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Real Clients and Real Results Using EIULs

by David Shafer on January 25, 2013 · 17 comments

  
EIUL

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%

Needless to say, they have been very pleased.  Since then, on my advice, they have invested in several real estate properties to add a third leg to their retirement [401K, EIUL, RE].  They are locked into their 401K, but have stopped adding to it beyond the match that the husband gets.

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:

2003  17%  [cap rate was 17%]
2004  10.47%
2005   5.63%
2006   12.16%
2007    2.43%
2008   0%
2009  16%  [cap was 16%]
2010   13.39%
2011  0%
2012 13.41%

$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.

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{ 17 comments… read them below or add one }

Kevin Sapp January 25, 2013 at 6:57 am

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

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David Shafer January 25, 2013 at 3:16 pm

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.

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Wai March 8, 2013 at 10:19 am

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

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David Shafer March 13, 2013 at 7:30 am

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.

Wai March 13, 2013 at 9:34 am

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?

David Shafer March 13, 2013 at 10:09 am

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.

Be Ho August 6, 2013 at 6:24 pm

@ Wai,

Great question on who endures the loss, hidden inside the contract, the policy will state that they insurer has the right to change crediting formulas and change participation rate at any time. What that means is even if the indexed does a remarkable 16% increase, your policy won’t. Here’s why

Indexed up 16%
Current participation rate is 50% (average around the industry)
The return credited to your policy is 8%

So if they company gets a 16% return, they’re holding the other 8% for themselves to carry them through down markets. However, there more ways they make money. They can increase the expense charge at any time, they can charge more administrative fee’s, they can increase your Cost of Insurance up to the maximum.

Again, very good question, because Sure as David said, they have money to carry them through, but as a business it boils down to current cash flow and profits. Business can’t just tap into their surplus whenever they’d like.

So yes, the insurer does take the hit in a down market, but by changing the crediting formula for years to come they don’t have as much rick as before. In addition, by adjusting the fees and insurance cost during the bad years, they can recoup some of the losses in the market.

I’ve taken a look at some of the leading companies who offer EIUL, GIUL, IUL’s in general, and have seen their assets shrink by as much as 50% in a down year.

Jeff Brown January 25, 2013 at 10:07 am

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.

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Greg Turnquist January 25, 2013 at 10:25 am

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.

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Julie H. January 25, 2013 at 3:07 pm

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

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Be Ho August 6, 2013 at 5:00 pm

I would have to disagree with David’s Statement regarding this:
“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.”

I am not biased on any time of policy since I don’t want to limit myself within one market/demand. Universal life was designed for two reasons, one being is to shift the risk away from the insurer to the insured, two is it was designed to capitalized on the high interest rate market in the 70s/80s.
Universal life policies, whether they are fixed, variable, equity indexed or globally indexed, there are several components which if FUNDED CORRECTLY will be permanent, but not completely permanent. Look deep inside the contract/policy of those UL’s and you will see that it clearly states the COI (cost of insurance) goes up every year according to the currently mortality experience but to never go past a specified maximum.
Also in UL’s, you have a couple of different premium amounts for the SAME death benefit. They are NLG, planned, and target. Many people do not know this and often only pay what they “planned.” because running illustrations for the planned premium shows a better monetary value. In the later years when the COI increases drastically due to older age, what they’re paying into the policy is less than the required amount to offset expense charges that are NOT guaranteed and mortality rates/COI that DO INCREASE ANNUALLY. I can go on and on and on about the many downsides of UL’s that many people, including agents do not know or try to ignore the true facts of the policy. However in Whole Life policies, everything is guaranteed and clearly stated in the contract. On the flip side, I DO sell universal life when deemed appropriate. Anyways, here is an article about UL’s in general on Forbes.
One could argue “well that doesn’t happen with EIUL and GIUL!!” Truth is, it doesn’t matter, the fancy lingo is only used to described how the cash value portion of the policy is credited in terms of interest rates, but the structure of how the policy works as a whole is universal across the board.

http://www.forbes.com/sites/investor/2012/09/13/retirement-disaster-looms-for-universal-life-policyholders/

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David Shafer August 7, 2013 at 8:26 am

I agree that the policy needs to be structured correctly. Many, if not most agents do not do this.

I am a little confused about your comment. No where did I imply the the cost of insurance doesn’t go up as one ages. But, again, the structure of all permanent insurance is to overpay in the early years, get a interest credit [dividend, market return, etc. depending on what type of insurance] on that cash value, so that when the insurance costs are high you have cash value and the interest credit pay that cost.

One other misunderstood area is that as the cash value increases the “corridor” between the death benefit and the cash value goes down. Therefore the actual total amount of insurance is going down, keeping insurance costs manageable. This is the achilles heel of variable UL. A bad market year can increase the corridor dramatically increasing insurance costs.

