When I visit advisors in the field we talk about many things, one of them being life insurance policy reviews. All universal life policies written before the year 2000 could lapse prior to their original maturity date due to the decline in interest rates.
The insurance companies reacted to this dilemma by developing universal life policies with guaranteed death benefits (GUL). No matter what happened to interest rates, if the premiums were paid and paid on time, the death benefit was guaranteed. However, the long-term low interest rate environment has made the cost for these products creep up over the last years.
Perhaps Index Universal Life (IUL) is a better alternative for your client. Let me tell you why.
When offering permanent death benefit options, the biggest objection you may hear when showing an IUL to a GUL client is that the benefit is not guaranteed to a higher age like 100 or our favorite age 105. We must remember that the structure of the IUL and it’s guarantees are not the same as the GUL. The GUL product ends when the guarantee ends. This is not true with the IUL. For an IUL to end at its guaranteed benefit period the underlying index like the S&P 500® would have to produce negative returns from the date of policy issue. Here is an example. Take a 50-year-old who purchases an IUL policy with a guaranteed benefit to age 88. The S&P 500® would have to spend the next 38 years in negative territory to have that policy end at that client’s age 88. We would literally have to be in the worst depression ever for this to happen! How likely is it that we would see this over 38 years? I’m betting, not likely.
Let’s take this even a bit further. The worst 30-year time period for the S&P 500® was 1928 to 1957 when the total return on the S&P 500® was 2.8%. If you take that same time period and run it through one of our carriers’ annual point to point with a hypothetical cap of 9% index strategy with a 0% guaranteed interest rate, the result is an illustration rate of 4.5%, which would represent the worst 30 years in recent history for the S&P 500®! Let’s compare a competitive GUL with an IUL at an illustrative rate of 4.5%. We are comparing a 50-year-old male, Preferred Non-tobacco for $1 million of coverage.
|Benefit amount||Premium||Guaranteed to age||Age policy ends||Cash Value in 20 years|
|IUL at 4.5%||$9,557||92||101||$167,928|
|IUL at current 5.6%||$9,557||92||131||$189,036|
|IUL at 5.6% premium solve||$8,654||85||105||$154,320|
As you can see, even if interest rates were at their worst your client would still have the advantage of a death benefit guarantee to age 92 but also some cash value they can access if necessary for the same cost as a GUL. If we look at the current interest rate you can actually save them premium today with a death benefit guarantee to age 85 and cash value tomorrow.
Now I would like to take it one step further. What if we add a Chronic Illness Rider to the IUL using the premium amount of $8,654 and the current interest rate assumption of 5.6%? A chronic illness rider will allow your client to access 2% of the benefit amount during his lifetime if he cannot perform 2 of the 6 activities of daily living. His benefit amount does reduce to $854,685 but he still has guarantees to age 85 and the policy illustrating to age 106.
If we look at the same premium as the original GUL of $9,557 we now have a benefit amount of $945,187 with the same guarantee to age 85.
So, what is my point with all of these numbers? Perhaps just showing a GUL is not in the best interest of the client. Will a lesser guarantee with accumulation that gets the policy beyond the guarantee be a better option for your client?