot less but the knowing how the products work .. I would definitely do an IUL almost all the time for myself.

Again I don't need insurance and if I did I'd buy term as I don't want to pay the fees and expenses of life insurance as an investment and I'm confident that I can produce returns that are better than I'd get from an insurance policy and my asset allocation protects me from sequence of returns risks.

 

[nun]

+1. The insurance companies pay into the state guaranty funds, and the companies are required to deposit less than 2% of the value of the policies they have sold (far less than 2% in some states). That tells us right there that these guaranty funds are small compared to the promises the companies have made to policyholders. The guaranty fund might help if there's some type of malfeasance or misjudgement at a single company, but they will be no use at all in an industry-wide crisis.
So, if we buy a WL policy (or annuity, etc), we are pretty much counting on the continued financial health of that single company. For the rest of our life.

It all boils down to whether you think the promised return and claimed low risk of WL insurance and the death benefit are worth the high cost. The people on here are good at assessing risk and I think most would rather live with that, some term insurance and their own investing resources. The returns promised by WL might actually be better than many people get investing on their own because they do even more foolish things than buying WL insurance. But the big issue for many is that WL is too expensive and they end up being under insured.