Category: Age 86

Indexed UL comparisons for cash accumulation and retirement income

Here’s a side-by-side comparison of two Indexed Universal life (IUL) products with a focus on cash value accumulation and retirement income.  This post compares Lincoln National‘s  ”Lincoln LifeReserve Index UL (2011)”  to North American‘s ”Rapid Builder IUL”.   North American in my prior comparison outperformed Minnesota Life and John Hancock’s IUL products.

I will not give here a detailed look and the product features of each IUL, as for example, Lincoln’s cap on its 1 Year Point-to-Point is currently 13%.  I will focus on the projects results of where affected by their internal rate of return, how the fees and expense charges affect the policy, assuming as much as possible apples-for-apples comparison: same death initial premium and death benefit.  North American assumes a 8.30% return on its S & P 500 point-to-point; Lincoln assumes 8.45%, so these policies run fairly close in their assumptions.  For an agent or a prospective buyer, reviewing full illustrations to see how this internal rate of return affects the policy in 20, 30 and 40 years, and by comparing values side-by-side with competing carriers is a very useful analytical tool.

Here are the assumptions:

44 year old male, best health rate, puts in $25,000 a year premiums for 20 years, then no further premium contributions.  Structure minimum death benefit, here a starting face amount of $538,923, and still qualifying at tax advantaged life insurance under IRS rules for a modified endowment contact (MEC).  In the next 20 years draws out the maximum in loans, which are not subject to taxation, for retirement income, and still target a $100,000 death benefit at age 120 or over.  The index is S & P 500 annual point-to-point.

 

Each quote comes with a full illustration that charts a lifetime of policy values year by year.  Here are some benchmarks for comparison:

Age 64                        (year 20):                cash value accumulation
Age 65 to age 84         (years 21-40)           retirement funds, i.e. policy loans
Age 85                        (year 41)                 death benefit amount

 

Carrier Cash Value
Year 20
Death Benefit
Year 20
Loan amount
Years  21 – 40
Cash Value
Year 41
Death Benefit
Year 41
 Lincoln  1,072,791  1,611,714  145,602  826,476  1,115,403
 North American  1,144,104  1,683,042  147,248  658,775     981,056

 

What became noteworthy and crucial in the comparison were the loan rates and rules of each plan.  North American offers a choice of loans at a fixed or variable rate.  The variable rate is based upon Moody’s monthly bond average yield , which for October, 2011 was 4.60%.   North American, presumably because the current rate is historically low, assumes by default a 5.60% rate for quotes, which I also used here.  This run down will give you a look how the rate has changed over the last century.  North American’s rate has a 4.00% floor and a 10.00% cap on their variable loan rate.

Lincoln had only one option a guaranteed fixed rate: 6% for policy years 1 – 10, and  5% for years 11 to age 100.  What was noteworthy is how strongly the fixed rate returns performed against the variable rate.  Other carriers including North American offer a fixed rate loan option but the loan payout numbers are not nearly as good as Lincoln’s.    (Also interesting to note Lincoln had an option for the loans/withdrawals to be monthly, quarterly, semi-annual or annual, and the loans values were higher selecting the monthly option.)

For cash value accumulation strategy and to use policy loans for retirement income, the parameters of this comparison, Lincoln has a more favorable IUL product than North American.   It would generally be much preferable to lock in a well performing fixed rate over the span of decades than be subject to downside risks of fluctuating rates.

For example,  compare Lincoln fixed loan rate to North American with changes to the loan rate:

$145,602     5.00%  fixed rate  Lincoln

$147,248     5.60%  variable rate North American
$130,920     6.60%
$124,853     7.00%
$110,775     8.00%
$92,123       9.00%
$70,351      10.00%   maximum

$107,777    fixed rate Standard Policy Loan option North American

As you can see, North American variable loan rate would have to consistently stay at or below 5.60% in order to outperform Lincoln.   That’s unlikely.

 

Carriers & Products:

Lincoln National Life Insurance Company:  ”Lincoln LifeReserve Indexed UL  (2011)”
North American Company for Life and Health Insurance:  ”Rapid Builder IUL”

 

Image source: Wikipedia Commons

Disclaimer:  Quotes were revised on 11/22/2011, and are correct and accurate to the best of my knowledge. Product features and rates are subject to change.  Please contact the carriers directly for full details on these products reviewed.  Tax information is general information only. Please seek professional tax advice for personal income tax questions and assistance.

Three Indexed Universal Life products compared for retirement funds

Note:  This post is on the wonky side.   It involves an analysis of a new Indexed Universal Life (IUL) product against two leading competitiors.  To skip the analysis, scroll down to end of the post for the conclusion.

