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EIUL Update February 23, 2016

Posted by shaferfinancial in Uncategorized.

Over the last year most of my clients achieved positive results.  This in light of a stock market that has gone nowhere with the S&P 500 actually slightly negative. Even more important is that with stock market watchers on edge, expecting negative results, those clients and myself who have EIULs know that whatever the market does our losses are capped at 0.  For those who have retirement looking at them in the mirror this has to be a very comfortable position.  For those who have decades to retirement, the good night sleep or the ability to completely ignore the noise has to be worth it.

In general, EIULs have continued to become an important alternative for thinking folks who want some protection from market forces.  It again was the fastest growing financial product.  During the last year, Wall Street and Whole Life forces ganged up to get the SEC to change the illustrations required.  This change produces illustrations that are grossly more conservative than before.  Note, the SEC didn’t force mutual fund sellers or whole life sellers to become more conservative in their marketing materials. Despite this more conservative illustration regulation, EIULS continued their popularity gain. Note that with the long term lower interest rate environment, the worse possible for life insurers, EIULs continue to preform as they were designed to do.  And, the insurers that sell them continue to be financial stable.  We are now starting the 3rd decade since the first EIULs were introduced, and everything the critics said would happen, hasn’t.  Something that can’t be said about Mutual Funds, Variable Universal Life, Whole Life, etc.  Given what has happened over the last 20 years to the economy, the fact that the stock indexes are barely above where they were 20 years ago, given that the historic returns in EIULs have dramatically outstripped mutual funds, this product has fully proved itself.

I get asked all the time why this product isn’t more well known?  The answer is very simply that Wall Street + the government has created a propaganda system that is all encompassing when it comes to retirement planning.  But rest assured that Wall Street and the Whole Life insurers are very cognizant of the power of EIULs for retirement income.  Hence, the new illustration rules.






1. David - February 27, 2016

I’m not in favor of illustration rules, but let’s be honest here. Not all EIULs panned out. And, not all of them will in the future. There have been some superstars in the industry. But, there are superstars in every industry.

Had you bought an AmerUs product, which at one time was the “gold standard” in the IUL market, you would have seen your policies eroded by the Aviva takeover.

Some EIUL companies that are employing dynamic hedging strategies, are putting undisclosed (or not immediately apparent) risks into their policies.

By design, ALL UL policies are riskier than whole life, too. And, it’s because of the moving parts and non-guaranteed elements in the policy. I’m not saying that’s inherently bad, but they are what they are.

I think it’s time for the UL industry to at least acknowledge it and stop pretending their risk profile is on par with whole life. It’s not. And, it IS in fact possible to have a 0% crediting rate and have your cash values go backwards in an IUL due to the ongoing COI. I’ve seen it happen.

Now, is that a big deal? For the most part, I don’t think so.

I don’t think this is something that is the norm, and it probably shouldn’t be unless or until the underlying call options become prohibitively expensive or until dynamic hedging becomes the norm and insurers start missing their targets.

If you own an IUL, you have a moderately risky insurance policy, which is fine. It’s not nearly as risky as a VUL, but also not as safe as whole life.

shaferfinancial - February 27, 2016

Funny, I own a policy that was the Americus product you speak of. And it has performed exactly as it was designed to do. Now is it a superstar EIUL in today’s market? No. But it sure has beaten the pants off of whole life. Of course you probably realize that whole life is a different tool than universal life. They both do a good job at what they are designed to do. Your whole discussion of risk, leaves this out. We both agree that EIULs are far less risky than VULs. There is no free lunch and just like fixed annuities, whole life trades overall return for guarantees. That is certainly appropriate for some people looking for guaranteed death protection. I have blogged on this fact. Thanks for the comment made in a reasonable way.

David - February 28, 2016

You mean AmerUs?

They did not perform as originally illustrated.

They did conform to the terms of the contract, however. When Aviva bought out AmerUs, one of the first things they did was to lower the cap rates, and then introduced their own product line. Existing customers had to deal with permanently lowered expectations. I was a GA for (formerly) Banker’s Life of NY when this happened (which was the NY subsidiary of AmerUs, then Aviva).

Yes, whole life is a different tool. It has its own limitations too as you point out. So do EIULs–many limitations. So many that Jason Konopik, an actuary who has helped design a lot of the EIULs in the marketplace has openly warned agents that because EIULs are not guaranteed products that insurers will not lose money on them. Which is why you have to be really careful about how you sell them, who you do business with and how you position the sale.

But, I respectfully disagree that whole life trades all of its return for guarantees.

My own whole life cash value growth equals some EIUL CV growth rates due to the term blending and PUAR and the way some EIUL carriers choose to handle their cap and par rates.

Is there more potential in an EIUL? Certainly. But, there is also more risk due to the inherent risk-sharing nature of all UL contracts and the nature of the embedded index call options (and pricing of those options). And if the insurer chooses to use imperfect hedging (dynamic hedging), that further increases the risk. This is something I almost never hear any insurance professional admit.

That doesn’t make ULs bad. But, in the interest of full disclosure, I think it’s important to acknowledge.

I don’t want this to become a whole life vs EIUL discussion. At the same time, this is often how EIULs are positioned.

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