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FOR PRODUCER USE ONLY – NOT FOR DISSEMINATION TO THE PUBLIC
Understanding IUL
Presented by…Levi Robinson, CLU, ChFC, FLMIDirector Product & Market Training
American General Life
FOR PRODUCER USE ONLY – NOT FOR DISSEMINATION TO THE PUBLIC
Agenda
• Life Insurance Uses
• IUL Value Proposition
• IUL How Does It Work
• Interest Crediting Options
• Cap/Participation Setting Process
• Policy Loans
• Questions?
FOR PRODUCER USE ONLY – NOT FOR DISSEMINATION TO THE PUBLIC
Source: LIMRA
The Case For IUL 2012 Stats
FOR PRODUCER USE ONLY – NOT FOR DISSEMINATION TO THE PUBLIC
Life Insurance Uses…
• Replacing income lost due to the premature death of a family wage
earner.
• Providing liquidity at the appropriate time to pay estate settlement
costs.
• Transferring wealth free of income taxes to heirs in succeeding
generations.
• Funding non-qualified executive benefits.
• Funding buy-sell arrangements to maintain business continuity.
• Supplementing retirement income.
FOR PRODUCER USE ONLY – NOT FOR DISSEMINATION TO THE PUBLIC
Benefits of Life Insurance
Premium Benefits
Duration
$10
$500
$1000
$2000
$3000
$4000
$5000
20 40 60 80
Minimum Premium = the lowest amount the insurance company will
accept for life insurance death benefit based on your age and
underwriting decision.
The Highest Amount of Premium the government will allow to be paid into a life
insurance contract without triggering a Modified Endowment Contract (MEC)
MEC Limits
Minimum Premium = the lowest amount the insurance company will accept for the life insurance death benefit based on your age and underwriting decision, aka, Term Premium
Minimum Premium = the lowest amount the insurance company will accept for the life insurance death benefit based on your age and underwriting decision, aka, Term Premium
The Highest Amount of Premium the government will allow to be paid into a life insurance contract without triggering a Modified Endowment Contract (MEC)
The Highest Amount of Premium the government will allow to be paid into a life insurance contract without triggering a Modified Endowment Contract (MEC)
Term Premium
FOR PRODUCER USE ONLY – NOT FOR DISSEMINATION TO THE PUBLIC
Benefits of Life Insurance
Premium Benefits
Duration
$100
$500
$1000
$2000
$3000
$4000
$5000
20 40 60 80
Term Premium = Tax Free Death Benefit
Tax Free Death BenefitTax Deferred Accumulation
High Contribution LimitsAccess to Capital
Competitive IRRCollateral
Liquidity, Control UseDisability Protection
Estate Tax Free
Guaranteed Interest
The Highest Amount of Premium allowed without triggering MEC.
MEC Limits
Bottom line, the more premium paid into a life insurance policy, the greater
the benefits!
Bottom line, the more premium paid into a life insurance policy, the greater
the benefits!
FOR PRODUCER USE ONLY – NOT FOR DISSEMINATION TO THE PUBLIC
IUL Value Proposition
Upside Potential
No Downside Risk
FOR PRODUCER USE ONLY – NOT FOR DISSEMINATION TO THE PUBLIC
Value Proposition
Market Upside
Downside Protection
Long-Term Yield
Advantage Over CAUL
FOR PRODUCER USE ONLY – NOT FOR DISSEMINATION TO THE PUBLIC
What is IUL?
• A life insurance policy that combines the features & benefits of a traditional UL but uses a different crediting method for determining interest
• Indexed interest is based, in part, on the movement of a stock market index over a specific time period
• Potential to earn indexed interest is based on increases in an index, while offering a minimum interest rate guarantee (normally 0% - 2%)
• Potential for higher than average crediting rates compared to traditional UL
FOR PRODUCER USE ONLY – NOT FOR DISSEMINATION TO THE PUBLIC
IUL vs Traditional UL
Indexed UL
Traditional UL
Flexible Premium YES YES
Permanent Insurance YES YES
Designed to cover Insured’s lifetime YES YES
Pays interest rate as determined by the company YES YES
Net premiums are invested in and backed by the company’s general account YES YES
Use “month-iversary” concept for COIs and other charges YES YES
Include a flexible death benefit and a choice for the death benefit option YES YES
Can include Rolling Target Premiums YES YES
Provide for tax-deferred cash value accumulation YES YES
Include the potential for significant cash value growth YES YES
Incorporate guarantee features YES YES
Include a guaranteed interest rate YES YES
Allow for withdrawals and loans YES YES
The major difference between traditional universal life and indexed universal life is the way interest is credited
Upside earnings potential with index-linked interest crediting YES NO
FOR PRODUCER USE ONLY – NOT FOR DISSEMINATION TO THE PUBLIC
FOR PRODUCER USE ONLY – NOT FOR DISSEMINATION TO THE PUBLIC
IUL Overview
Different method for determining and crediting
Non-guaranteed interest
• Fixed UL: declared interest - by carrier
• Index UL: indexed interest - reference stock market index
General account product
• No policy owner investments in separate accounts (unlike VUL)
• Policy owner only chooses allocation to index crediting account
• No securities license required
• Improper product design/marketing can have securities implications
FOR PRODUCER USE ONLY – NOT FOR DISSEMINATION TO THE PUBLIC
Interest Crediting
FOR PRODUCER USE ONLY – NOT FOR DISSEMINATION TO THE PUBLIC
Crediting Options
With index universal life insurance, you acquire the death benefit protection you need plus the opportunity to build cash value that you can access in the future for a variety of needs.
