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For Agent Use Only / Not for Public Distribution cn57038122010 Solutions That Leave an Impression In the Wholesale Brokerage World.

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Presentation on theme: "For Agent Use Only / Not for Public Distribution cn57038122010 Solutions That Leave an Impression In the Wholesale Brokerage World."— Presentation transcript:

1 For Agent Use Only / Not for Public Distribution cn57038122010 Solutions That Leave an Impression In the Wholesale Brokerage World

2 For Agent Use Only / Not for Public Distribution cn57038122010 Senior Vice President – Zenith Marketing Group, Inc. Michael Pinkans, CFA Indexed Universal Life Insurance – A broad discussion of how companies generally Design Indexed Universal Life Insurance policies

3 For Agent Use Only / Not for Public Distribution cn57038122010 What We’ll Cover History of Indexed Universal Life (IUL) What is Indexed Life? Regulatory environment Indexed Life mechanics Company Positioning/Gotcha’s Q&A

4 For Agent Use Only / Not for Public Distribution cn57038122010 History of IUL Developed in mid-90’s as EIUL Sales slow until 2002 –Accelerated since ‘04 –Over 30 companies –About $500 million sales (IA’s about $25B) Why? –VUL below 0% returns? –No variable licensing –Design features – variable loans –Declining WL dividend scales and UL crediting rates –Companies with IA’s – easier transition

5 For Agent Use Only / Not for Public Distribution cn57038122010 Cautions Producers may have migrated to IUL to avoid securities licenses – “next best thing” –But, IUL is closer to fixed UL, not VUL Goal of IUL is to “beat” current assumption UL rates by 150-200 bps long term

6 For Agent Use Only / Not for Public Distribution cn57038122010 Sales Applications Anytime CASH ACCUMULATION/DISTRIBUTION is important –Pension Max, College Funding, Personal Retirement, ROTH Alternative Not as a term alternative – that’s the UL NLG marketplace Not useful in an ILIT

7 For Agent Use Only / Not for Public Distribution cn57038122010 What is Indexed Life? Combines features & benefits of traditional UL but uses a different crediting method for determining interest Interest credited is linked (in part) to movement of a stock market index over a period of time Potential to earn interest based on increases, if any, in an equity index, while offering minimum interest rate guarantees (may be 0%, 1%, 2% or slightly higher) Potential for higher average crediting rates than more traditional UL

8 For Agent Use Only / Not for Public Distribution cn57038122010 What is Indexed Life? Potential for greater cash value & death benefit than more traditional UL More cash value protection against market declines than VUL So:

9 For Agent Use Only / Not for Public Distribution cn57038122010 What is Indexed Life? IT IS NOT… IT IS NOT an investment in the stock market and does not directly participate in any stock, equity or bond investments IT IS NOT the client buying or participating directly in the index IT IS NOT a policy where cash value is based upon performance of client selected sub-accounts (variable life) Does NOT offer FULL Upside Potential

10 For Agent Use Only / Not for Public Distribution cn57038122010 What is Indexed Life? A Middle Ground… Traditional ULIndexed LifeVUL Not better… different

11 For Agent Use Only / Not for Public Distribution cn57038122010 Why The Time May Be Right For IUL Current focus on accumulation and distribution Pricing changes to no lapse guarantee UL and term rates Customers more comfortable with an index Unattractive rates on current assumption UL and WL

12 For Agent Use Only / Not for Public Distribution cn57038122010 Indexed UL Versus Indexed Annuities Will be differences in how contract works Customers must understand the guarantees in each contract –Must stronger in annuities Lower caps and participation ratesLower caps and participation rates

13 For Agent Use Only / Not for Public Distribution cn57038122010 Regulatory Environment Is an Equity Indexed Annuity a Security? Is an Indexed Life? –Depends in part on how the product is positioned, presented and sold Some B/D’s don’t allow the sale; others have approved lists NASD 05-50

14 For Agent Use Only / Not for Public Distribution cn57038122010 Regulatory Environment Actual claims mentioned in NASD 05-50 –“What if the market goes down and you would lose nothing? The market goes up- you gain?” –“A WIN/WIN Investment vehicle!” –“Growth Potential without Market Risk.” Inappropriate Sales Language

