With the current wave of companies lowering the caps on indexed universal life contracts, we thought it would be good idea to share our thoughts on that today.
Honestly, we've been “low balling” expectations on IUL contracts since we started offering them to our clients five'ish years ago. And that was back when some policies offered cap rates as high as 14%.
Now, I do hope that you all realize I'm being a bit tongue and cheek with the “low balling” comment above. Actually, we just believed that using a lower projected return was prudent.
If you've been hanging out around here for any length of time, you know that Brandon likes spreadsheets and pivot tables….a lot. What more fun can you have on a Friday night?
He put in a lot of effort to calculate mathematical probabilities of certain returns over time using historical returns as the input. What does all that mean to you?
I can't reveal every step of how he arrived at the conclusions for what's a reasonable expected return for an IUL contract. That's part of our secret sauce.
What's more important for you to know is that we've never used anything close to what insurance company software default rates were (or are now for that matter). There were some that defaulted to well over 8%.
Those default rates made us very uncomfortable because when we looked at the probability of success it was between 80-85%.
Those odds are not good for what we do. Our clients are planning to place substantial sums of money in their policies for extended periods of time. They are planning on this actually working out for them with a high degree of certainty.
They can't get a “do-over” 25 years from now when the projected return falls short. The result will be that they have far less cash than originally planned and that is not good.
Using life insurance as an alternative asset class or as a way to generate tax-free retirement income is meant to be conservative. Our clients aren't taking a home run cut with this portion of their portfolio.
We plan accordingly.