Indexed Universal Life Insurance Income Comparison

Indexed Universal Life InsuranceIndexed Universal Life Insurance is well known for its ability to generate a retirement income stream. But how does one know if he or she is selecting a good product or a bad one? Many others have attempted to create a comparison across company products, but most have fallen prey to marketing gimmicks and failed to create a constant across carriers to really compare these products efficiently.

Where Others have Failed

The problem with most indexed universal life comparisons is too much variation is allowed across carriers. All carriers have a defaulted interest rate for their various indexing strategies and these are loosely substantiated by the current cap and participation rates currently stipulated in the policy. While this may make some intuitive sense, the logical mechanics behind indexed universal life would suggest that minus some very slight specific situations, we should assume all indexed universal life contracts are going to yield more or less the same.

Again, this doesn’t mean we should completely ignore specific variations among carriers when it comes to current cap rates (participation rates are mostly the same), we still can control a macro evaluation of expenses if we assume the same credited interest rate. Whether or not the additional cap rates justify the additional expenses is part of a fine tuning process of selecting the best contract for a given situation.

So, failure number one is the lack of a universally assumed interest rate.

Death Benefit Assumptions

While this isn’t a universal problem, it’s one that exists nonetheless. Death benefit or income comparison purposes should be solved to minimum non-MEC in compliance with DEFRA and use the Guide Line Premium Test to qualify as life insurance under DEFRA.

Some comparisons have specified premiums and solved the death benefit to the premiums “target premium”–bad idea. We want the minimum death benefit because we want to mitigate insurance costs as much as possible to build the best performing universal life contract.

Preferred Best Assumptions

This one is less about comparing companies with each other and more about what is more probable to happen for an individual who wants to apply for life insurance.

Most comparisons (including those run by the carriers themselves) always assume best case scenarios with a preferred plus (best) risk class. Truth is, most carriers issue a large portion of their policies as standard, and that’s where most assumptions should start. It is true that this life insurance as an asset class thing gets better the healthier one happens to be–longer life expectancy begets lower insurance costs–better risks classes are, again, one of the fine tuning considerations.

The Comparison

Our comparison takes a 40 year old male issued standard placing $10,000 annually into an indexed universal life contract for 25 years. After 25 years he begins and income stream until he reaches age 100 (years 26 to 60). We solve the death benefit for minimum non-MEC and DEFRA compliant, increasing until the year income starts at which point we switch the death benefit option to level.

The only rider we’ve elected to include is the overloan protection rider (sometimes this is not a selectable rider, and rather a built in feature, regardless it’s included with all policies compared).

insurance pro blog indexed universal life insurance income comparison

Here’s the Comparison

We’ve sorted the results by income derived.

What the results tell us

While it’s tempting to draw definitive conclusions about who has the best product and who doesn’t, it’s important to remember that this specific situation only evaluates a very narrow circumstance. Still, the comparison helps at least get people started and pointed in the right direction.

There are certain less easily quantifiable considerations. For example, Life of the Southwest (LSW) tops the chart quite impressively, but with a disappointing Comdex and a junk bond position that totals 75% of the company’s surplus position, we remain hesitant to strongly recommend them in most cases.

It’s important to keep in mind that this is merely a starting point, and further consideration of company/contract specifics are always in order.

Some Notable Omissions

There are some companies that are missing from this list. This was due to problems with company software. We’re working on this and hope to update this once this is resolved. Those companies include: Prudential, Transamerica, PacLife and Aviva.

If you feel we’ve neglected someone, we’d be happy to to hear from you.

The Next Step

From here, it’s prudent to evaluate such specifics are: available riders, premium loads, caps, minimum guarantees, additional contract benefits/options, and company strength. Though a lot of agents skip it, there’s a lot of reasons why I would suggest paying attention to the fixed account is important.

It’s also important to keep death benefit performance in mind. This asset can be leveraged for more than just its generate-able income, so similar incomes with one company performing markedly better on death benefit could swing favor in the better performing death benefit indexed universal life insurance contract’s favor.


23 Responses to “Indexed Universal Life Insurance Income Comparison”

  1. Greg says:

    In your first paragraph here, you say that an IUL is “well known for its ability to generate a retirement income stream” yet these plans have only been around for barely more than 15 years. How many people have successfully use an IUL to produce the income stream that is advertised? And in that time, how many have imploded?

    The biggest thing that IULs generate is mismanaged expectations due to rosy illustrations that are nowhere near reality. Of course, this is just my opinion…

    • Brandon Roberts says:

      Hi Greg,

      Your asking a question that has no answer as you and I both know there are no stats collected on what sort of policies work out as intended.