15 For Agent Use Only / Not for Public Distribution cn57038122010 Indexed Life Mechanics Interest Crediting Standard & Poor's 500 ® Composite Stock Price Index Dow Jones Industrial Average Index NASDAQ-100 Lehman US Aggregate US Treasury Indexes Hang Seng Index Standard & Poor’s ®,” " S&P ®," “S&P 500 ®,” “Standard & Poor’s 500,” and “500” are trademarks of The McGraw-Hill Companies, Inc. and have been licensed for use by Security Life of Denver Insurance Company. No product is sponsored, endorsed, sold or promoted by Standard & Poor’s and Standard & Poor’s makes no representation regarding the advisability of purchasing any product. Hang Seng Index – An index of the largest and most liquid stocks listed on the Stock Exchange of Hong Kong. It does not reflect dividends payable on the underlying stocks. Potential to earn interest based in part on the movements of an index such as:

16 For Agent Use Only / Not for Public Distribution cn57038122010 Indexed Life Mechanics Interest Crediting The index is looked at on a certain date; that is the beginning of that particular index segment period At end of index segment period: –if index is higher, the policy owner can earn additional interest paid by the insurance company –if the index stays flat or declines, cash value is still credited with a minimum guaranteed interest rate Index Segment Period Jan 1 Dec 31

17 For Agent Use Only / Not for Public Distribution cn57038122010 Indexed Life Mechanics Policy Blocks Traditional UL premiums can occur at any time –What if indexed universal life premiums come in the middle of the index period? Premium blocks –Portion of account value applied to a particular crediting period

18 For Agent Use Only / Not for Public Distribution cn57038122010 Indexed Life Mechanics Interest Crediting The values of an index vary daily & are not predictable Cash value growth does not reflect dividends on the index Cash value will likely not reflect entire increase of index

19 For Agent Use Only / Not for Public Distribution cn57038122010 Indexed Life Mechanics Point to Point (Annual Reset Crediting) –Most common Index Credit May use one or a combination of the following crediting methods to determine amounts credited to the cash value: –Participation rate –Rate Spreads or Asset Fees –Caps Indexing Methods

20 For Agent Use Only / Not for Public Distribution cn57038122010 Indexed Life Mechanics Point to Point Participation Point to Point: time period over which index is being measured. Participation: percentage that determines how much of the index’s increase is reflected in the indexed interest –Acts as one factor in determining a ceiling on crediting rate of the policy

21 For Agent Use Only / Not for Public Distribution cn57038122010 Indexed Life Mechanics Point to Point Participation 100% Participation Index increases 12% Client gets 12% index interest –Subject to any other limits The hypothetical investment results are for illustrative purposes only and should not be deemed a representation of past or future results. This example does not represent any specific product, nor does it reflect sales charges or other expenses that may be required for some investments. 100% Participation

22 For Agent Use Only / Not for Public Distribution cn57038122010 Indexed Life Mechanics Point to Point Participation 100% Participation Index decreases 1.5% Client gets minimum guarantee The hypothetical investment results are for illustrative purposes only and should not be deemed a representation of past or future results. This example does not represent any specific product, nor does it reflect sales charges or other expenses that may be required for some investments. Minimum Guarantee

23 For Agent Use Only / Not for Public Distribution cn57038122010 Indexed Life Mechanics Point to Point Participation 50% Participation Index increases 12% Client gets 6% index interest –Subject to any other limits The hypothetical investment results are for illustrative purposes only and should not be deemed a representation of past or future results. This example does not represent any specific product, nor does it reflect sales charges or other expenses that may be required for some investments. 100% Participation 50% Participation

24 For Agent Use Only / Not for Public Distribution cn57038122010 Indexed Life Mechanics Point to Point Participation with Cap Cap: upper limit of index increase that can be applied to the policy Often used in conjunction with a participation rate Establishes maximum amount of increase in the index that can be factored into index interest

