Recently running comparison quotes, I took a renewed look at Lincoln National‘s “LifeReserve Indexed UL Accumulator”. It is a highly competitive Indexed UL product among the best on the market. Their loan option, designed to generate retirement income, has been improved. Back in November 2012 Lincoln added a “Fixed Loan” feature to go along with their “Participating Loan” option. Two loan options, fixed and variable, are typical in an Indexed UL. Lincoln allows the policy holder to switch between options once per year by transferring the entire loan balance. When selecting an Indexed UL product, care should to be taken to review the provisions on changing loans. There are more stringent loan provisions where the loan must be remain the same account unless the existing loan balance has been paid off. Many carriers have uncapped or high caps to their variable loans. For Lincoln’s Accumulator IUL the participating loan annual rate is 6% for policy years 1–10, 5% for policy year 11 through attained age 100, and 3% thereafter. Look for carriers like Lincoln will low variable loan caps. Some are not or have very high caps with rates tied to the Moody’s Monthly Corporate Bond Yield Average. Historically those rates have been much higher than they are now.
For Lincoln Accumulator’s Fixed Loan debt is transferred into a collateral account, interest charged is guaranteed at 3.00% through policy year 10 and 2% thereafter. The interest rate credited to the collateral account is guaranteed at 2% in all years, which means a zero net cost loan in years 11 and thereafter.
The participating loan would be advantageous in a high interest rate environment to receive interest crediting. Switching to the fixed loan would be advantageous in a low interest rate environment. It may be that a partial surrender of cash value will be the best option. Flexibility is the key if structuring a cash accumulation IUL with distributions for retirement income in order to provide the best options over the years depending on market conditions.
When requesting an Indexed UL quote insist the agent email you a full illustration. Please contact me directly, and I’ll be glad to provide confidential quotes and comparative illustrations. These illustrations are about 10 pages long with a table at the end that project policy values starting at your current age and give yearly values generally past age 100. Ask for direct comparisons between carriers using the same assumptions. Request index returns on the conservative side 5% or 5.50%. Agents can run interest assumptions, depending on the index, at 7%, 8%, some even above 9%. Those are often the default rates on the software, based on 25 or 30 year historical look backs. Running those higher assumptions projecting values out for decades is highly questionable.
Not that illustrations are the perfect tool. Comparisons between carriers are useful, but the projections of cash value, death benefit and loan income are fairly meaningless. Projections are inherently problematic. In the real world an index like the S & P 500 returns go up, down or sideways. Keep in mind index return exclude dividends. On an illustration index interest return run out with an unrealistically steady value for 20, 30, 40, 50 years or longer. All this is way too far beyond the horizon. But at least illustrations can directly compare competing carrier performance, and if the quote is structured properly, at the MEC, stopping premiums contributions at retirement age and maximizing distributions, illustrations can test the limits of the product’s ability to generate results and be sustained.