      We could of course ask this question of any financial product and again, there’d be no answer.

      There’s no doubt that there are people who do harm with IUL, just as their are people who do harm with annuities, whole life insurance, mutual funds, 401k’s, hedge funds, and the list goes on.

  2. Greg says:

    My issue was the use of it being “well known.” It’s not well known because it’s not proven. That’s my only point. The other products you mentioned have at least some kind of track record. IULs simply do not have that.

    I have no quarrel with you…hell, I don’t even know you! I am just concerned that using such flowery language is going to bite you, and worse, your CLIENT’s ass when the plan blows out because the internals just can’t support it.

    Good luck… :)

    • Brandon Roberts says:

      There’s actually no proof to substantiate the falling apart stories. Universal life insurance has more than enough track record to support its position as an income generation tool.

  3. Thank you for the useful spreadsheet comparison. I was a bit confused why I didn’t see Pac Life initially, however realize further down on your post you had issues.

    Here is my view on IUL. Over fund and review annually. If you use an early cash value rider the cash value at the end of year one will be much higher than without it. Your clients will appreciate it, and liquidity won’t be much of an issue.

    Insurance carriers are buying the same bonds and have access to option markets via the same investment banks. Options have been around a lot longer than Indexed Universal Life so it is fair to say Investment Banks price and know their risk. We can probably assume that option markets are efficient as well.

    It comes down to how efficient the life insurance company is with their costs.

    My opinion is that participation rates and caps are marketing tactics. Higher participation rates probably means higher costs. Eventually these participation rates will converge.

  4. Tod says:

    LSW is a wholly owned subsidiary of National Life, is there a legal wall that keeps National Life off the hook from the potential negative consequences of LSW’s junk bond holdings? Is this why you look at LSW and withhold the favorable recommendation rather than looking at the parent National Life?

    Thank you both for the great work

    • Brandon Roberts says:

      Hi Tod,

      National Life of Vermont could theoretically be involved in shifting assets to assist LSW if there was a problem, and that’s always the implied hope for subsidiaries. For example, Penn Mutual’s IUL is issued by the Penn Insurance and Annuity Company, which is a subsidiary of Penn Mutual and we’d anticipate that the mother ship looks after the subsidiary.

  5. Tod Murphy says:

    Hi Guys

    Wondering if you are planning on running this analysis again in the next month or so; that is have the company software issues been resolved.

    When you present this data again would you point out some of the comments you’ve made over the past year about each carrier. In this post you mention LSW and their junk bond position. Recently you mentioned your concerns about Aviva. These caveats are a valuable insight to consider.

    Thank you again for the tremendous work and delightful presentation.

    Tod

    • Brandon Roberts says:

      Hi Tod,

      It may be a little longer than the next month before we can come back to this, but it is on the to-do list.

      Regarding the next point, this is a slightly more delicate piece to navigate. We are working on a few items. More to come.

      Thanks for the comments.

  6. Ben says:

    Sorry that last post should have been on this page….
    For the income illustration.. Did you use a variable loan rate or fixed? If Var. what was the loan rate used? One other question, I am curious how LSW so far ahead of the others?

  7. Howard says:

    I did not see and answer to the question about which loan type was used in the analysis. Was it a fixed or variable loan?

  8. Louis says:

    In regard to the variable loans, what loan interest rates did you use for each product. Some company’s software uses the current rate of about 4% for the entire illustration while others use close to the maximum rate that can be charged for the entire illustration. Where the rubber meets the road is when one is taking money out of the policy and how flexible the company is in regard to loan rates as well as conversion to fixed rates or wash loans when the market is going sideways or down.

  9. warren steinborn says:

    I believe that the assumption of “standard” placement is an unrealistic presumption.an alternative spreadsheet should compare best class i.e. preferred plus or super preferred is more realistic for 40 year olds. furthermore all over loan protection riders are not the same. there is only 1 carrier listed that has 2 requirements to prevent the lapse all the rest have at least 3. that third being that the accrued loan and interest must exceed the face amount.

    • Brandon Roberts says:

      Warren,

      No, quoting these at preferred or better is not more realistic. I’m not even sure what “more realistic” is supposed to mean. But feel free to elaborate.

      The over-loan use and requirements to trigger is irrelevant since all income solves were set to trigger in all situations.

  10. John Murphy says:

    In reading through your comparison I believe you have a made a significant error. You “assume the same credited interest rate” in a failed attempt to control for policy expenses.