25 For Agent Use Only / Not for Public Distribution cn57038122010 Indexed Life Mechanics Point to Point Participation with Cap 50% Participation Index increases 30% 30% increase with 50% participation is 15% 10% Cap applied to 15% Client gets 10% index interest –Subject to any other limits The hypothetical investment results are for illustrative purposes only and should not be deemed a representation of past or future results. This example does not represent any specific product, nor does it reflect sales charges or other expenses that may be required for some investments. 50% Participation 10% Cap

26 For Agent Use Only / Not for Public Distribution cn57038122010 Indexed Life Mechanics Monthly Average Index Average of index from point "A" through point "B“ Often monthly, but can be annual over multiple years The hypothetical investment results are for illustrative purposes only and should not be deemed a representation of past or future results. This example does not represent any specific product, nor does it reflect sales charges or other expenses that may be required for some investments. Average Rate

27 For Agent Use Only / Not for Public Distribution cn57038122010 Indexed Life Mechanics Which is better? A lower 50% participation rate and high 15% cap? –50% of 12% = 6% A high 100% participation rate and a lower 10% cap? –100% of 12% = 12% capped @ 10% The hypothetical investment results are for illustrative purposes only and should not be deemed a representation of past or future results. This example does not represent any specific product, nor does it reflect sales charges or other expenses that may be required for some investments. Question: With 12% increase in an index, is client better off with: 50% Participation 15% Cap 10% Cap 100% Participation

28 For Agent Use Only / Not for Public Distribution cn57038122010 Indexed Life Mechanics Bringing it all together Hypothetical example –50% Participation rate –12% cap –1% minimum guarantee –Cash Value = $1,000 –Index increases 20% –20% increase x 50% Part. Rate = 10% –End of year 1 Cash Value = $1,100 Less any fees and chargesLess any fees and charges Year 1 – Index increases

29 For Agent Use Only / Not for Public Distribution cn57038122010 Indexed Life Mechanics Bringing it all together Hypothetical example continued –50% Participation rate –12% cap –1% minimum guarantee –Cash Value = $1,100 Ignoring any fees and chargesIgnoring any fees and charges –Index drops 10% –1% minimum guarantee credited to policy –End of year 2 Cash Value = $1,111 Again, less any fees and chargesAgain, less any fees and charges Year 2 – Index Decreases

30 For Agent Use Only / Not for Public Distribution cn57038122010 Other Crediting Strategies Can be daily, monthly, or annual basis (multiyear) Each day, or month, or year is a factor in the index creating value Averaging more useful in a volatile environment –Overall point-to-point outperforms If not point-to-point then some form of averaging

31 For Agent Use Only / Not for Public Distribution cn57038122010 Indexed Life Mechanics Illustrated Rate Can be a set rate however it’s usually determined by looking back at past history of Index over a certain period. –Can be confusing Does 8% always beat 7% illustrated rate?Does 8% always beat 7% illustrated rate?

