Understanding IUL
Presented by…
Levi Robinson, CLU, ChFC, FLMI
Director Product & Market Training
American General Life
FOR PRODUCER USE ONLY – NOT FOR DISSEMINATION TO THE PUBLIC
Agenda
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Life Insurance Uses
IUL Value Proposition
IUL How Does It Work
Interest Crediting Options
Cap/Participation Setting Process
Policy Loans
Questions?
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The Case For IUL 2012 Stats
Source: LIMRA
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
MEC Limits
$5000
The Highest Amount of Premium the
government will allow to be paid into a life
insurance contract without triggering a Modified
Endowment Contract (MEC)
$4000
Minimum
Premium
= the
amount
the
The Highest
Amount
of lowest
Premium
the government
insurance
for the life contract
insurance
will allow company
to be paidwill
intoaccept
a life insurance
Benefits
Premium
death
benefit
baseda on
your age
and underwriting
without
triggering
Modified
Endowment
Contract
Minimum Premium = the lowest
(MEC) aka, Term Premium
decision,
$3000
$2000
amount the insurance company will
accept for life insurance death
benefit based on your age and
underwriting decision.
$1000
$500
$10
Term Premium
20
40
FOR PRODUCER USE ONLY – NOT FOR DISSEMINATION TO THE PUBLIC
Duration
60
80
Benefits of Life Insurance
MEC Limits
$5000
The Highest Amount of Premium allowed
without triggering MEC.
$4000
Bottom line, the more premium
paid
Estate Tax
Free
Disability Protection
into a life insurance policy, the
Liquidity,greater
Control Use
Collateral
the benefits! Competitive IRR
$3000
Premium
$2000
Guaranteed Interest
Access to Capital
High Contribution Limits
Tax Deferred Accumulation
Tax Free Death Benefit
$1000
$500
$100
Term Premium = Tax Free
Death Benefit
20
FOR PRODUCER USE ONLY – NOT FOR DISSEMINATION TO THE PUBLIC
40
60
Duration
80
Benefits
IUL Value Proposition
Upside Potential
No Downside Risk
FOR PRODUCER USE ONLY – NOT FOR DISSEMINATION TO THE PUBLIC
Value Proposition
Market
Upside
Long-Term
Yield
Advantage
Over CAUL
Downside
Protection
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
The major difference between traditional universal life
and indexed universal life is the way interest is credited
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
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 interestcrediting 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?
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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)
FOR PRODUCER USE ONLY – NOT FOR DISSEMINATION TO THE PUBLIC
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
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)
FOR PRODUCER USE ONLY – NOT FOR DISSEMINATION TO THE PUBLIC
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.
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”
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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
Company/Policy
Value
$100,000
Policy
Owner
Investment 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%
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Corporate
Bond
5%=$5,000
Guarantee/
Spread
Deducted
$1,000
Earned Rates Impact on IUL
10.00%
9.00%
8.00%
7.00%
6.00%
5.00%
4.00%
3.00%
2.00%
1.00%
10 Year Treasury Rate
Moody's AAA Corporate Bond Yield
Source: US Treasury – treasury.gov and St. Louis Federal Reserve Bank – stlouisfed.org
FOR PRODUCER USE ONLY – NOT FOR DISSEMINATION TO THE PUBLIC
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
0.00%
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
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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
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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
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
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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
FOR PRODUCER USE ONLY – NOT FOR DISSEMINATION TO THE PUBLIC