Traditionally, an insurance agent will structure the policy to get the maximum amount of death benefit per premium. Under this arrangement the guarantees on whole life for the death benefit are important and why if death benefit is your only reason for purchasing LI, then whole life is your tool. However, UL has allowed for a different structure to emerge where the death benefit is minimized [as low as IRS rules allow]. This does two very important things. 1st because you are overpaying the actual costs much more, the cash value increases at a dramatically higher rate. Second, because the costs [commissions, insurance costs, etc.] are determined by the amount of death benefit, by lowering that amount the expenses are lowered substantially. This combination creates a very efficient policy with high Internal Rates of Return. You will also note that since your insurance costs are covered in the later years by cash value and the interest credit, a much higher cash value has a much easier time dealing with those higher insurance costs throughout the life cycle of the policy.

Finally, UL’s flexibility allows for the lowering of the death benefit as long as you stay within the IRS rules. This means you can keep the corridor between cash value and death benefit as narrow as possible, keeping insurance costs down.

My illustrations I send to my clients are 40 pages long because all this is a little hard to understand at first and seeing it all [cash value, death benefit, expenses, internal rate of return] laid out numerically by year allows for easier understanding.

My clients and I do not ignore the risks inherent in this product. Exactly the opposite, we explore those risks and accept them. I would say around 25% of my clients create their own spreadsheets and run this product under various environments. I myself give clients multiple illustrations using different assumptions.

My clients are not “average Joe’s” but sophisticated folks that work as engineers, lawyers, doctors, physician assistants, run businesses, scientists, real estate investors, etc. They take their time to understand the product and make an informed decision. They understand the inherent risks and accept them.

By the way, that article you linked might be the single worst article I have read on the subject. How Forbes published that is beyond me. It was first brought to my attention by a client who was laughing at how bad it was.

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David Shafer August 7, 2013 at 8:36 am

I didn’t see the previous comment so wanted to add a little.
You state the average participation rate is 50%. That is factually wrong in the EIUL market.
Participation rate for the products I sell are, and always have been 100% to 140% [lower cap rate].

Contractually the expenses can be increased, but this has never happened in an EIUL product to my knowledge, definitely not by the companies I use. Not even in 2008 and 2009 when the market was really bad. As to companies losing 50% of their assets, I don’t know where you got that from, but again did not happen to the companies I use.

The piece that does move based on the overall environment is the cap rate. This has gone down since 2009 because of the lowering interest rate environment. This is how this product is managed by insurers. When interest rates normalize the cap rates should rise to reflect that.

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Be Ho August 7, 2013 at 3:35 pm

David,

I just want to let you know that I didn’t mean to bash on you or ULs in general. You, are one of the most honest and educated agents who handle UL that I have came across in my career.

Many of the agents I have come across do not fully understand the product and in most cases, sell it @ the NLG or low scheduled premiums to get people to purchase it.

Thumbs up for you!

As far as the companies I have listed, one to name a few is Western Reserve Life. They happened to be a very big competitor in terms of agent force in my local area.

Jeff Brown August 7, 2013 at 9:24 am

The may be the funniest comment thread of the year for me. Thanks so much, David.

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Greg August 7, 2013 at 9:34 am

I see that the Forbe’s article reads:
“The insurance companies set a minimum premium payment based on a policyholder’s age at the time, and then used prevailing returns on stocks and bonds to argue that there would be enough profit on investments to cover both the rising premiums and the guaranteed dividend on the cash value.”

With that as the cornerstone of the whole article, I can tell the whole thing is ridiculous. It presumes setting up a policy with minimum funding, the exact OPPOSITE of what you must do: OVERFUND.

The second hint is that they have little in concrete details. Sure they bandy about what happened in the 80s and 90s regarding interest rates. But there is no discussion on looking at an actual illustration to make their point. Perhaps because it would expose how much this article is based on generalities?

It’s kind of like putting in the minimum to your 401K (1%?), getting the minimum in company match, putting it into some “super stable bond fund”, and then complaining on the day of your retirement that you have next to nothing in purchase power because the fees at up 90% of you thought you would get!

Thanks to Dr. Dave’s writings and ALWAYS having gobs of specifics to examine, I have become really shrewd at spotting when people write articles for/against various investment strategies and embrace or avoid specifics. It drives to write my own articles using as many specifics as possible so people can check my own ramblings.

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Jeff Brown August 7, 2013 at 9:38 am

Greg — As you’re clearly aware, most agents who offer EIULs to their clients don’t know what they’re doing. Imagine how little journalists know after an interview with a ‘pro’ who’s confused themselves.

Reply

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