32 For Agent Use Only / Not for Public Distribution cn57038122010CompanyPolicy Indexed Crediting Rate Utilized Guaranteed Crediting Rate Level DB Current Accum Value Year 5 Level DB Current CV (net) Year 5 Level DB Current Accum Value Year 30 Level DB Current Accum Value Year 40 Level DB IRR Current Accum Year 40 Current Level Death Benefit Year 40 Current Increasing DB Year 40 IRR Current Increasin g DB Year 40 AIG American General Life Platinum Provider Ultra 500 6.58%2.00%29,61521,365532,3361,080,8315.50%1,091,640808,5104.35% AIG American General Life Elite Index UL 2004 7.16%1.00%29,69221,442585,9021,242,0346.04%1,254,454931,7684.92% AIG American General Life AIG Elite Global IUL 10.20%2.50%N/RN/RN/RN/RN/RN/RN/RN/R Allianz Life GenDex II 9.29%*2.00%28,84216,942905,7892,355,8938.42%2,379,4521,615,9657.03% Aviva Life and Annuity Co. Lifetime Builder 7.95%2.00%29,89021,424663,3871,568,8846.92%1,600,2611,023,3485.29% Aviva Life and Annuity Co. Advantage Builder 7.55%2.00%37,27128,334695,1811,565,6136.91%1,596,9251,209,2425.93% Aviva-Indianapolis Life Vista Advantage 7.55%2.00%37,27128,334695,1811,565,6136.91%1,596,9251,209,2425.93% Aviva-Indianapolis Life Vista Lifetime 7.95%2.00%29,89021,424663,3871,568,8846.92%1,600,2611,023,3485.29% Aviva Life and Annuity Co. of NY Lifetime Builder 7.95%2.00%29,89021,527663,3871,568,8846.92%1,600,2610N/A Aviva Life and Annuity Co. of NY Empire Solution UL 7.55%2.00%37,27128,334695,1811,565,6136.91%1,596,9251,209,2425.93% Bankers Life Innovative Life EIUL 3.12%3.00%31,70622,926262,058430,1051.68%421,7320N/A Conseco Life Asset Builder Plus 100% EIAV 4.80%2.00%31,50021,249406,988777,0144.19%784,785320,6930.32% ING "Security Life of Denver" Indexed Strategic Accumulator UL 7.36%3.00%30,17530,175528,3511,143,6885.72%1,155,125653,4643.48% Life Insurance Company of the SW SecurePlus Paragon 9.70%2.50%29,14322,786777,1931,992,9387.81%2,012,867819,3134.41% Lincoln Benefit Life Ultra Index 8.00%2.00%36,72127,726717,5281,603,3227.00%1,619,3561,038,7775.35% Lincoln National Life Lincoln LifeElements(sm) IUL 8.00% 1.00% up to attained age 100; 3.00% thereafter. 30,24923,976613,7321,353,4316.36%1,366,966966,4085.06% Midland National Life XL-DB8.40%3.00%35,09227,782758,1821,858,9517.55%1,877,5411,091,6325.54% XL-CV8.40%3.00%30,71221,179712,5411,748,3937.33%1,765,876875,9344.67% XL-EC8.4

33 For Agent Use Only / Not for Public Distribution cn57038122010 12/31 Published Date S&P 500  Historical Performance Date S&P 500 Value Change Value % Change Date S&P 500 Value Change Value % Change 12/31/84167.2512/31/97970.43+31.0% 12/31/85211.25+26.3%12/31/981229.23+26.7% 12/31/86242.17+14.6%12/31/991469.25+19.5% 12/31/87247.08+2.0%12/31/001320.28-10.1% 12/31/88277.72+12.4%12/31/011144.89-13.0% 12/31/89353.40+27.3%12/31/02879.82-23.4% 12/31/90330.22-6.6%12/31/031111.92+26.4% 12/31/91417.09+26.3%12/31/041211.92+9.0% 12/31/92435.71+4.5%12/31/051248+3.0% 12/31/93466.45+7.1%12/31/061408+12.8% 12/31/94459.27+1.5%12/31/071485+5.5% 12/31/95615.93+34.1%12/31/08903-33.8% 12/31/96740.74+20.3%12/31/091115+23.5% Past performance is not indicative of future performance.

34 For Agent Use Only / Not for Public Distribution cn57038122010 Who Buys on 12/31? One of the difficulties customers will have with IUL is trying to track performance online, WSJ, etc. –Performance on S&P generally measured quarterly/annually (i.e. 12/31) –Monies aren’t invested into the indexed accounts until it’s “swept” by the insurance company. This gives companies economies of scale in buying optionsThis gives companies economies of scale in buying options Can be a competitive advantageCan be a competitive advantage No daily valuation like variable lifeNo daily valuation like variable life Companies sweep monthly, quarterly, perhaps even annually –Until sweep monies remain in a fixed account. Caution – producers must know sweep dates

35 For Agent Use Only / Not for Public Distribution cn57038122010 Special Features - IUL Variable or Synthetic Loan Allows all indexed dollars to Participate in Performance of S&P 500  –Allows the opportunity for the S&P 500 to outperform the VLR being charged. (Loan interest is charged annually.) Heavily marketed by some carriers –More loans = more cash value accumulation –Easy to out-illustrate the competition Loan amount does not reduce the Indexed Account values

