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Don’t Judge IULs By Illustration Alone

confusedJoe Client is 45, male, a non-tobacco user, and his health suggests a standard rating. He calls two agents and they both agree to “run some numbers” for him.  Joe wants to max fund a policy with $1000/month for 15 years then stop paying and when he’s 66 (year 21) start pulling out cash as policy loans.  Agent A comes back to Joe with an illustration*** that shows Joe being able to pull out ~$61,000/year income tax-free for life.  Agent B comes back with a fancy illustration of her own but it only shows a ~$46,000/year income tax-free for life cash flow.  Which policy is better? Fair warning: This is a trick question!

Well the answer of course is “C” – it’s the exact same product from the same company!

What happened is Agent A showed Joe the default rate settings in his carrier’s illustration software.  Agent B changed the defaults to show a more conservative outcome.  She explains, “You see even though the actual 25 year look back rate for the S&P 500® Annual Point-to-Point Index Strategy is 8.2% I feel better with a slightly lower rate, 7.5%.  The last 25 years have been historically really good.  Who knows what the next 25 year period will look like. Right now the carrier is offering a 4.4% variable interest rate on loans.  That just seems low.  Heck it is low by any historical benchmark!  Is it really sustainable for the life of this contract? I just feel better with a 5% rate.  What’s right? I don’t know.  I just feel better showing my clients some more conservative numbers.  I believe in good surprises and like it when the policy is over delivering on what we put in the illustration.”

She smiled, “my clients tend to like that better, too!”

Now what was Agent A thinking? Was he lazy, inexperienced, putting his best foot forward, or really just more bullish on the future?  It could be any and/or all of those reasons or something else.  It doesn’t mean he’s necessarily a bad agent, particularly if he explained what the assumptions are in his illustration or model and how he got to them.

What happened to Joe?  Fortunately for Agent B, she happened to be presenting after Agent A and was pretty quick on her feet.  Agent B was able to pull out her laptop and with a few keystrokes show Joe how Voila! her proposal looked identical to Agent A’s.

Now who did Joe go with?  Who knows….this is just a made up story…(although the numbers are real numbers I pulled off of a leading carrier’s illustration software this evening.)  I think most savvy clients would like to think they’d go with Agent B, but in real life things are rarely this clean.  Did the Agent B catch you on a bad day and you weren’t really engaged with what she was sharing with you? Was there a preexisting relationship with one of the competing agents or did they come as a referral?  (Sometimes a referral, well-intended as it may be, isn’t always a good thing.  Maybe your brother-in-law got a great rate on a term life policy from Agent A and gives you his number but Agent A’s understanding of IUL is surface deep at best…is that who you want to go with?)  Did one of the agents give a flashier presentation or dress better or tell better jokes or root for your football team or have a cooler website or any of a bunch of other things???

At the end of the day the answer is you want to find and work with an agent that you feel you can trust and who can explain in relatively plain English the assumptions behind the policy he is recommending.  You want to work with a financially strong carrier (the actual insurance company that is responsible for the promises made in the policy contract) that has a reputation for maintaining favorable terms in the non-guaranteed elements of its contracts. (Yes, many things like index participation rates and caps are not guaranteed and you should be comfortable with that.  If you aren’t you probably shouldn’t be considering an IUL policy).  The reality is the numbers in illustrations can be gamed, either by agents or carriers.

 

***Illustration – so what is an “Illustration”??? Basically it is the term for the document that your agent must give you in its entirety either at the time of application or at policy delivery.  It is usually long (20+ pages) and boring to read.  There is a lot of good, important stuff in them and they really should be read but the reality is most people don’t.  Inside the illustration there will be some financial projections like cash values.  All of the statements you’ll hear like, “this policy may deliver xyz…” are in the illustration.  (This is not to be confused with the policy contract itself, which is also long and boring but important to read.)  The only thing that is certain is the illustration will be wrong.  Your actual results will either be more favorable or less favorable than what is in the illustration.  You will either put more/less money into the policy, take more/less money out of the policy, have higher/lower interest credited to your policy, and be charged higher/lower interest on policy loans than what is illustrated.  More important than the numbers in your illustration is that you understand how your policy works and the key assumptions behind it.

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