Equity Indexed Universal Life Insurance – Is it good for us?

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PostPosted: Thu May 10, 2012 4:39 am   Post subject: LSW FlexLife  

Anyone familiar with First Financial Services ?



Told me my wife (29) would be looking at $60K/yr in tax-free policy loans from an IUL projection based on 8.5% avg gain, if she bought a $200/mo policy and funded until age 67.

Shows $91,200 in total premiums; TCV = $455,093; TDB = $537,010 and can start tax-free policy loans of $60,685. Projection taken to age 119. If she died at age 98yrs, TCV= $5,286,065; TDB= $5,338,925. Will have received $1,941,920 in tax-free policy loans. $5,338,925 - $1,941,920 = $3,397,005 in income-tax free Death Benenfits passed to her beneficiaries. Policy with Life Insurance Company of the Southwest and is their FlexLife policy in particular. Also, projection shows :

Minimum Monthly DBPR Premium $96.96 (minimum premium that can be paid ?)

Minimum Annual DBPR Premium $1,163.52

Target Premium $1,973.29 ( My annual minimum goal ? )

DEFRA Level Premium $2,401 ( MEANS WHAT ? )

MEC Premium Limit $7,156 ( MEANS WHAT ? )

Guideline Single Premium ( MEANS WHAT ? )

Modal Premium $200

Rate Class : Verified Standard NT



Thanks Max, or anyone else with the knowledge !!



Seems people have questions but no one putting up full info like above from a projection by an agent.

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PostPosted: Thu May 10, 2012 5:18 am   Post subject:   

Their Interest Crediting Strategies are :



Fixed-Interest



Point-to-Point, Cap Focus Index (100% partic. w/ 14% Cap)



Point-to-Point, Participation Rate Focus Index ( 140% partic. w/ 12% Cap)



Point-to-Point , No Cap Index ( 80% partic. w/ NO Cap)



Point-to-Average Index ( Index beginning value = 1000, daily avg = 1100, Index Growth = 10% [(1100 - 1000 = 100) / 1000 = 10%



They state: The Index Strategy earnings are credited and locked in annually. Once interested is credited it can never be lost due to a decline in the Index. NO INDEX STRATEGY EARNINGS ARE CREDITED FOR FUNDS ALLOCATED TO THE INDEX STRATEGIES FOR PERIODS SHOTER THAN A FULL YEAR.



Policy has 2 loans options:



Variable Net Cost

Fixed Net Cost



Further states:

As long as the policy stays in-force until the death of the insured, policy loans remain tax-free income. If the policy were to lapse prior to death, a portion of the loaned amount may be taxed as income to the policy holder. (Anything beyond the Basis I assume ?)

Note: Loans and withdrawals will reduce the policy's death benefit and cash value.It may also become necessary for you to resume premium payments if the policy's cash value is not sufficient enough to cover the monthly fees and cost of insurance charges. (How do I avoid this ? By over-funding like a policy holder should with an IUL ? Is this where the MEC Premium Limit comes into play ? )

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PostPosted: Thu May 10, 2012 5:25 am   Post subject:   

$200 per month will not do what they claim. Plain and simple.



DEFRA level premium is the amount you could pay every year and possibly expect the policy to last to age 121. It may or may not happen. Taking the loans later in the policy always affect the future performance of the contract, often in a negative manner. If nothing else, it reduces the death benefit by the amount of the loan plus unpaid interest.



MEC premium is the only one you should pay attention to. That's also known as the 7-pay premium -- pay more than that each year in the first seven years (or more than that total in the first seven years) and you will not be able to do ANY of the "tax-free" crap they told you -- because you won't have a life insurance policy as you thought. Once a policy becomes a Modified Endowment Contract, it is essentially irreversible. The IRS has allowed a relative handful of folks who demonstrated that their MEC was the result of an inadvertent mistake to undo the mistake. For all the others . . . tough luck.



Guideline single premium is the most you can pay the first year to avoid a MEC. It's also an important number.



Both the 7-pay and Guideline Single premiums are the ones you should consider paying. They won't promise any of the things you were shown in the illustration, but it's better to "fully fund" a UL policy early, than to get the big premium surprise later in life when you may not be prepared or able to pay it.



But look at the difference: the MODAL premium ($200 per MONTH) is what the agent led you to believe will be worth $5,000,000+ in the future, and how does $2400 per year compare to $7156? Yep, 1/3 the amount you should be paying to try to make the policy work.



Quote:
First Financial Services
and

Quote:
Policy with Life Insurance Company of the Southwest and is their FlexLife policy in particular


Oh yes. Mark Colbert and I are currently working up a class action suit based on these policies and illustrations. That might tell you something.



Taking $60,000/year out beginning at age 67 with only $500,000 of cash value will not lead to a $5,000,000 death benefit in 52 more years. When you say "Funded to age 67" . . . were you told -- or in any way led to believe -- that you won't have to pay any premiums after that? If you were, Mark and I would definitely want to talk to you about it.


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PostPosted: Thu May 10, 2012 5:35 am   Post subject:   

I'm lost on the MEC Premium Limit.