36 For Agent Use Only / Not for Public Distribution cn57038122010 Sales Applications Anytime cash accumulation and/or distribution is important Premium financing Minimum premium to solve for 0 cash – risky –Should really overfund contract –Have a longer time horizon –Be willing to give up some guarantees for upside potential –Absolutely want some guarantees though

37 For Agent Use Only / Not for Public Distribution cn57038122010 Target Customers Generally under age 65 Longer term time horizon Moderate risk tolerance –Willing to assume more than UL risk but less than VUL risk Moderate to heavy funding capability

38 For Agent Use Only / Not for Public Distribution cn57038122010 Competitive Landscape Illustrated/Indexed Rate –Over 9% currently Loan structure Crediting strategies –Caps –Participation Rates –Multiple Indices Guaranteed Rates Unique Features/Benefits/Riders Performance Drivers

39 For Agent Use Only / Not for Public Distribution cn57038122010 Common Questions If the participation rate is 100% and the cap is 12% and the index returns 25% didn’t the insurance company make a lot more money? –No, the insurance company matches assets & liabilities and buys options on the index (buying an option providing for a possible 12% payout). The seller of the option made the excess return. The insurance company made its expected return on investment – nothing more.

40 For Agent Use Only / Not for Public Distribution cn57038122010 Common Questions Is a variable/synthetic loan bad? –No, but it must be disclosed to the customer with the pros/cons. Pros – customer bought into the indexing strategy when buying policy. Strategy may still make sense. Monies stay in indexed account. Will out illustrate any other option and probably even variable life.Pros – customer bought into the indexing strategy when buying policy. Strategy may still make sense. Monies stay in indexed account. Will out illustrate any other option and probably even variable life. Cons – Illustration always shows a “positive” spread. Actual cost of loan could be illustrated rate minus guaranteed credited rate in any given year. 8%?Cons – Illustration always shows a “positive” spread. Actual cost of loan could be illustrated rate minus guaranteed credited rate in any given year. 8%?

41 For Agent Use Only / Not for Public Distribution cn57038122010 Common Questions There’s too many moving parts to IUL. It seems like the issuing company always has an “out” by changing caps, participation rates, etc. Isn’t it too confusing? –Since IUL is a universal life contract, there is disclosure on minimums, guarantees, etc. on the illustration. In fact there is more disclosure than a contract like whole life. In every product line (except perhaps for no lapse guarantee UL and no dividend WL), the insurance company has levers to change based on experience.

42 For Agent Use Only / Not for Public Distribution cn57038122010 Common Questions Which index is best to use? –It really depends on how the customer will think the market will act… Linear-up point-to-point betterLinear-up point-to-point better Volatile market averaging betterVolatile market averaging better –Averaging will generally credit something –Point-to-Point strategies generally better 2/3rds of the time

43 For Agent Use Only / Not for Public Distribution cn57038122010 Common Questions Why aren’t the caps and participation rates the same for a company’s IA’s and IUL contract? –Generally, caps and participation rates will be higher for IUL than for IAs because: –The guarantees are stronger on IAs (i.e. 3% on 90%) – less money to buy options –The investment horizon for IULs is longer allowing lower cost option buying A few more percent of premium available to buy options with IUL contractsA few more percent of premium available to buy options with IUL contracts For Bramco Use Only.

44 For Agent Use Only / Not for Public Distribution cn57038122010 Common Questions Isn’t IUL the perfect product – no downside risk but upside market participation? –No, IUL is an additive product but doesn’t replace UL or VUL. It’s in between. Base guarantees lower than UL and less upside potential than VUL. This contract should never be compared to VUL – really only fixed UL as the performance will never match the unlimited upside potential of VUL.

45 For Agent Use Only / Not for Public Distribution cn57038122010 Common Questions Does the producer/customer really understand all the moving parts of IUL and the positioning of the contract? –Probably not. That’s why there’s such an opportunity for our firms – provide the unbiased advice and sell the best contract.

