I was recently reviewing an indexed universal life policy issued seven years ago. We do a lot of reviews for life insurance policies (especially the ones we ourselves put in force for people) and such reviews look at performance to date as well as a comparison to the original policy projection to review how things have unfolded.
For a lot of policies, there’s little variance from the original projection. This is especially true on the whole life insurance side of things since dividends don’t tend to vary all that much (a few exceptions exist for policies we’ve been asked to review we didn’t have a hand in putting in force).
Not all that surprisingly the indexed universal life insurance policies have tended to do better than the original projections.
For the policies we’ve put in force, this is commonly due largely to our insistence on assuming a 6 to 6.5% annual index credit (a lot of less honest agents/brokers like to use numbers in the mid 7 to 8% range, though recent legislation is changing that).
The market has enjoyed a pretty good run since 2008 and indexed insurance products have certainly benefited. As a result, I often get asked what happens if the policy performs better than the 6% number I assume, to which I always point out, you’ll simply have more money.
This is great in theory, but a lot of people have a hard time grasping what that means in a more concrete sense. So today we’ll review publicly a policy that has been in existence for almost a decade and see how it has performed.
The policy was issued in early 2008 with a lower five figures planned premium. From the original projection it would break even in terms of gross cash value by around year 8 and net cash surrender value around year 10.
It could have actually been designed a little better for cash performance, but there was a more important than usual death benefit goal that sacrificed some of the cash surrender value–this was understood from the outset.
The client was issued preferred and in his early 40’s at the time of issue.
It’s somewhat noteworthy that despite an initial planned constant premium, the client ended up varying the premium a bit and paying slightly less over the course of the last seven years than was originally planned–that flexibility thing we harp on came in handy.
The policy has already achieved a positive return both on gross cash and net cash surrender value. Positive return on gross cash came two years ago and net cash value last year.
Average indexed interest rate credit paid to the policy for the last seven years was 8.77%. I want to highlight something in regard to this. This timespan includes 2011, which was a blah year for the market and zero interest crediting year for this policy.
I’ve commented a time or 10 in the past that one of the truly spectacular things indexed insurance products bring to the table is the zero or 1% floor in the bad years followed by generally extremely high (i.e. double digit) interest paid in immediately following years as markets surge back due to little more than decreased selling pressure.
This is exactly what played out here. 2012 brought interest payments that capped out the index interest rate; 2013 did as well.
It’s also worth bringing up that the 8.77% average interest rate includes what are playing out as mostly zero interest credits for this year as the market has been less than stellar.
Current cash in the policy is roughly $20,000 more than originally projected.
At the end of the most recent policy year, interest earned exceeded expenses deducted by $11,000 and if the client chose to move all of his cash to the fixed interest account (instead of using the indexed account) he could generate enough interest to cover all policy expenses.
Despite still being a pretty new policy, the total expenses charged makeup slightly less than 2% of cash in the policy; under our original assumptions it should have been about double that at this point in the policy.
In another three years, these expenses will be more than cut in half and due to growth in cash values represent around 0.5% of the cash value (not bad for a financial product that also hands $1 million dollars over to the client’s wife if he dies).
Call me crazy, but I don’t view this as wildly expensive. And let’s not forget something I pointed out earlier, this policy has more death benefit than it should if cash accumulation was really our only goal (i.e. it could have done better).
Also, I want to note something really quickly about guaranteed cash values. I’ve often remarked that guaranteed cash values are interesting, but highly not likely to be close to reality.
There are some, however, who choose to make a big deal out of guaranteed cash values in a very disingenuous way.
It’s worth noting that this policy has performed 37% better (almost $50,000 more in cash) than the guaranteed cash value originally reported. Remember, the cool thing about life insurance is, this dramatically increases the floor for the guaranteed cash value and moving forward his guaranteed cash will always be dramatically better than originally depicted.
Based on conversations we’ve had both recently and in past years, I’m certain there is little that could happen or I could say that would convince this policyholder that he needs to drop this policy and do something differently with this money.
He’s well aware of the fact that if this money had gone directly to the stock market he would have made more money. He had plenty of other money sitting in stocks and has enjoyed the run up in appreciation he’s achieved there.
He’s earmarked this money for different plans than the money in the market. His approach to diversification is much more well thought out than simply buying stocks and bonds.
Furthermore, he’s expressed the peace of mind he has for having done this and for being made aware this option exists as a part of his retirement savings strategy. He’s not alone.
Millions of life insurance policies are sold every year.
Some of them really badly implemented I grant you. But there are also a large number that are done right and the correct application is what matters.
If you want to know more about how we can bring a little more stability to your portfolio, we welcome you to contact us or call us at the number found at the top of the page.
Brandon launched the Insurance Pro Blog in July of 2011 as a project to de-mystify the life insurance industry. Brandon was born in Northern New England, and he currently calls VT home. He attended Syracuse University and graduated with a triple major in Economics, Public Administration, and Political Science.
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