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How do you know if your insurance salesperson has structured your EIUL correctly? April 19, 2009

Posted by shaferfinancial in Finance, Uncategorized.
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My posts on equity indexed universal life insurance policies are fairly popular.  I generally get several people a week contacting me with questions about this product.  One of the hardest thing I do is try to help people understand if their sales person is being up front with them and structuring the EIUL correctly.  Generally, I have found it is not usually set up in the clients interest, instead set up in the insurance agents interest!

There are several issues that need to be correct in order for these policies to accumulate maximum cash values and generally all these things decrease the amount of commission to the agent.  There are also some illustration issues that can cover up the wrong structure.

Here are the issues:

1.  The face value should be minimized down as far as possible without creating a modified endowment contract.  There is little the consumer can do to tell from looking at the policy to know if this is done.  I have done so many of these illustrations that I can pretty much tell just by getting a little information from folks.

2.  Option A or Option B?  Should the face value be set up as increasing [option b] or level [option a]?  Generally, if you are max funding over 5 payments, option B should be the initial set up and it should be changed to option A after the premiums are paid.  For those funding with monthly payments option A should be used.

3.  Rate of return?  The software generally allows the agent to put in any number under a maximum the agent wants to.  This is the speculative rate of return that the purchaser can expect these policies to return.  Most agents use the maximum number.  I use 10% less than the 20 year look back to be conservative.  The product works as advertised using this more conservative number so why pump it up?  Agents do this because they are afraid of another agent using an even higher number or having a better product to offer the consumer.  It is the same reason these same salespeople tell people they will get 10 or 12% from their mutual funds.  They think people won’t buy unless they make their product seem like it will make the client wealthy!  Instead I rather give people a realistic view of what these products can do for them.  It makes for happier customers and a much happier salesperson [me!].

4.  There is a fear from most that if clients learn you are making a good commission from the product that people won’t buy it, so they refuse to disclose when asked.  I always disclose when ask.  And yes I make a good living selling these products!  But if the client doesn’t purchase one of these policies based on my commission, then that is a client that I don’t need to have because they are working under a different set of assumptions that I work under.  For me, I help put my clients in better financial positions by the use of my intellect and abilities and that works as a win-win because I can make a living helping people.  Those that want to work with people who can’t make a living doing this get what they are asking for; poor advice!

5.  Which company to buy the policy from?  I spend much time researching the best products out there for my clients.  Most agents offer up what their managers want them to, instead of what is the best out there.

Bottom line, keep up the phone calls and e-mails, and I will continue to structure these in your best interests, so we have a win-win situation!  I have licenses in many states and can get a license in most so it matters little where you live.

Have a great week and consider an EIUL as a part of your financial strategies.

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Comments»

1. Alphonso - April 19, 2009

Hi Dave. I’ve enjoyed your blog for the past few months. Can you elaborate more on your statement above regarding the best strategy when maxing out your EIUL is to choose Option B until the policy is maxed out and then to switch to option A after the premiums are paid. Just trying to understand how this impacts the policy in terms of death benefit and policy costs.

shaferfinancial - April 20, 2009

Alphonso,

Sure here is the way it works. Commissions paid out are based generally on the face value of insurance policy. Also some fee’s are paid based on the face value of the insurance policy. By choosing option B you have a lower face value in the first few years [how long this last is dependent upon the internal dynamics of the individual policy and how much fees are put into the insurance cost versus the cash value]. So when max funding over 5 payments you can lower the commission paid out and some of the fees which are inside the cost of insurance therefore lowering your overall costs. As soon as you can, usually year 5 you switch the option to A which freezes the insurance amount at that level [most companies allow you to do this and won’t let you do it in a way that turns it into a modified endowment contract]. The rules are somewhat arcane, but the policies I sell make sure you do this without changing the fundamental structure of the contract into the previously mentioned modified endowment contract. Even if you are a few years late in making this change you still come out ahead in the long run. However, if you are paying premiums monthly for a long period of time [over 10 years] to fund this policy then the increase insurance costs catch up with you and you are better off starting off with option A [level insurance amount].
Note this option can be used if for example you get a poor health diagnosis. You switch to option B and your insurance amount will start increasing. So if you live for a few more years, the insurance payout will go up.
Also note that companies put their fees in different places. The Minnesota Life policy I like puts many of their fees inside the cost of insurance, which you are minimizing. Therefore the fees paid are minimized and the cash value can grow faster. Many companies do the opposite and so you pay increasing amounts of fees as your cash value grows.