46 For Agent Use Only / Not for Public Distribution cn57038122010 RankCompanyProduct Annual Premium Assumed Rate Cash Value Year 10 Cash Value Year 20 Cash Value Year 30 Target Premium Notes 1 Lincoln Benefit Life Ultra Index $5,9648.00%$53,701$153,357$317,976$9,170 2 North American Builder IUL *** $6,0758.61%$15,195$105,079$242,243$15,7701 3 North American Builder IUL **** $6,1268.61%$15,983$107,812$249,838$15,7702 4 Aviva Life & Annuity Advantage Builder II $6,1379.00%$41,131$132,924$270,966$7,850 5 American General Elite Index UL $6,4026.93%$28,194$135,203$269,827$9,720 6 North American Guarantee Builder IUL *** $6,6098.61%$17,910$107,576$244,341$8,4101 7 North American Guarantee Builder IUL **** $6,6608.61%$18,695$110,302$251,917$8,4102 8 Aviva Life & Annuity of NY Empire Solution II * $6,9937.95%$52,272$156,955$304,792$7,850 9 ING Security Life of Denver ING IUL-CV ** ^ $8,7877.94%$42,435$144,307$303,679$18,0003 10 American National Indexed Universal Life $9,010 for 4 years; $7,238 thereafter 8.25%$35,208$147,902$307,8312 11 Lincoln Financial LifeReserve Indexed UL $9,8768.00%$77,702$202,028$368,910$11,1002 Male, 45, Pref. NS $1,000,000 Premium Solve to Endow; Pay All Years Notes: 1 - endow at age 120 2 - endow at age 100 2 - endow at age 100 3 - endow at age 121 3 - endow at age 121

47 For Agent Use Only / Not for Public Distribution cn57038122010 Sample Carriers Accounts – Interest based on the best-performing two out of three international indices based on a 5-year, or 1-year point-to-point term (75%/25%). –S&P 500 –Dow Jones EURO STOXX 50 –Hang Seng Fixed loans available Illustrates 20 year look back, 55% participation, no cap Sweeps annually 3% annual guarantee Marketing – Foreign participation Customer doesn’t know performance until after the 5th year if 5-year selected AIG Elite Global Plus IUL

48 For Agent Use Only / Not for Public Distribution cn57038122010 Sample Carriers Accounts –S&P 500 Fixed & variable loans available Illustrates at 8.25% Sweeps 1st of every month 2.5% annual guarantee Marketing – CI rider; competes against “sizzle” contracts ANICO

49 For Agent Use Only / Not for Public Distribution cn57038122010 Sample Carriers Account –One year point-to-point based on S&P 500 –Swept 15th every month –100% participation rate guaranteed Fixed loans only 0% annual guarantee but 2% guarantee on surrender or death Illustrates at 8% (also provides avg of S&P 500 over 30 years, 15 years, plus highest and lowest one year change Overloan protection Marketing – strong fixed account (close to current assumption UL); full surrender charge adjustment rider Lincoln Benefit Life – Ultra Index

50 For Agent Use Only / Not for Public Distribution cn57038122010 Sample Carriers Part of Mass Affluent Product Line –Disability Rider –ABR for terminal and chronic illness Accounts –One year point-to-point –One year monthly cap –One year monthly average Fixed and Variable loans available Illustrates at 8% Overloan protection Sweeps quarterly 1% annual guarantee 9 year surrender Marketing – a package sale for mass affluent Lincoln LifeReserve Indexed UL

51 For Agent Use Only / Not for Public Distribution cn57038122010 Sample Carriers S&P 500 - annual point-to-point Swept monthly on 28th Illustrated rate 7.83% (20 year look back; 10% cap) 3% annual guarantee Fixed loans Adjustable Term Rider (ATR) Marketing – can build higher early cash value – no surrender charges in any year; refund of sales charges in the first 3 years (current basis); hypo projections – 15 high and 15 low years, premium financing. ING – Indexed Universal Life

52 For Agent Use Only / Not for Public Distribution cn57038122010 Summary This is not a variable product Your client is not invested in the market or the index The index is merely a tool used as a component in the calculation of the interest rate credited to the policy Educate your clients about Indexed Life products Remember

53 For Agent Use Only / Not for Public Distribution cn57038122010 Indexed Universal Life Insurance Questions & Answers


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