Hitch Hiking on Michael Zuber’s last post, I thought I would share an example of three clients of mine. I always try to categorize those that contact me and end up purchasing an EIUL with those who decide not to. Generally, the people that do fall into the following categories:
- Successful careers
- Disappointed in the typical financial planner advice
- Educated
- Skeptical
- Good with numbers
- Has shown good tolerance for risk in other endeavors [some have moved from other countries, others have risky professions, others are independent consultants and small business owners]
Example #1: The Computer Engineers
Both husband and wife are computer engineers in their early 40s. They were born in India and have worked in the California computer industry for years. They have 3 school age children. They both had invested in mutual funds inside their companies 401K, but were disappointed in the performance [this was 2008] and had pulled all their funds out of the equity mutual funds and into a money market fund. We spent much time going over the numbers as engineers like to do. They bought a policy for both the wife and the husband and plan on buying one for each child in the future. Since they purchased their policies the interest credit has been the following:
2009 16%
2010 13.39%
2011 0%
2012 13.41%
Example #2: The Doctor
He is a 34 year old medical doctor working in NYC, living in NJ, who was engaged to be married. He had just finished his internship and was getting his first big jump in pay. He had not started saving for retirement when I spoke to him. He had a reserve of six months expenses. He wanted to totally fund his EIUL in 15 years so he was aggressive in the premium amount. He felt since he was use to living on so much less than he was starting to make he could continue his current lifestyle at least until kids arrive and aggressively save for the future. He bought his policy in 2010 and has had the following interest returns:
2010- 2011 9.5%
2011-2012 6%
2012-2013 [not finished this leg yet but it sits at 8% at this point]
He is busy at work and has added in a 401K meeting the match. He has no plans at this point to expand beyond what he is doing, despite my prodding. Is currently married with no children.
Example #3: The Army Officer
He is 46 year old army officer on his last tour of duty before retirement. He is married and has two kids. He had several tours of duties in the Middle East. He will get the full military retirement with over 25 years of service upon retirement. The EIUL is to supplement that. His planned premium payments goes to age 60. He just went past his first year policy anniversary where he received a 13% interest credit. Despite being overseas, he keeps in close contact with me and asks advice as to his policy. He last talked to me a couple of weeks ago and seemed very happy with the policy.
It’s interesting as I look over my client list how many engineers I have as clients. Also quite a few attorneys, doctors and independent consultants. I’m not sure what that means, but I know that every one of my clients were given all the information and data to come to their own independent buying decision.
I sent the following out to a potential client and thought my readers might find it interesting:
The Minnesota Life EIUL is 10 years old. Here are the actual results for the interest credit over the life of the product:
$1000 in cash value at the inception of this product would be worth $2,340 today.
Once again these are real life results since the inception of the product over the last decade.
Photo: Unhindered by Talent
{ 9 comments… read them below or add one }
David,
Thanks for sharing experiences and profile of a few of your customers. Looking at the returns and comparing to standard market returns, using a EIUL does appear to beat the broad markets for rate of return over time due to no loss in the portfolio (options can be a wonderful thing when used properly).
That said, and much like investing in an ETF or indes fund and the performance numbers year over year need to include the management fees. In the case of ETFs and index funds these are the fees paid to the broker to manage the fund and are generally subtracted before showing the rate of return. In the case of EIUL, the equivalent cost seems to be the cost for the LifeInsurance portion and other fees.
To help show the benefit of EIUL to even more people, could you show the breakdown in premium from your examples of percentage that is contributed to cash value and percentage to the insurance product? Perhaps alternatively, the growth of $1000 to $2340 required how much investment to bring the cash value to $1000? Feel free to assume a healthy 40 year old male.
Thank you for bringing the ideas and returns of these products to a broader audience.
Kevin
Kevin, unfortunately unlike mutual funds, life insurance expenses work differently. They aren’t universal because you are dealing with life insurance which has different rates depending upon age, gender, rating class. There are no management fees as such.
There are expenses though. Each and every one of my illustrations has a breakdown annually of expected expenses, and the internal rate of return by year. Generally, the total expenses, expressed as a percentage, ranges from .5% to 1.5% depending upon the above factors and the premium paying time. A 40 year old man would probably be some where around .75%.