Index universal life insurance offers you the flexibility to choose among various interest-crediting accounts that can fit your needs.
FOR PRODUCER USE ONLY – NOT FOR DISSEMINATION TO THE PUBLIC
Crediting Options
1)Declared Interest Account
2)Index Interest Account with Annual Cap
3)Index Interest Account with Participation Rate
Index universal life insurance gives you the ability to adjust to life’s changes.
FOR PRODUCER USE ONLY – NOT FOR DISSEMINATION TO THE PUBLIC
Crediting Options
FOR PRODUCER USE ONLY – NOT FOR DISSEMINATION TO THE PUBLIC
What Determines The Possible Interest
Credits?
FOR PRODUCER USE ONLY – NOT FOR DISSEMINATION TO THE PUBLIC
FOR PRODUCER USE ONLY – NOT FOR DISSEMINATION TO THE PUBLIC
Index Strategies
An indexed strategy uses a formula that calculates interest
based in part on the movement of a stock market index,
such as the S&P 500 Index.
Index UL has different index strategies where your clients can
direct their money in an effort to take advantage of positive
movements in a stock market index.
FOR PRODUCER USE ONLY – NOT FOR DISSEMINATION TO THE PUBLIC
What Are The Moving Parts?
FOR PRODUCER USE ONLY – NOT FOR DISSEMINATION TO THE PUBLIC
Participation Rate
• The Participation Rate is the percentage of index
interest growth (if any) the policy owner receives as
actual index interest credited to the policy in the
year in which crediting occurs.
FOR PRODUCER USE ONLY – NOT FOR DISSEMINATION TO THE PUBLIC
Understanding Participation Rates
Example: Assuming no cap, a participation rate of 60% and a guarantee of 2%:
If the index increases 10% policy credited 6% (60% x 10%)
If the index increases 50%, policy credited 30% (60% x 50%)
If the index increases 0%, policy credited 2% (guarantee rate)
If the index decreases 10%, policy credited 2% (guarantee rate)
Participation: the percentage of positive index movement which will be used in the crediting calculation
• Acts as one factor in determining a ceiling on crediting rate of the policy
FOR PRODUCER USE ONLY – NOT FOR DISSEMINATION TO THE PUBLIC
Cap Rate
• The Cap Rate is the maximum point-to-point index
interest growth (if any) the policy owner can receive
as actual index interest credited to the policy.
FOR PRODUCER USE ONLY – NOT FOR DISSEMINATION TO THE PUBLIC
Understanding Cap Rates
Example: Assume a cap of 10% (participation rate of 100%) and a guarantee of 1%:
If the index increases 8%, policy credited 8% (100% x 8%)
If the index increases 20%, policy credited 10% (100% x 10%)
If the index increases 0%, policy credited 1% (guarantee rate)
If the index decreases 10%, policy credited 1% (guarantee rate)
Point to Point: the period of time over which the index is being measured.
• Each index term has a beginning date and an ending date.
FOR PRODUCER USE ONLY – NOT FOR DISSEMINATION TO THE PUBLIC
Determining Cap & Participation Rates
• Step 1 - Premium invested in fixed income investments
• Step 2 - Net investment earnings provide guaranteed interest rate
• Step 3 - Remaining earnings purchase one-year or longer call options on the specific index or indices.
• Price of call options relative to investment earnings is primary factor in determining participation rate
• This is commonly referred to as a carrier’s “option budget”
FOR PRODUCER USE ONLY – NOT FOR DISSEMINATION TO THE PUBLIC
What Happens Next?
