Selecting the Appropriate
Indexed Life Insurance Policy
When selecting an equity-index universal life
insurance policy, there are a number of things you should
consider before buying a policy. Don’t make a decision
based on what an individual insurance agent says without
thoroughly investigating all potential options. Seeking
a second opinion from another insurance professional
is always a useful tool in making sure you actually understand
what you are buying. Finally, make sure that you carefully
scrutinize each of the items below then choose the policy
that best meets your needs.
Insurance Company Integrity and Independent Financial
Ratings
Obtaining a financially strong insurance company with a history of treating its policyholder’s with integrity is especially important when buying an equity-indexed life policy. Economic variables such as interest rates, bond yields and option costs will change dramatically over time and insurance companies have to adapt to these changes. With indexed life, these economic changes can have adverse effects on cap rates and index credits which can significantly affect cash value growth. Companies that are financially strong with good track records are much more likely to continue to credit their policyholders with fair interest rates and cap rates in uncertain economic conditions. In the long run, with equity indexed life, the policy’s performance will be impacted more by the quality of the insurance company than the performance of a stock index.
A company’s reputation with respect to its treatment of its policyholders is of crucial importance in making the right indexed life policy choice. Before making a final decision on any insurance policy, it is a good idea to investigate the history of the insurance company with respect to interest rate and policy changes. By comparing the historical performance of each insurance company during changing economic conditions, you can get an understanding of their philosophy and how they might react in the future. Identifying the companies with the best track records of results will help you select the policy that will likely perform better over time.
Financial ratings for most insurance companies are available with one or more of the independent ratings services. These services include AM Best, , . Each of the independent rating services has its own criteria for ranking an insurance company. You may also visit the websites of each of these services or you can contact MEG and we can provide the financial ratings of any insurance company. When you obtain a quote for either term life insurance or guaranteed universal life insurance, you will see the AM Best rating for each company listed. We recommend using companies that have at least an “A” rating with AM Best but prefer “A+”.
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Life Insurance Policy Illustration Integrity
After insurance company integrity and financial strength, life insurance policy illustration integrity is likely the most important factor in selecting the right equity indexed universal life insurance policy. The first thing to note about any life insurance illustration is that it is a marketing tool designed to explain the basics of the policy and is in no way a guarantee of future performance. In fact, policy illustrations are advertising and promotion materials designed to sell more insurance. Comparing policies based on illustrations alone is a dangerous proposition and likely to result in the incorrect policy choice.
As discussed, indexed universal life insurance has many non-guaranteed variables that will change over time. These variables include flexible premiums, interest rate fluctuations, cap rate changes, and costs of insurance changes. Any or all of these factors can have a dramatic affect on how a policy will perform in the future. A life insurance policy illustration has no way of showing these changes and therefore can only offer projections and guarantees based on today’s circumstances moving forward. These projections will most certainly be different than what happens in reality. Don’t make the mistake of putting too much emphasis on illustrated projections.
The best approach to determining the integrity of an equity indexed policy illustration is to look at and compare the participation rate, the projected index credit rate, and most importantly the cap rate. Most policies have guaranteed participation rates of 100% so beware if the policy’s participation rate can be changed. If the participation rate is not guaranteed, the insurance company can significantly reduce your upside cash growth potential by reducing this rate. Another important factor to scrutinize is the index interest credit projected. The index credit is entirely variable and based on the upward movement of a stock index. Most companies are illustrating a projected index interest credit of around 8% depending on the specific stock index. This rate is based on the historical averages only and is no way an indication of future performance. In fact there will be periods when the given index is negative for an index segment and will receive no interest credits. Make sure that when comparing EIUL illustrations, the index interest credit rates illustrated are equal. Additionally, if a company is illustrating an index rate that varies significantly from its competitors there may be an integrity issue.
Finally, the cap rates illustrated must be realistic. As discussed in the section covering call options and derivatives, cap rates are determined based on the insurance company’s ability to negotiate costs for these options. Cap rates vary by insurer but on average are around 10-14%. Pay special attention to those companies that are offering cap rates above these levels. The likelihood is that they are paying a significantly higher price for their call options and may not be able to maintain those cap rates in the future. As soon as the cap rate is reduced, the illustration that you based your purchasing decision on becomes worthless. Make sure the insurance company you select has integrity and offers realistic illustration assumptions.
Life Underwriting and Insurability
Underwriting is the process where the insurance company reviews your health and medical history, avocations, MVR, hobbies and lifestyle issues to determine the risk of insuring you at a given rate. Each insurance company has different underwriting criteria that are used to evaluate a given risk. Click here to see a generic life underwriting guide that provides the criteria insurance companies use to determine your health class. Because each company has their own specific underwriting guidelines, the choice of insurance policies will be affected by the way each respective company evaluates your health.
Underwriting issues can have a significant impact
on policy pricing among competing companies. Small
things like a family history of heart disease or cancer
may increase the rate by 40 % with Company A but may
not have any impact at all on Company B’s rate.
An experienced agent is crucial in helping you select
the insurance company that will provide the most favorable
risk review based on your specific underwriting circumstances.
For more details, you can click
here to complete a brief qualifying questionnaire . Once completed, you
can compare your answers to the generic
life underwriting guide or call our office
toll free at (877) 583-3955 and an insurance professional will help you identify
insurance companies that will offer you the best possible
health class.
Equity Indexed Insurance Policy Features
Before making a decision to buy
indexed universal life insurance, policy features should
be compared
to determine the right policy based on your given objectives.
Some of the key policy considerations include choice
of index account options, choice
of index interest crediting methods, choice
of fixed or variable loan rates, optional
index segment periods, and death
benefit guarantee options. Understanding the
features of each policy and the options they present,
will help you
select the best policy.
