Issues that May Arise from Pure Death Benefit Products [IUL vs GUL]
Life insurance plays an important role in any financial plan. There are a variety of life insurance products, but I want to focus on a recent trend towards Protection IUL/UL. Protection IUL/UL products are designed to provide a low-cost permanent death benefit.
These policies are designed so that the premiums will carry-out to maturity age based on current assumptions (mortality and interest rates). Carriers typically offer a maximum cost and minimum interests guarantee, but this usually takes the death benefit guarantee down to age 85-90.
Therefore, the policyholder assumes the risk of lower interest rates as well as a potential for higher policy-costs in the future. You need to consider these issues as you decide if a protection IUL/UL product fits your planning needs.
Current Economic Conditions
The increased number of Protection IUL/UL products is due to the current interest rate environment. Insurance companies are dealing with a sustained low interest environment. The lower interest rates are affecting insurance company pricing.
Using the Moody's Seasoned AAA Corporate Bond Yield as a measure of interest rates, you will see just how low interest rates are today. In January 2000, the rate was over 7%. This was down from its peak of over 15% in the 80's, and has been declining ever since. In 2010 the rate dropped to 5%, and today it is under 2.5%.
Since actuaries have to account for the current interest environment, we are starting to see a trend in protection products. The shift is away from Guaranteed Universal Life (GUL) to current assumption products. This shifts the risk from the insurance company to the policyholder.
The Good and Bad of Protection IUL/UL
If you look at the cost savings between a Protection IUL versus a GUL product, you will find a saving over 15%. You are trading off the initial cost for the risk policy performance. To get a feel for the magnitude of this risk let's consider the following example:
Male age 65, preferred best risk class, and a death benefit of $1,000,000.
A competitive Protection IUL produce would cost $17,184 to carry the contract to age 125 based on current mortality charges and a 5.5% rate of return. This is about 20% less than a competitive GUL contract which would guarantee the premium for the same insured.
However, if the actual experience is less favorable, you could end up in a situation where the costs to carry goes up dramatically. For example, if you look at the policy values after 10 years when the policy has earned 4% versus the original proposal of 5.5%, the policy would still have healthy cash value in excess of $59,000.
Even though the cash value is only $10,000 behind the original projection, you would need to increase the premiums to $25,121 to get back on track. In hindsight, it may have been better to purchase a GUL contract locking in the premium at $21,175!
Mitigating the Risk
The above analysis does not mean Protection IUL is a bad deal, it simply means that you have to monitor the policy on a regular basis. It requires periodic policy review so that you can keep the policy on track. Fortunately, there are companies out there that do offer services specifically designed to help their clients systematically track the progress of all their policy(ies).
Alternatively, you could go with a guaranteed product. GUL products are also undergoing changes. They are being repriced, but usually price increases due to the interest environment.
Guaranteed Universal Life Re-Pricing
In the past when a company announced a new product, it was good news. Typically the policy provided lower cost or more benefit for the same premium dollar. Improvements in mortality and technology along with product innovation were the main driver.
Today, however, the new products are becoming more expensive. The extra cost has not been from any mortality increases (it is too early to know if COVID-19 will impact the insured population.) The increase is driven almost exclusively due to the low interest environment.
Several carriers are announcing product changes to their Guaranteed Universal Life (GUL) products. GUL's are designed to guarantee a death benefit for a specified premium. As long as the client pays a premium, the policy is guaranteed to stay in force and pay the death benefit once the insured passes away.
Recently some major carriers (Lincoln National, AIG, and Pacific Life) have announced their pricing increases to their GUL products. The increases are in the 15% range with some of them already in place. As these companies announce the price increases it wont be long before the competition follow suit.
The Best Time is Now
You still have time to lock in current pricing for some (not all) GUL contracts. Even if you are not interested in a GUL, but would like to get life insurance, now is still the best time. The process of securing coverage has gotten easier with the advent of electronic application processes and express underwriting.
Driven by technology, competition, and now the current lock down, underwriting is becoming easier. Companies are relaxing their standards on medical exams by accessing information they can obtain through medical databases. In some cases you can get up to $3,000,000 in coverage without having to get a medical exam.
Take advantage of the time you have now to look at your life insurance coverage. We would be happy to review the amount and type of insurance you currently have. If you need help getting additional coverage, we can help you find the right type of coverage with the right company - before prices go up! Contact the Advisor's Resource team today.
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