John Hancock recently introduced an Indexed Universal Life (IUL) product called “Index UL”.   Briefly, its index is linked to the performance of S & P 500.  There are two options for crediting: either a “Capped Indexed Account” which currently credits up to 13%, or an “Uncapped Index Account” which credits the full performance of the S & P 500, less 5.5%.  The floor is zero percent.   It’s crediting is annual point-t0-point.    For example, if the S & P went up 15% over a one year period,  the capped account would credit 13%, the uncapped account 9.5%.  If the S % P 500 went up 20%: capped 13%, uncapped 14.5%.

Indexed ULs can either be protection focused or accumulation focused. Protection focus is with the beneficiaries in mind, and accumulation focus is for retirement income.   These comparison will be accumulation focused.   Take a person in their 30′s, 40′s or 50′s with the goal to use an indexed UL to build up cash value within the policy for retirement.  For tax reasons drawing cash value out of the policy will be in the form of loans.   Here is the assumption:

Male, age 44, best health rate, contributes $25,000 a year in premium for 20 years into an indexed universal life, goal retirement income.  After 20 years, no further premium payments.  Starting year 21 at age 65, maximum level of disbursement in policy loans for 20 years, to age 85.   After the 20 years of disbursements, year 42 at age 86, no further changes, premium payments or loans, are made.  Goal at this stage estate planning and to provide a death benefit. Target death benefit at 100,000 lifetime maximum, age 120 or over.

For accumulation the policy is structured with the smallest face amount allowed by IRS rules, so it is not a modified endowment contract (MEC).   Cash value accumulation takes a secondary role to death benefit.  Here’s how that works out with John Hancock’s new Indexed UL.  It has a $538,928 initial death benefit, and the net outlay for the loan projected as $104,110 for years 21 to 41.  (note: using the indexed loan method, the loan amount projects significantly higher $139,719, but the illustration notes, in bold typeface. that this method carry significantly more risk.)  This is based on current charges, 100 percent in the capped account and an assumed rate of 8.58% a year; variable loan interest rate of 5% and loan type: standard.  So that means $500,000 put in and $2,094,320 taken out for retirement income.

$104,718  per year disbursements, 20 years,   John Hancock  “Index UL”

Okay, the key in evaluating the product’s potential is to compare full illustrations using the same apples-for-apples structure with other indexed UL products.   So next compare it to North American’s indexed UL “Rapid Builder IUL”.   First use the same $538,928 initial face amount and put in the same $25,000 in the first 20 years.   Choose the S & P 500 Point-to-Point account, which assumes a 8.30% rate, the current variable loan interest rate of 5.60%

$142,394  per year disbursement, 20 years,  North American “Rapid BuilderIUL”

North American projects a better loan pay out.  Also comparing cash value and death benefit in year 20 after the accumulation phase is over North American better:  1,144,106 cash value North American versus 1,085,171 John Hancock.  Death benefit 1,683,029 with North American versus 1,323,908 with John Hancock.

Well, how about another carrier?    Compare these with top seller Minnesota Life and their “Eclipse Indexed UL”.  Using their S & P 500 index with 100% participation whick assumes a 8.43% rate of return.  For comparison purposes use initial death benefit had to be a bit higher $555,000 for the $25,000 premium figure to be used.  I used the same variable loan interest rate as North American as 5.60%.   Since for the variable loan rate they both go by published monthly average of Moody’s Investor Services this is a fair comparison, though that figure is currently lower and Minnesota Life software uses 4.75% as its current default value. It’s hard to get true apples-for-apples comparison, but this is close.

$128,111  per year disbursements, 20 years,  Minnesota Life  ”Eclipse Indexed Life”

North American again projects better.  In year 20, 1,144,104 cash value North American versus 1,100,898 Minnesota Life, and death benefit 1,683,042 North American versus 1,655,898 Minnesota Life.   Minnesota Life has a 140% participation allocation option with the S & P.  The loan figure improved to $133,155 per year but still North American projects better.

One more thing, since this is life insurance it’s useful to compare those values after the payout period has ended.

Death Benefit age 85 (year 41) non-guaranteed:
North American  1,164,926
Minnesota Life    1,104,420
John Hancock        350,278

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Coverage ages 80 to 90

Life insurance coverage with full and immediate benefit is available for those in their 80′s. Generally one has to be in fair health or good health to make it cost effective.

Here’s a brief overview for octogenarians:

Ages 80 – 85

1.   whole life  -  coverage  $3,000 to $15,000

2.   universal life  -  coverage:  $25,000 to $50 million

 

Ages:  86 – 90

1.   whole life      coverage  $3,000 to $10,000   American Continental

2.   universal life   $100,000+    John Hancock, Transamerica, Security Life of Denver

3.   universal life   $250,000+   Genworth, John Hancock, Transamerica,  Security Life of Denver

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