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At Fleming Financial Services, Inc., our role is to assist our clients in defining and realizing their financial objectives and goals. We work with our clients to implement personalized plans designed for their unique situations. Our areas of concentration are: Retirement planning, Estate and Wealth Transfer strategies, and Business Continuation planning. We emphasize the importance of conducting our business with integrity and professionalism. As a member of PartnersFinancial, an independent national financial services company, we are able to provide access to sophisticated resources for the benefit of our clients. Some of the professionals with our firm are currently registered to conduct business through NFP Securities, Inc. With those additional resources in place, we help facilitate the complex corporate and personal financial decisions our clients must make.
INDEXED UNIVERSAL LIFE: Mechanics and Capabilities - Part 6
Celeste Moya, AVP, Product Management, NFP Life FutureInflated Illustrated Crediting Rates A life insurance illustration is an integral part of the life insurance sales process, as it reflects a set of hypothetical projections depicting how a policy could perform over time, based on the design utilized and the client details (e.g., age, risk class).  An important factor within an IUL illustration is the crediting rate used to project that performance.  Sometimes an inflated crediting rate is used to to create projections that are almost too good to resist from a client perspective; however, this can create unrealistic expectations, and in the majority of these cases, the policy will not ultimately perform as projected, resulting in a dissatisfied client. IUL illustrations are particularly prone to this abuse as they do not fall under any specific illustration restrictions, unlike a fixed UL, which is restricted to current rates, or a VUL, which is subject to the regulation of the Securities and Exchange Commission (SEC). It is important to consider current market conditions and the client’s investment time horizon when deciding on a suitable, realistic crediting rate to illustrate. High Policy Charges Charges associated with any life insurance policy are also an important factor in determining the overall competitiveness of a product. These charges directly affect performance, because if a product has high charges, it may require a better return than like-kind products to offset the increased cost. Charges inside an IUL are generally higher than a fixed UL, in some cases significantly so. This indicates the possibility that, even at a conservative crediting rate, a fixed UL could potentially perform better over time than an IUL. However, some IULs are notable exceptions, and some competitive contracts offer charges similar to the charges found in a fixed UL.  (See “Comparison of Fixed UL and IUL Charges”) Charges with any UL policy are disclosed in the illustration, so it is important for the agent and client to review these charges to make an informed decision. Volatility and Risk Added by Participating Loans Many IULs offer two loan options that allow clients to borrow against the policy values: fixed loans and participating loans. Fixed loans have a fixed loan interest rate charged and a fixed crediting rate on the policy collateral backing the loan. Participating loans have a defined interest rate charge on the loan, but a crediting rate on collateral based on the performance of the index account and subject to the participation limits outlined in the policy. Many insurance companies tie their charged interest rate to the Moody’s Corporate Bond Yield Average; others have a set or declared rate but reserve the right to change that charged rate at their discretion.  In both cases, there is typically a maximum loan interest rate declared by the insurance company and outlined in the policy. The advantage of a participating loan in an IUL is that the policy values that are loaned against continue to earn indexed interest. Additionally, there is the possibility that the credited earnings will outperform loan interest being charged, creating a positive arbitrage in the policy. However, a major disadvantage of a participating loan is the uncertainty and additional volatility it adds to an IUL policy. Both the policy’s crediting rate and the loan interest rate can change and significantly deviate from what is originally illustrated, meaning that the total net cost of the loan is unpredictable.  And, although there is the possibility of positive arbitrage, there is the possibility that the loan rate charged could exceed the policy’s crediting rate, creating a negative arbitrage and causing the client to be upside-down in their life insurance policy. Copyright © 2013 NFP. All rights reserved.