All Forum Posts by: David Lewis

This is your opinion. What is this based on? Its the same companies. Name one company that sells IUL that doesn't also sell Whole Life.

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It's based on my experience working with these companies, and also looking at how they manage their GIA, what their strengths are, and how they position their product line. Also, I want to stress *different*. That doesn't necessarily mean "worse", although it potentially could mean that. It's a fact that NML is not run like AIG, neither of which are run like Ohio National. For anyone who has had any experience with any of these these companies, this is blatantly obvious.

To answer your second, somewhat irrelevant, question about who sells IUL that also doesn't sell whole life, that's easy. F&G Life. Also John Hancock. Also AXA/Equitable. Symetra. Lincoln. I mean... there's lots of them. And all those are major players in the IUL space. A better question would be "what are the differences between companies that put par whole life (not just whole life) front and center in their product line versus companies that put IUL front and center?"

This isn't a matter of opinion. There are objective differences in how these companies run, just as there are objective differences in how mutuals are run versus stock companies.

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I don't think you truly understand what is going on under the hood.

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I think it's the opposite. You are using equity markets as the proxy for IUL. 

The reality is insurers are collecting a premium, establishing an options budget, buying index options from investment banks, and hedging those options with bonds. Then, insurance agents are selling policyholders a false promise that it works just like an equity index, but with caps and par rates, which is not really how it works. The future returns on these policies are premised on the idea that index options can (at least in the current product iterations) achieve long term net profits of between 30% and 50%, forever. The last decade was ideal for this type of story because of the amount of capital insurers had, the portfolio rates they had (they still had a bunch of old bonds goosing their portfolio), and the options costs (which were much lower than they are today).

The next iteration of IUL is going to look very different, because all the past advantages are gone. And, because of that, it will perform differently than in the past. This isn't my opinion. This is based on the fact of currently rising cost of options, and the new money rates that insurers are being forced to roll over into.

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How do you know what insurance company motives are? This is merely your assumption.

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This is not my assumption. Read any policy contract. The insurer tells you exactly what their primary concern is. It is providing the guarantees of the policy. Excess return is not guaranteed. Insurers cannot speculate on NAR reductions due to non-guaranteed returns. And, in a UL policy, they're not going to speculate. They don't have to. The risk has been pushed off onto the policyholder and to investment banks.

You still haven't answered my other questions, so I assume you don't have an answer.

**For two apples to apples policies, both companies would have exactly the same risk and could expect exactly the same risk/liability. They have the same problem to solve with exactly the same resources to do it.**

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I'm not convinced they are taking the same risks. You're equivocating between the insurer, the general investment account, and the policies they issue. The risk and liabilities aren't *just* in the general investment account. Companies that sell par whole life are run very differently than companies that sell primarily IUL, and the risks in each company (and thus for each policyholder) are very different.

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**Why go to the trouble of hedging if you don't expect to earn a premium over what you would have simply credited in interest?

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Again, whole life doesn't merely credit excess interest from bonds. The dividend scale is a 3-factor model at most (probably all) mutual insurers. Aside from that, policyholders hedge in an IUL because they want to speculate (or maybe because their agent told them they would earn more money in an IUL). 

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I have analyzed the numbers and IUL DO earn a premium over the debt market rate of return as expressed by the Moody's Corporate Bond Yield. You should understand that Insurance companies have an incentive for the cash value to earn as great a return as possible as safely as possible. The faster your cash value grows in a policy, the faster the risk is driven out of the policy. The risk is the difference between the death benefit and the cash value. That is the amount for which the insurance company is on the hook.

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Analyzed which numbers? You're saying index options earn a premium over bonds? Can you point to any research showing that buying index call options at the ratio that insurers do for IULs will yield the type of projected returns in these illustrations? Or that it is a profitable strategy? There are investment guys who do structured investments for a living, which is essentially the same thing as an IUL, minus the insurance policy wrapper. Do you know what the expected long-term return on these strategies are?

As for insurance company motives, the only thing they care about is the guarantees because that's all they're on the hook for. They don't really care what the call options earn because it's not being held on their books. When they account for the risk of these policies, they're not speculating about NAR reduction due to index or dividend credits 20 or 30 years from now. The safest way to reduce NAR for them is to keep collecting premium and making sure the cash flows specified in the guaranteed rate matches the liabilities they're on the hook for. The rest is a sales story. Reducing the NAR is a huge benefit to the policyholder, however. So from the policyholder's perspective, yeah they want the cost of insurance to go away as fast as possible.

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While the interest-crediting may be variable (subject to cap and floor and performance of the underlying index), it will, on an annualized basis, earn a premium over the debt market return that a Whole Life and a Universal Life capture. **

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How do you know it will earn a premium over whole life? Where are the studies to show this? The cap and par rates in IUL are dropping because the options are becoming more expensive and insurers are trying to think up ways to increase the options budget. Market pressures are also forcing insurers to take more risks, and push more risk onto policyholders (e.g. using charge-funded multipliers and higher internal charges for bonuses and proprietary indices). The performance of the underlying index doesn't exactly correlate to the profits earned on these call options that power IUL, either. Investing in call options isn't the same thing as buying an index fund, for example.

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**Yes. Its easy to do your own analysis by looking at the Moody's Corporate Bond Yield, which is a good proxy for what the insurance company is earning. Historical market performance and Caps are available. Typically you'll find >2% premium for the cash value in an IUL.**

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That's not a study. I mean an academic study or some kind (any kind) of controlled study that carefully analyzes the variables involved in this sort of approach. Historical returns are not predictive, and not a great way to analyze future returns. Look-backs are taking advantage of a bond market that used to earn 8%-10% yields. Where is that in today's bond market? The same is true of look-backs in equities. A 100-year, 50 year, and 20-year look-back produce very different results, and more data doesn't mean more accurate predictions. The economy of 1900, and the drivers of growth back then, are very (very) different from the drivers of growth today. That market existed in essentially a different world. That data is near useless for future predictions. 