Hope this helps.

2. Joshua - April 20, 2009

Dave:

These babies are difficult to understand to us common folk without PhD’s and brains the size of the Jupiter. So I’m going to make an official request of you:

Can you please provide us financial weenies with one of the following:

1. A step-by-step example of what an investment would look like in a EIUL policy and list all the fee’s in relation to an investment as if we were really doing one.

OR

2. You could use a service like CommonCraft (http://www.CommonCraft.com) and have them work with you to create such a video for your site.

I’d prefer option two as CommonCraft does an EXCELLENT job of putting things in a way us normal folks can understand.

Thanks Dave!

– Joshua

shaferfinancial - April 21, 2009

Joshua,

I have put it out there, but maybe not all in one post. I will work on a post for you, but it will take a while!

3. Andrew - August 22, 2010

Hello David,
It has been refreshing to read your posts on EIUL in particular but on other topics as well. I am interested in using an EIUL policy as a retirement savings tool. I have only recently been made aware of this type of financial vehicle and have been trying to learn as much as I can about it.
I have corresponded with a couple of local folks who sell these policies(I first heard about the EIULs on their radio program although they never identify the “product” that they are advocating as insurance). They have been a little slow in addressing my more detailed questions and seem more concerned with selling a policy quickly.
Anyway, here is what I would like to be able to do. I would like to set up a policy that I can fund as fast as possible to be reach the break even/growth point as soon as I can. Here are some numbers that might be needed. I am a 43 year old male in good health(prefered). I have $8K-$10K to use to initially fund a policy and would like to look at $250 monthly premiums in addition to that. I have term(10 yr. $250K NY Life) already. The EIUL could be set at whatever level will build cash value the fastest.
The illustrations that I have received have been through OM Life. The agent said their policy worked best for my situation, but they don’t seem to have the greatest ratings.
I appreciate the clearer light that you have shed on this topic and thank you for whatever information you can provide to help me see if this is indeed th way I should go.
-Andrew

shaferfinancial - August 24, 2010

Sent you an e-mail to set up a time to discuss your particular situation.

4. Andrew - August 22, 2010

David,
Another question has come to mind. Is it possible to write a single EIUL policy that covers both spouses with the death benefit going to whichever spouse is the survivor?

Thanks.
Andrew

shaferfinancial - August 24, 2010

Possibly, I will look into the second to die EIUL market.

5. Susan - June 26, 2011

Hi Dave, I have been researching this EIUL policy and listened to a webinar that stated they would walk me thru the set up of the policy to see if it was something I would be interested with no obligation and then when the agent called me to review the information stated their company would charge me $500 to draw up the proposal “blueprint” of the policy and get the medical exams performed. I feel like it’s a bait and switch since they stated no money up front and no obligation during the webinar I listened to. Is this fee common with most agents? It’s been weighing heavily on me and what questions do I ask a prospective agent to know they have my best interests in mind and are setting up the policy correctly? Said they use only the best companies, like Minnesota Life. When I asked questions he said it depending on how much I invested and what type of policy so I would have to move further and pay the $500 to get a clear answer and understanding. Any help with this would be greatly appreciated. Thank you, Susan

6. Sam - September 7, 2012

Hi David, if you have a client who is making monthley payments on IUL for max cash value wouldn’t it be better to go with option B & then switch option a when the client turns 65

shaferfinancial - September 7, 2012

Yes, with one caveat. It needs to be set up like this from the beginning.

7. Quincy - July 28, 2013

Hi Dave….Is it correct that the cash value in the EIUL can never be larger than the insurance coverage amount ? Thanks


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