Demystifying Indexed Universal Life Insurance

Transcription

1 Demystifying Indexed Universal Life Insurance Effective Illustration Tips 1

2 DISCLOSURES These disclosures apply to this presentation in its entirety. Neither North American Company nor its agents give legal or tax advice. Please advise your customers to consult with and rely on a qualified legal or tax advisor before entering into or paying additional premiums with respect to such arrangements. The net cost of a variable interest rate loan could be negative if the credits earned are greater than the interest charged. The net cost of the loan could also be larger than under standard policy loans if the amount credited is less than the interest charged. In the extreme example, the amount credited could be zero and the net cost of the loan would equal the maximum interest rate charged on variable interest loans. In brief, variable Interest Rate Loans have more uncertainty than Standard Policy Loans in both the interest rate charged and the interest rate credited. In some situations, loans and withdrawals may be subject to federal taxes. North American Company does not give tax or legal advice. Clients should be instructed to consult with and rely on their own tax advisor or attorney for advice on their specific situation. Index Universal Life products are not an investment in the market or in the applicable index and are subject to all policy fees and charges normally associated with most universal life insurance. Builder IUL is issued on policy form series LS172 by North American Company for Life and Health Insurance, Administrative Office, Sioux Falls, SD Product, features, issue ages, endorsements or riders may not be available in all jurisdictions. Limitations or restrictions may apply. 2

3 Agenda Illustration tips Historical look back Comparing illustrations/products 3

4 Illustration Tips Guideline Premium Test (GPT) or Cash Value Accumulation Test (CVAT) Increasing versus level death benefit option (DBO) Adequate face amount Loan/withdrawal timing Length of income stream 4

5 Illustration Tips GPT or CVAT Both still have the 7-pay Modified Endowment Contract (MEC) test. GPT has premium limits Guideline Single Premium Guideline Level Premium CVAT monitors death benefit size relative to account value Higher death benefit required than GPT corridors For most policies, withdrawals are free from federal income tax to the extent of the investment in the contract, and policy loans are also tax-free so long as the policy does not terminate before the death of the insured. However, if the policy is a Modified Endowment Contract (MEC), a withdrawal or policy loan may be taxable upon receipt. Further, unpaid loan interest on a MEC may be taxable. A MEC is a contract received in exchange for a MEC or for which premiums paid during a seven-year testing period exceed prescribed premium limits (7-pay premiums). 5

6 Illustration Tips Increasing or Level DBO Meet clients death benefit needs is primary objective. Increasing DBO allows small face amount. Raises Guideline Level Premium amount. Not helpful for minimizing face with CVAT. Consider changing increasing to level DBO in year following last premium payment. Changing DBO is material change causing new 7-pay testing period. 6

7 Illustration Tips Adequate Face Amount Meet client s life insurance needs Leave room for premium growth Show alternative illustration with premium growth 7

8 Illustration Tips Loan/Withdrawal Timing Loans/withdrawals at beginning of year. Age on illustration is end of year The information presented is hypothetical and not intended to project or predict investment results. Illustrations are not complete unless all pages are included. Sample uses Builder IUL Indexed Universal Life Insurance, Male, 45, Preferred NT, 8% illustrated rate, 6%variable interest rate loan, $260,000 death benefit. 8

9 Illustration Tips Loan/Withdrawal Timing Consider duration of income stream May or may not show more income if stopping before age 100 The information presented is hypothetical and not intended to project or predict investment results. Illustrations are not complete unless all pages are included. Sample uses Builder IUL Indexed Universal Life Insurance, Male, 45, Preferred NT, 8% illustrated rate, 6%variable interest rate loan, $260,000 death benefit. 9

10 Historical Look Back 30 year look back Maximum illustrated interest rate Minimum variable loan interest rate Additional index look backs shown in software Index rate look back method Uses every trading day of the year Current Caps and Participation Rates Geometric Average 10

11 Historical Look Back Step 1: Calculate annual return for each of the past 30 years for the 1 st business day of the year. Step 2: Take the geometric average of Step 1 to produce the average annual return for money invested on that date. Step 3: Repeat Steps 1 and 2 for each of the other business days. Step 4: Average the 30-year average annual returns for all business days within the year to show an overall geometric average rate. 11

12 Historical Look Back Geometric versus Arithmetic Average Arithmetic average Add up the values and then divide by # of values Geometric average Multiply the values and then raise to the power of (1 / # of values) Geometric average is typically used in investments. Example of 5 returns: 90%, 10%, 20%, 30%, and -10% Arithmetic Average: ( ) / 5-1 = 28% Geometric Average: [(1.9 x 1.1 x 1.2 x 1.3 x 0.9)^(1/5) 1 = 24% Proof using $100 (90%, 10%, 20%, 30%, -10%) Actual ($100, $190, $209, $250.80, $326.04, $293.44) 28% per year ($100, $128, $163.84, $209.72, $268.44, $343.60) 24% per year ($100, $124, $153.76, $190.66, $236.42, $293.16) 12

13 Comparing Illustrations / Products Comparing Apples to Apples Products may be priced to support different caps Consider illustrating same look back rate period (or same percent reduction from rate) Consider variable interest loan rate Check age nearest or age last Match policy years for premiums and loans/withdrawals Look for design elements Index selections, flexibility, riders & benefits, interest rate bonus, death benefit guarantees (subject to premium payment requirements), etc. Company considerations (integrity, ratings, etc.) 13

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