Bob Ritter's Blog #25: Is Indexed Universal Life Too Good To Be True? | Bob Ritter's Blog, ideas for financial service professionals

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Allianz Life Insurance Company of North America is the Platinum Title Sponsor of the InsMark Symposium scheduled for November 7 – 9, 2013, in Las Vegas, NV.

One of our Main Platform speakers November 8 is Todd Petit, AVP, Actuarial Product Development, the key designer behind the development of Allianz’s fixed indexed universal life (FIUL).

Recently I asked Todd some questions about the cash value accumulation potential based on the positive changes in an external index and the downside protection that FIUL policies offer. Below is the exchange between us.

Bob Ritter: Some people think that FIUL policies are too good to be true. How can they really offer the potential for cash value accumulation with limited downside risk?

Todd Petit: An advantage fixed index universal life insurance policies offer is protection – first and foremost, death benefit protection. They also offer the potential for cash value accumulation which is protected from negative index performance. With FIUL, the policy has the upside potential of receiving cash value accumulation based on positive changes in an external index, with the downside protection from negative index performance.

Here’s how. A large portion of the premium is placed into our company’s general account. This account is very conservative and is made up of mostly bonds. This provides the downside protection.

Consider this hypothetical example. Think of a $1,000 premium split into two parts ($950 and $50). $950 will grow back to $1,000 after one year thanks to the yield of the general portfolio. This helps us back the promises on our policies that provide downside protection, meaning that if the index performance is flat or negative, your client will not lose cash value due to the index performance. (Keep in mind that fees and charges will reduce cash value.)

A smaller portion of the premium is used to purchase options. These options provide the potential for the policy to build cash value based on the positive performance of an external index. When the external index has positive performance, the cash value is credited with indexed interest. Allianz spends the same amount regardless of the index allocations chosen. If the chosen index increases, the options will provide a return that is equal to the amount needed for the policy. If the chosen index decreases, the option will not provide a return.

Bob Ritter: Why are the caps on life insurance and annuities so different?

Todd Petit: A common myth in the FIUL marketplace is that life insurance caps are artificially inflated which makes them much higher than annuity caps. Annuity caps are much lower for three main reasons:

The method of investing: Life insurance uses a portfolio method of investing and annuities use the new money method of investing. In the current interest rate environment, most carriers’ portfolio rates are exceeding the new money rates for annuities.
Differing investment spreads: Life insurance policies have other sources of profit such as mortality charges and expenses that annuity products do not have. Because of this, life insurance products have lower spreads than annuities. The spread is the only source of profit on annuities.
Life insurance invests in longer duration bonds: Life insurance policies are longer term contracts. Because we can invest longer with life insurance policies, we are able to purchase higher yielding investments which can lead to higher caps on life insurance policies.

Bob Ritter: What is an appropriate illustrated rate to use when illustrating FIUL policies?

Todd Petit: This may be the most controversial question out there in the FIUL marketplace. Currently, there are no regulations on illustrated rates which is resulting in confusion among life insurance carriers. Carriers are not offering information on how to use an illustrated rate and they are not consistent in determining look-back periods. The many index allocation choices also leads to confusion.

One thing to keep in mind is that all FIUL policies should not be illustrated at the same rate. All carriers do not have the same option budget – so all policies should not be illustrated at the same rate. Illustrating all policies at the same rate is virtually just comparing the fees and charges within the policy.

Bob Ritter: Thanks, Todd. We’re looking forward to your presentations.

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