Premium Financed Indexed Universal Life - Have my doubts

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IndexFun
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Premium Financed Indexed Universal Life - Have my doubts

Post by IndexFun »

Hey Team,
My company leadership team is being pitched a premium financed indexed universal life policy as an executive perk from an insurance broker.

The product is Nationwide New Heights Indexed Universal Life Accumulator 2020 (New Heights IUL).

Basic gist: illustrations and marketing materials look like sunshine and rainbows accumulating massive amounts of cash value and death benefit in these policies.

My concern: Fatal flaw of mixing insurance + investing. Seems like a house of cards with a ton of moving parts, only a few of which need to go sideways to tumble down the whole thing.

Any other things beyond the below items I should be asking pointed questions about?

1. borrowing costs for premium payments will rise if/when rates rise
2. average return is high (6.32%) plus the sequence of return risk
3. Cap rates can always be reduced (current cap is 9.5%)
4. Cost of insurance within the policy can rise each year
5. Participation rates can be reduced as well

Thoughts?
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Nate79
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Re: Premium Financed Indexed Universal Life - Have my doubts

Post by Nate79 »

Have you searched on here to see the general opinion on such products? (Hint: tons of threads on this TRASH product)

Sounds like you have an insurance salesman getting ready to make a big boat purchase.
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Brianmcg321
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Re: Premium Financed Indexed Universal Life - Have my doubts

Post by Brianmcg321 »

Barf :oops:
Rules to investing: | 1. Don't lose money. | 2. Don't forget rule number 1.
CJC000
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Re: Premium Financed Indexed Universal Life - Have my doubts

Post by CJC000 »

My FIL, a very smart man, was a career Life Insurance agent for a major company. He told me on more than one occasion: Never mix life insurance with investments. Life insurance is PROTECTION ONLY, not an investment -- never forget that...
You need both, never mix the two.
bsteiner
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Re: Premium Financed Indexed Universal Life - Have my doubts

Post by bsteiner »

How is this better than borrowing to invest in stocks, real estate, bitcoins or anything else?
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Stinky
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Re: Premium Financed Indexed Universal Life - Have my doubts

Post by Stinky »

Your doubts are well founded.

The illustrated rate of 6.32%, year after year after year, is ludicrously high. That alone is enough to disqualify the product.

The insurance broker will make a fat, fat commission if he can make this sale. Ask him how much his commission is. (And don’t accept a BS answer like “You don’t pay the commission - the company takes care of that.” Of course, you pay for EVERYTHING.)

As others said, don’t mix insurance with “investing”. And throwing leverage on top of that makes it a toxic brew.

If your company has extra money to spend on executive perks, find something else that can deliver real value to your team.
It's a GREAT day to be alive! - Travis Tritt
Topic Author
IndexFun
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Re: Premium Financed Indexed Universal Life - Have my doubts

Post by IndexFun »

Nate79 wrote: Tue Apr 06, 2021 8:33 pm Have you searched on here to see the general opinion on such products? (Hint: tons of threads on this TRASH product)

Sounds like you have an insurance salesman getting ready to make a big boat purchase.
I did - only found two: viewtopic.php?t=255708 and viewtopic.php?t=210492

Neither had a lot of constructive questions/holes to poke. I need to be prepared to ask the right questions and point out the assumptions/flaws in the models since it isn't my decision alone.
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Stinky
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Re: Premium Financed Indexed Universal Life - Have my doubts

Post by Stinky »

IndexFun wrote: Wed Apr 07, 2021 7:26 am I need to be prepared to ask the right questions and point out the assumptions/flaws in the models since it isn't my decision alone.
IndexFun wrote: Tue Apr 06, 2021 8:10 pm Hey Team,

My concern: Fatal flaw of mixing insurance + investing. Seems like a house of cards with a ton of moving parts, only a few of which need to go sideways to tumble down the whole thing.

Any other things beyond the below items I should be asking pointed questions about?

1. borrowing costs for premium payments will rise if/when rates rise
2. average return is high (6.32%) plus the sequence of return risk
3. Cap rates can always be reduced (current cap is 9.5%)
4. Cost of insurance within the policy can rise each year
5. Participation rates can be reduced as well
You did a pretty darned good job starting your list, assuming you're not an insurance professional. Congratulations. :D

Let me add a few more things:

6. What commission will be paid to the salesman and his managers, both in the first year and in renewal years. (And don't accept the answer "The client doesn't pay any commission, because the insurance company pays." Of course the client is paying - the insurance company doesn't have a printing press to generate commission dollars.)

7. Precisely which index is being used to illustrate the product? What are the exact components of the index? How long has this index been in existence, and what is its past performance?

This question requires a bit of explanation. First, some background. There has been a huge controversy in the life insurance industry over the past five years or so about the illustrated rates on indexed universal life. The argument has been between the companies like Nationwide that sell the product, and can juice up sales if they can illustrate high credited rates, and companies like Northwestern Mutual, which sells whole life and illustrates its product at a lower rate. To put it bluntly, companies like NWML basically accused companies like Nationwide of "making up" the credited rates shown in IUL illustrations.

In response to the controversy, the state regulators came up with Actuarial Guideline (AG) 49, which has already been amended by AG 49-a. The Actuarial Guidelines put limits on how companies can illustrate IUL.

Now, to the punchline. In response to AG49 and AG49-a, many companies like Nationwide have come up with "customized" indices, that are explicitly designed to "illustrate well". The rates that can be used for future illustrations are based on past results of the "customized" indices. So for example, here in 2021, we've seen bond funds perform well over the last number of years because of the decline in interest rates. Therefore, it's possible that the index being used to illustrate the Nationwide product has a high proportion of bond funds included in the index.

Just for illustration - let's say that a certain bond fund has had an earned rate of 8% over the last period of years, due to declining interest rates. Does any rational person believe that that bond fund will return 8% per year over the lifetime of the IUL policies?

That's why it's important to understand the index used for illustration.

8. How will be product perform at a lower credited rate? Please show me illustrations at (for example) 5% and 4% credited rates. Does the product "blow up" at those credited rates? I believe that it's wildly unrealistic to assume a 6.32% credited rate forever, for a product that is backed primarily by bonds. The product will not look as attractive at lower credited rates, and there's no telling what will happen if you throw leverage on top of that.

9. What are the financial implications of this "benefit" to the employees? Will they incur taxable income? Will they be required to make premium payments? These may already be covered in the sales materials.

Post back if you have questions, especially about point #7.
It's a GREAT day to be alive! - Travis Tritt
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Nate79
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Re: Premium Financed Indexed Universal Life - Have my doubts

Post by Nate79 »

IndexFun wrote: Wed Apr 07, 2021 7:26 am
Nate79 wrote: Tue Apr 06, 2021 8:33 pm Have you searched on here to see the general opinion on such products? (Hint: tons of threads on this TRASH product)

Sounds like you have an insurance salesman getting ready to make a big boat purchase.
I did - only found two: viewtopic.php?t=255708 and viewtopic.php?t=210492

Neither had a lot of constructive questions/holes to poke. I need to be prepared to ask the right questions and point out the assumptions/flaws in the models since it isn't my decision alone.
If you search the term "indexed universal life" there are hundreds of threads on this family of products. You may also want to search the term in google and add White Coat Investor as he has written pretty extensively on them such as here: https://www.whitecoatinvestor.com/5-rea ... insurance/
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