I can put the $7,156 into the policy annually for 7 seven years ?

Or $50,092 TOTAL over 7 years ( 7,156 x 7 ) ?

What would we be looking at doing that instead ?

Yes, the projection shows her paying $2400/yr from ages 29 to 66, then $0 for the remainder of her life until age 119.

I assumed he got those numbers using the 8.5% for the projection.

What are IUL's historical average since they have been available ?

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PostPosted: Thu May 10, 2012 5:52 am   Post subject:   

$7156 - $2400 = $4756

If I fail to put that extra $4756 per year for those first 7 seven years, can I come back with the $32,292 and place it all on the policy, say in year 8 ?

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PostPosted: Thu May 10, 2012 5:53 am   Post subject:   

Quote:
If the policy were to lapse prior to death, a portion of the loaned amount may be taxed as income to the policy holder.


"May" is NOT the right word to use. The IRS WILL assess income tax on EVERY PENNY borrowed PLUS unpaid interest that exceeds the cost basis. IN ONE YEAR -- the year of policy lapse. Makes no difference to them that you are totally disabled, blind, deaf, and/or about to die (although if they waited until after you died, they might collect even more through estate tax).



So think about this: $91,200 in premiums to age 67. $60,000 borrowed in that year. Loan interest? Let's be generous (in your favor) and say 5%. At the end of the year you owe $63,000. Don't have to pay it. Borrow another $60,000 at age 68. End of the year, you now owe $129,150 ($3000 interest on the most recent $60,000 plus $3,150 on the unpaid $63,000 from last year). You're already $37,950 over the cost basis. Every additional dollar of "tax-free" loan beyond that point and the unpaid interest is a potential tax liability if the policy lapses.



What do you think might happen in 7-8 years, at age 75 or so, when you have no cash value remaining and get a premium due notice for, let's say $10,000 to keep the policy in force for just one year? Let it go? Well, how does paying income tax on $500,000 or more sound to you at age 75? Where will that money come from?



If you need TAX-FREE money in retirement, the way to have it is put that $2400 in a Roth IRA every year.



But wait! Why not put in the whole $5000 you can put in this year? And every year. At age 67, your account would have been funded with $190,000 and with any amount of positive growth in all the 38 years, will be worth more than that. Using the same 8.5% straight line rate of return, the account would be worth $1,411,391.23. With 0% interest after that, you could take out $60,000 per year for the next 23 years. With a nominal interest rate of a few percent in retirement, the money would last even longer. But who's going to want to be alive at age 90 or 100 in 40 or 50 years from now when the minimum income tax rate is 50% and the maximum tax rate is 90%?



The really hard part . . . getting 8.5% EVERY YEAR for 38 years. No one's ever done that, no one is likely to do that. But with the ups and downs of the stock market, an AVERAGE rate of 8.5% is not unrealistic.



Being invested in the stock market, through Index ETFs or low cost Index mutual funds (such as Vanguard's S&P500 fund) is VERY DIFFERENT than giving control of your money over to an insurance company for their pie in the sky.


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PostPosted: Thu May 10, 2012 6:01 am   Post subject:   

Quote:
$7156 - $2400 = $4756

If I fail to put that extra $4756 per year for those first 7 seven years, can I come back with the $32,292 and place it all on the policy, say in year 8 ?


Possibly. It depends on which MEC test the policy is based on. With Cash Value Accumulation test it might not be, with the Guideline Premium Test, it might.



Large lump sum payments into any UL policy can be problematic. You always have to calculate what the maximum amount you can put into the policy is. Make a mistake, and the IRS doesn't have to give you a do over. And with all the money we now owe to the world, they might not be inclined to even listen to your request.


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PostPosted: Thu May 10, 2012 6:04 am   Post subject:   

Found that from 1998 - 2008,Index products have averaged +5.91%

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PostPosted: Thu May 10, 2012 6:10 am   Post subject:   

During that time, the REAL return for Index products was +74.19%

S&P averaged -0.84% and REAL return was -29.83%

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PostPosted: Thu May 10, 2012 6:12 am   Post subject:   

No kidding. (But what about the 8.5% they talked about?)



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PostPosted: Thu May 10, 2012 6:13 am   Post subject:   

With all the talk of "living benefits" associated with IUL's, how can a 42yr old, non-smoking/drinking, male get $60K/yr income-tax free from such a policy ?

Or anyone for that matter ?

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PostPosted: Thu May 10, 2012 6:14 am   Post subject:   

I figured he used a high %, like 8.5%.

When I called and asked, he was honest about it right away.

I would use something like 6% for clients.

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PostPosted: Thu May 10, 2012 6:16 am   Post subject:   

$60K for 35yrs after retirement, that is.............