    What you have actually done is to hamper the projected performance of products that are designed to provide a higher cap rate than a product that is not.

    Here is a simple example. Both North American and Midland are sister companies and their products are designed by the same people. Yet North American has a 1% lower cap on it’s S&P pt to pt index strategy than Midland does. The reason is the NA policy has lower expenses in other areas of the policy than the cousin product at Midland.

    What assuming the same return assumption does is penalize a product like Midland’s and favor a product like North American where certain expenses are already baked into the lower caps/participation rates.

    There are two places a company can take it’s profit – lower crediting terms or direct policy expenses. What you have done is benefit all of the products that take those dollars from lower crediting terms at the expense of products that take them at the policy level.

    • Brandon Roberts says:

      John,

      Leaving the assumed credited rates level does not fail to accomplish what I was shooting for. We have to start somewhere, and I very explicitly mentioned towards the end of the article that there are other factors to consider (and caps was on that list of considerations).

      This is only one piece of a much larger puzzle, nothing in this article is laid out in a way to ignore that fact. Taking Midland and North American as an example, projected income is very close, and it makes a lot of sense to try and internalize the higher cap at Midland and consider if 1. the difference is even significant enough to assume one will truly outperform the other or if that far into the future its close enough to pretty much be the same and 2. that the higher cap at Midland might outperform based on the closeness.

      So no significant error made. And further, if I was going to try and accommodate all of the different caps out there, there would be even more complaining about whether or not I allowed an adequate crediting rate for various caps. This comparison is fine, and it also leaves considerable room for margin if caps were reduced among carriers with higher caps.

  11. David says:

    Hello~ wondering when you are planning to update the comparison. Would like to see Western Reserve Life on it. Thanks.

  12. Dave says:

    I see you used a 6% loan rate across the board, however that’s not a realistic projection unless the carrier caps it at at 6%. The rates on most variable loan provisions are based on the Moody’s Corporate Bond Index plus a spread. Carriers like LSW who are showing 4% from day one are doing a MAJOR disservice to their policy holders by creating such unrealistic expectations, when the average Moody’s yield is over 8% since 1982. Even bumping the loan rate up to 6% isn’t an honest projection (again, unless there’s a guaranteed max cap of 6%) based off of historical averages. To do a more accurate comparison, the variable loan provision needs to be run with the 30 year Moody’s yield, plus any applicable spread – up to the guaranteed maximum loan rate – just as they’re showing 30 year lookbacks on hypothetical crediting.

    • Brandon Roberts says:

      No Dave you’ve forgotten that we’ve also adjusted the assumed rate of return. If we’re going to use historical data to guide the loan rate, then we’d also use historical bond assumptions to guide the assumed interest rate and we’d be around 8% there as well.

      But that assumes historically high interest rates will prevail again, which is an awfully lofty assumption. Truth is 6% is a number we can use to bring parity among assumed loan interest rates across all carriers and that’s why we chose it. That being said, it’s very wrong to assert that if loan interest rates were to rise due to underlying interest rate market conditions, caps would not also rise to affect yield. These products are designed and managed to target a given interest rate and that interest rate is based on what the carrier believes it can support given market conditions, which is heavily supported by bond yields.

      By bringing assumed credited interest down and bringing loan interest rates up (in most cases) these are much more realistic projections.

  13. Jameson Ferney says:

    The comparison is not even close to being an accurate depiction of the selected products. YOU CAN NOT RUN THE SAME INTEREST-RATE ON EACH PRODUCT TO COMPARE THEM. Considering that the caps on each of those products is vastly different and the participation rates are different. Your asking us to compare a Ford eco boost with a Dodge 3/4 Ton Turbo Diesel. yes they are both six cylinders yes they both have turbos, but no are they even close the same truck.

    • Brandon Roberts says:

      Jameson,

      You can use all the CAPS you want, it doesn’t help to make your point any less ridiculous.

      Reading comprehension doesn’t appear to be your strong suit, as I mentioned numerous times in this post that this is by no means a definitive answer to who is good and who is bad, and further noted that looking at other considerations was extremely important (hey look at that, I even mentioned index caps as an example).

      Further, I’ll note that our use of an identical interest rate was to evaluate underlying expenses in these contracts, without arduously looking through expense ledgers. This sums up the comparison really well. No, this doesn’t suggest that LSW is the best, and no it doesn’t suggest that Minnesota is the worst. We were pretty clear about that.

      There’s no need to get so indignant because your favorite carrier didn’t top the list. As I’ve suggested to others who have felt the need to spew their BS here, this is just one look at a very narrow angle of a very large picture.

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