If you're using historicals to suggest an equity premium going forward, I'm not convinced that's valid. 

What matters is what is happening *today* in these markets, and the risks being taken today.

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**I've only heard that such a thing exists. I've never confirmed.**

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I think this gets to the heart of my original question. It doesn't sound like you have any first-hand knowledge that these will in fact perform better than other types of life insurance. What's your confidence level on this? Could you take your conclusions in front of an ethics board or compliance officer and state these as hard facts?

They are all investing in the same basic assets, like bonds. No doubt those provide the basic guarantees in terms of the crediting rates to the policy. But, dividend credits from whole life are not just an interest component like it is in a UL policy. Whole life and UL are structurally different from one another, and approach the problem of insurance from 2 completely different angles. In the IUL, the company is buying options with the interest gain, or charging internal fees for the options budget. Then, they go buy the index options with that budget.

But, why would buying index call (or put) options be a better idea that taking the dividend? 

Is there some study showing net positive gains from buying index options for decades on end? Outside of the life insurance industry, do you know of an investment firm that uses this as a long-term high-profit strategy for growing client portfolios? 

It's true (sort of) that no one will watch your money and cut your losses as diligently as you will. 

But, unless you are doing original investment research by yourself, managing the money yourself, writing the legal contracts to buy into a company yourself, not using any financial intermediaries, not using trust accounts (which eliminates all IRAs), you're not really doing it yourself. 

Cash value insurance is often used because it is highly liquid, the funds are easy to access, repayment terms are extremely flexible, and when you die all the money in the contract gets forwarded to whomever tax free. 

Did you have a question Mark (no pun intended)? If so, it didn't show up when you quoted the original post. 

@Dmitriy, Hey, chill out. 

First of all, I went into a lot of detail in those spreadsheets, which details what all the numbers mean. It's a hypothetical illustration which shows how something works (if this, then that). 

It's not a "scheme". It's a legitimate and legal financial contract. I know it's not very popular with stock jockeys and mutual fund guys, but you'll just have to get over it. No, it's not for everyone. I'm not saying everyone should buy it. 

And, this is no different from any other financial product or strategy. You can't see into the future anymore than I can. At the same time, my policy is actually performing as expected. That's the proof, as it were. 

The policy is from MassMutual. You can see Mass' declared dividend interest rate in this year's press release. It's 7.1%, just as illustrated here.

You do a lot of questioning about the commission structure, IRR of the policy, etc. but you don't seem to really understand how this particular policy design works. I invite you to carefully re-read what I've written above.

It's not magic. Just good money management on the part of the insurer. 

Finally, lots of people like using whole life for a variety of purposes, including leveraging to buy real estate. They're not all here in this thread (some of them were in the other thread that got all messed up). But, they're out there. 

 No, I'm not saying that. 

But, since you asked, you might be able to do it and avoid the self-dealing rules as long as  the paper trail is there. 

Earned income goes into your IRA (as normal). A loan is taken against the policy to replace that income or to do something else that you want to do anyway.

Said loan is repaid at a suitable interest rate. 

Since money is fungible, the effect is the same as if you had used policy loan proceeds directly for that purpose. I'm not entirely sure how the IRS looks at this as self-dealing can be not so black and white in a situation like this. 

You don't need to have non-direct recognition (NDR) to make this work. The IBC folks say you do (not sure why). What you need (if your carrier uses direct recognition (DR)) is an alternate dividend scale that is either the same or higher than the non-DR one.

Or, you need a small spread and the ability to juice the PUAs. Penn Mutual comes to mind (they actually have 2 different paid up additions riders). They underwrite their APPUAR differently than most and even though their loans are DR on whole life, their APPUAR is very very flexible so you can make up the spread pretty easily. Good for people who don't want to use variable loans or whose income is highly variable since Penn allows you to stop and start (or vary) the paid up additions inside of 5-year blocks/windows.

You can also go reduced paid-up in any year beyond (I think) the 5th year. 

Hey Derek,

Not sure if you missed my earlier post, but my commissions on the above are roughly 7-8% of the total premium. You are absolutely right about the lower commission percentages. Typically, I see 30% on these policies for the base premium because it's a 10-pay whole life, which already carries a lower commission. On top of that, the term insurance that's blended into the policy pays a few percent and the paid up additional insurance is only commissionable at 3%. 

Not sure why you see narrow suitability for it (perhaps we're in different markets). I find it very suitable for all my clients, but then I restrict my market and do a good job qualifying beforehand so people self-select. Most people for whom this isn't suitable filter themselves out. 

What I've discovered over the last 10 years is that people need:

1) a high savings potential and;
2) the psychology of a saver.

If they've got #2 but are a little lacking in #1, then financial planning is in order. 

"What about commissions on whole life?"

The commissions on a blended whole life insurance, such as the one I presented above, are very low. I calculated the commission on my own policy at 7.3% of the total premium amount. That is $74ish per $1,000 of premium. Commissions on a typical client policy range from between 7% to 10% of total premium.

This is significantly less than even term insurance. It's actually less than any commissionable mutual fund since this commission is payable only in the first year, not subsequent years as is the case with the majority of equity investments.

The 90% commission payout is based off from a life paid up at age 100 or age 95 where there is no term insurance blending or paid up additional insurance being added.

If I were to strip out the paid up insurance and term blending on this policy, the base commission would still only be 30% of the premium, but I reduced it further to increase cash value.

This particular policy is now one year old and is expected to exceed the non-guaranteed illustrated rate I originally ran before taking out insurance on my life, due in part to the fact that I employed the banking process in the first year.