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PostPosted: Thu May 10, 2012 8:06 am   Post subject:   

Max, I only learned of IUL's 3 weeks ago.Sine then I've read Patrick Kelly's The Retirement Miracle and Douglas R. Andrew's Missed Fortune 101. I also watched 13 YouTube videos, literally, with the most profound being one titled Time To Retire Your 401K. It's from MSNBC in October 2009 where the Managing Editor of Time Magazine, holding the current front cover issue of the same title, is stating 401'sk and certain tax-qualified plans don't work and actually suggests Indexed Universal Life Insurance. I understand you're a veteran in the industry ( since Nov. 1980 ) with state and federal experience, so I respectfully request for you to tell me exactly how to fund such a policy for 25 - 30 years and have it provide tax-free living benefits for 25 - 30 years plus still pass a death benefit. Or is it even possible ?

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PostPosted: Thu May 10, 2012 3:00 pm   Post subject:   

Anything is "POSSIBLE" -- that's what they're showing you in the illustration. But that's not really your question You are really asking this:

Quote:
I respectfully request for you to tell me exactly how to fund such a policy for 25 - 30 years and have it provide tax-free living benefits for 25 - 30 years plus still pass a death benefit.


I worked for a large agency as a policy analyst responsible for monitoring cash values across up to several hundred policies per corporate account and determining how much additional premium needed to be paid into the contract, if any -- mostly VULs, but plenty of "traditional" UL, too (at the time I was there, we did not use IUL at all, and I don't believe they are using any IUL today either because I get a few of their new employees as students in my insurance classes from time to time who tell me they aren't). The VULs we monitored monthly, the ULs once a year unless an unusual circumstance required additional analysis. And none of what we did employed any of these crazy loan schemes. [Notably, the personal policies sold to some of the corporate executives were almost always dividend paying whole life contracts.]



Some of our corporate clients did use policy loans occasionally to pay premiums when cash flow was tight, but then our responsibility was to make sure they never exceeded cost basis in doing so, that they repaid the interest if nothing else, and eventually repaid the loans when practical. Except for one client -- no longer in business -- that listened to another agent who told them there would be no problem taking money out of the policies and seriously exceeded that cost basis threshold. A few years later, they could not understand why they now had to pay over $100,000 per year in new premium to prevent one $300,000 life policy for a 90-year-old retired executive from lapsing (not to mention the tens of thousands of dollars needed annually to keep the other 12 or 15 policies they tinkered with afloat as well). With that kind of mismanagement, it's no wonder they were taken over by a much larger company just a few years ago.



When it comes to ANY form of UL, I can tell you this: no one, including myself, can tell you "EXACTLY" how to fund such a policy with a finite number of dollars from Day One for 2-100+ years and have it do exactly what you (or anyone else) suggests it will do. It is an impossibility.



The only way to come close is to use the annual statement together with an IN FORCE ILLUSTRATION and perform a detailed policy analysis EVERY YEAR to determine whether the policy is on track or not. If it is not, the analysis will only show how much additional money needs to be dumped into the contract that year to try to put it back on track.



And even that is not entirely accurate, because with IUL, it's only a best guess. The LSW interest crediting scheme in particular (not unlike some others), takes money each time a premium is paid and moves it into a separately tracked "segment". You only see the results of that segment once per year, and you only see the precise "snapshot" of ONE segment on ONE DAY once per year. The twelve segments are always "in motion" and cannot be tracked in "real time" without imposing tremendous effort on the insurance company to provide you with a MONTHLY in force illustration. And for that, they would certainly charge you whatever the amount stated in your contract is, typically $25-$30 per illustration. (In fact, each segment is only valued once per year on one day until you start taking money out, and then, read the contract carefully, they take your loan/withdrawal from the segment(s) that will not be credited with interest first. So that money will earn exactly $0 for up to 364 days.)



With this particular class of LSW policies, you can only get "close" to a factual statement of financial position when you rely on the annual statement alone. And by the time you get your annual statement, everything is in motion again.



The question which has not been asked: "Is it at all possible for the policy to do what was illustrated?" the answer is, possibly yes, but probably no. There are just too many "hidden" and variable elements in the illustration, thanks to the software that created it. No one outside the insurance company's home office illustration actuary -- including the agents of the company -- has any idea what the precise "current assumptions" are. The agent, least of all, cannot tell you if the assumptions included any increases in the COI over time to account for changing mortality assumptions (which the actuaries discuss behind closed doors). And even the illustration actuary can't tell you what effect an unexpected change in those assumptions would do down the road.



This is not a "variable" insurance product, but there are so many internal variables that the illustrations are simply a puff of smoke. They cannot be guaranteed . . . except for the GUARANTEED COLUMNS which show a WORST CASE SCENARIO . . . the minimum amount of interest and maximum internal expenses.



That scenario is also not very likely to occur, but it could. So if the illustration can be run in a way that the GUARANTEED COLUMNS show the outcome you have been discussing, then you would have an assurance of at that outcome as the minimum, and probably significantly more than that.



To make that happen, you would probably not like the numbers you see in the PREMIUM space. And I'm not even sure the illustration software can do that. Which is why the GUARANTEED COLUMNS in a UL illustration will eventually show $0 cash accumulation and $0 death benefit (with the exception of a secondary DB guarantee, which still requires payment of premium in all months of all years in most policies -- miss one payment and you could lose that guarantee).


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