• Market rises, call options are exercised
• Policy credited with indexed interest
• Market decreases, options expire (worthless)
• Policy credited with guarantee, or
• Other selected policy options
FOR PRODUCER USE ONLY – NOT FOR DISSEMINATION TO THE PUBLIC
IUL Cap Setting Process
Policy OwnerPolicy Owner
Company/Policy Value
$100,000
Company/Policy Value
$100,000
Corporate Bond
5%=$5,000
Corporate Bond
5%=$5,000
Investment Bank 12.00 cap=$4,000Investment Bank 12.00 cap=$4,000
Policy Cash Value
Corporate Bond Rate of Return
Cost of Index Option
Cap Rate
$100,000 5% $4,000 12%
Guarantee/Spread
Deducted$1,000
Guarantee/Spread
Deducted$1,000
FOR PRODUCER USE ONLY – NOT FOR DISSEMINATION TO THE PUBLIC
Earned Rates Impact on IUL
Source: US Treasury – treasury.gov and St. Louis Federal Reserve Bank – stlouisfed.org
FOR PRODUCER USE ONLY – NOT FOR DISSEMINATION TO THE PUBLIC
Earned Rates Impact on IUL
6.0% Company’s Earned Rate on Assets
- 0.5% Interest Spread/Guaranteed Interest
5.5% Option Budget (amount co. has available to purchase options)
5.5% Company’s Earned Rate on Assets
- 0.5% Interest Spread/Guaranteed Interest
5.0% Option Budget (amount co. has available to purchase options)
FOR PRODUCER USE ONLY – NOT FOR DISSEMINATION TO THE PUBLIC
Policy Loans
FOR PRODUCER USE ONLY – NOT FOR DISSEMINATION TO THE PUBLIC
Policy Loan Types
• Fixed Loan – both the loan rate and the borrowed funds are fixed
• Variable Loan – Two types where both the loan rate and the borrowed funds participate in an index –
• True Variable loan - loan charge rate set by the Moody’s Corporate Bond Average while the funds continue to participate in the index account
• Fixed Loan with Participating Funds - Participating variable loan has a fixed loan rate while the funds continue to participate in the index account (less aggressive type of loan structure)
FOR PRODUCER USE ONLY – NOT FOR DISSEMINATION TO THE PUBLIC
Variable Loans Pros & Cons
Pros•Allows indexed values to remain & participate in the performance of the index/indices account
• Allows the opportunity for the index to outperform the loan rate being charged.
•Heavily marketed by some carriers• Variable loans illustrate higher
disbursements compared to standard loans
• Becomes an illustration game - easy to out-illustrate other competitors, especially with a true variable loan structure
Cons•Possibility the amount credited from index interest or fixed interest accounts is less than the interest charged
•Risk if index performs at less than the interest charged, the policy could lapse or income reduced
•Illustrations almost always show a “positive” spread.
• Allows the opportunity for the index to outperform the loan rate being charged.
•Loan charge could change on previous loans
FOR PRODUCER USE ONLY – NOT FOR DISSEMINATION TO THE PUBLIC
Illustration Comparisons
• Use several different illustrated rates
• Be sure your carrier illustrates index interest lower than the
interest rate on a variable loan
• The greater the difference in outcomes
• – The greater the risk in the product
• It is impossible to know how often a policy will credit interest up
to a caps
• Do a thorough review of all the other features and benefits of
the policy
FOR PRODUCER USE ONLY – NOT FOR DISSEMINATION TO THE PUBLIC
Why Index UL?
• Upside accumulation potential from index interest• Interest based on a diversified equity position
• Downside cash value protection
• Guaranteed interest rates• Eliminate losses
• Lock in gains
• Guaranteed death benefits thru secondary guarantees (Depending on product)
• Declared Interest Account
• Tax efficient distribution methods
• Overloan protection
FOR PRODUCER USE ONLY – NOT FOR DISSEMINATION TO THE PUBLIC
Questions
FOR PRODUCER USE ONLY – NOT FOR DISSEMINATION TO THE PUBLIC
Policies issued by:American General Life Insurance Company (AGL)2727-A Allen Parkway, Houston, TX 77019
The United States Life Insurance Company in the City of New York (US Life)One World Financial Center, 200 Liberty Street, New York, NY 10281
The underwriting risks, financial and contractual obligations and support functions associated with the products issued by AGL or US Life are the issuing insurer’s responsibility. Guarantees are subject to the claims-paying ability of the issuing insurance company. US Life is authorized to conduct insurance business in New York. Policies and riders not available in all states. American General Life Companies, www.americangeneral.com, is the marketing name for a group of affiliated domestic life insurers, including AGL and US Life.
©2013. All rights reserved.
AGLC106658