Having said this, owning a life insurance policy is not like owning mutual funds. There are surrender fees going out 10 years. The expenses are front loaded into the first 10 years. So this is not an instrument for those who are looking for short term places to put their money. It is called PERMANENT Life Insurance for a reason! The expectation is for one to hold this until death.
For those who are good with this arrangement, the tradeoff is tax free withdrawals. So the expenses compared to paying taxes seems to be a fair trade. I also must mention that since the cash value doesn’t go negative, you don’t the issue of “sequence of return risk” that mutual funds, ETFs, etc. have for those trying to plan a retirement. Hope this helps.
David,
During years like 2008 and 2011 where the return is 0% and the EIUL is indexed to the S&P for instance if the insurer does not take the hit for the stock market loss, then who does?
I have read that as the insurer ages, the cost of the EIUL gets more expensive in premiums. Is this true because of the cost of mortality as one ages. Is this true?
Thanks,
Wai
Wai, good questions. The policy owner doesn’t have a negative year, but the insurer might. The investment portfolio for an insurance company is complex with hedges, etc. But their liabilities from the insurance [reserves] by legislation, must be covered with fixed rate options like treasuries, AAA corporate bonds, etc. That is why it is important to have a financially sound insurance company backing your policy. Each year the insurance company investments do give positive results, but some years are better than others. The insurance companies I use have been around over 130 years and are rated in the top 7% of all insurers for financial stability. When you have billions of dollars of reserves, conservatively invested, you can withstand some bad market years as these companies did in 2008-2009.
The answer to your next question is no. Premiums do not go up according to cost of insurance as you age. In fact, permanent insurance works the exact opposite, with you overpaying for the cost of insurance in the early years, so you have much cash value to pay for the cost of insurance in later years. That is the basis for what we can do in building up cash value to use tax free.
Another question David. What are the cons to having a EIUL versus a Mutual Dividend Paying Whole Life Policy? It seems the EIUL is still a very new product, while the WL policies have been around for a much longer period. Groups like Bank On Yourself or Nelson Nash’s Infinite Banking Concept are all pushing WL. What are your thoughts?
Wai, another good question that I get a lot. There are some fundamental differences between whole life and universal life policies that should guide the decision. Whole life is a old product for insurers and has been structured from the beginning to guarantee the death benefit. Historically this has been primary structural element from the design perspective and as a result has built in guarantees for the death benefit. Returns inside the policy have been less important structurally as long as they can produce the death benefit guarantees. Mutual companies have averaged IRRs for their whole life in the 4% range. Universal life was designed starting in the 1970s for cash value build-up. That is its structural mandate. In the 1990s the insurance companies designed Equity Indexed Universal Life to overcome some of the issues with the Variable Universal Life they were seeing. The IRRs of the EIULs have surpassed even the variable universal life IRRs because of the market variability over the last 15 years. IRRs for many of the EIULs since there inception have been in the 7.5%-9% range. On top of this universal life has built in flexibility with regards to premium payment and death benefit level that allows one to initiate a very efficient structure. With whole life it is much more difficult to get this efficient structure because it was not designed to accomplish this.
The bottom line is that one needs to use the right tool for the job. If death benefit guarantee is the important aspect then whole life is your tool. You can get 10 pay or 20 pay premiums that guarantee the level of death benefit you want as long as you make those 10 year or 20 year premium payments. If cash value is what you are mainly looking for, then the EIUL is your tool. For those that are looking at retirement income streams from their policy, then the higher cash value produced by EIULs would produce much higher income streams. The guarantee is on the cash value side for UL.
Hope this helps explain the differences.
The most compelling yield figure in the decade you highlighted, David, was 0% in 2008. Those who insisted on stubbornly remaining in their 401s that year would’ve walked on glass for that yield. You and I both remember when, in 2007 I begged folks to leave their employers’ retirement plans and embrace EIULs. I was ridiculed with undisguised derision.
Not so much any more.
I suspect this very simple, but powerful post might save more readers’ than you realize.
My records show that the S&P500 suffered -38% in 2008. Dave’s figures sport an annualized return of 8.87%. Swap that 0% gain for -38%, and the annualized return suddenly drops to 3.79%. (Don’t fall for that junk arithmetic mean.)
That is the difference of a single correction in a 10-year span, dropping you to below 4% and barely keeping up with inflation.
That’s the reason I no longer pump money into my 401K and instead into my EIUL.
Wow this is such a fantastic representation of how successful this product has been. Definitely a great way to show interest within the different markets. Thanks David