Index account options
The
primary index account option offered by all insurance
companies to calculate
indexed credits is the S & P
500 Index® (1).
However, there is one insurer that also offers
the Dow Jones Industrial Average (2) and
the NASDAQ-100
Index® (3) as
additional options. Each of these indices is
made up of different companies and measures
a slightly different mix of industries. Therefore,
the actual performance of each index will be
slightly different. Make sure you choose the
index account
option that best fits your overall goals.
Choice of index interest crediting
methods
The index crediting method
is the process used to determine the actual index credit
at
the end
of an index segment. There are basically two index
crediting methods utilized by companies offering
indexed life: the annual
point-to-point method and
the daily
averaging method.
Most companies use the annual point-to-point method to calculate the index interest crediting rate. The annual point-to-point method records the beginning equity index value which is then compared to the ending equity index value at the end of the index period. If the ending index value is higher, interest is credited annually based on the percentage change subject to the participation rate and growth cap. If the ending index value is lower then no interest is credited. For more information on how to calculate the annual point-to-point method see "How an equity indexed universal policy works."
The daily averaging method is used by only a few companies. It takes the average daily indexed value over the entire index period and compares this average with the beginning index value at the first day of the index segment. If the average indexed value over the index period is greater than the beginning index value, interest is credited to the cash value based on the percentage change subject to the participation rate only as there is no cap with daily averaging. If the ending index value is lower, no interest will be credited.
There is no guarantee that one crediting method will return a higher interest credit than the other. Therefore, it is important for you to carefully review both options and compare examples of each given your specific goals and objectives.
Choice of fixed and preferred
loans and fixed or variable loan rates
Loan interest
is charge on any amount of cash value borrowed
that is not considered a withdrawal. Many companies
offer
a
current fixed loan interest rate of 2.25%-5%.
At the same time, most companies are paying about 2%-3%
interest
on the cash values of loaned funds. Therefore,
there
is essentially a .25%-3% spreads on fixed loan
funds. This spread represents the actual interest rate
paid
on the loaned cash values.
After certain number of years and depending on the insurance company, preferred loans may be available. Preferred loans actually credit an interest rate on the cash value of borrowed funds that matches the interest loan rate on these same funds essentially netting a zero cost loan. Some companies offer preferred loans after the first 5 policy years and other after the first 10 policy years.
Variable rate loans are available with several companies and offer the policyholder the option of maintaining loaned funds in the indexed account while the funds are borrowed. A current variable market interest rate is charged on borrowed funds based on the Moody’s Corporate Bond Yield Average. At the same time, the loaned funds continue to participate in the upward movement of the underlying index and will be credited with the actual index performance subject to the growth cap and participation rate. During periods where the underlying index is rising, variable rate loans may allow for cash value growth above and beyond the actual loan interest charged. The risk with variable loans is that index will not grow and the actual index credits will be lower than the loan rate. In the latter case, loan interest is accruing at a faster rate than a simple fixed loan.
Optional index segment periods
The
indexed segment period or indexed account segment is
the length of time over which the
index is measured.
Many companies offering equity-indexed life polices
have more than one index segment period option. The
shortest index segment is 1 year but some companies
require up to a 6 year index segment period. During
this segment period, there are limitations on transferring
cash values from one account to another. Many companies
will not allow transfers from the indexed account
to the fixed account until the end of the index segment
period. Other companies will allow you to transfer
cash values from the indexed account to the fixed
account
but will not provide any indexed credits unless the
index segment period has ended. When comparing options,
keep in mind that as a general rule, the shorter
the indexed account period the better.
Death benefit guarantee options
The death
benefit guarantee period is a guarantee by the insurance company that as long
as a minimum premium
is paid on time the coverage will not lapse during
that given period. Most all companies offering equity
indexed universal life offer a minimum death benefit
guarantee of at least the first 5 policy years. Some
companies, depending on the age of the insured, will
offer up a 15 year minimum death benefit guarantee.
There are also several companies that will allow you
to pay a higher premium and get a lifetime guaranteed
policy. If the lifetime death benefit guarantee option
is selected, the coverage can never be terminated by
the insurance company as long as the policy premium
is paid when due. However, there is an additional cost
for the lifetime guarantee and it does have the impact
of reducing the policy’s normal cash growth potential.
If a guaranteed death benefit is a primary concern,
you may want to consider a guaranteed universal life
insurance policy.
Comparing Insurance Policies Based on Price
One of the most common misconceptions when buying any kind of life insurance policy is the idea of trying to shop for the lowest price. The statement “you get what you pay for” is usually accurate in all instances but is even more so with life insurance and especially with equity indexed universal life insurance. With any type of universal life, premium payments are flexible and can be adjusted as long as the policy cash value is sufficient to cover monthly insurance costs and other policy charges. The ability to pay low premium payments can create an illusion that the policy is less expensive than what it is in reality. Before buying any equity index insurance policy, please review the actual insurance costs and policy administrative fees and expenses. Paying a low price is very desirable but not at the risk of future premium increases or a policy lapsing.
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(1) The
S & P 500 (Standard and Poor’s Composite
Price Index) is composed of 500 commons stocks
representing major U.S. industry sectors.
“ Standard and Poor’s®,” “S & P®,” “S & P
500®,” “Standard & Poor’s 500,” and “500” are
trademarks of The McGraw-Hill Companies, Inc.
(2) “Dow Jones” and “DOW JONES INDUSTRIAL AVERAGE (DJIA) COMPOSITE
STOCK INDEX” are service marks of Dow Jones & Company, Inc.
This product is not sponsored, endorsed, sold or promoted by Standard & Poor’s
and Standard & Poor’s makes no representation regarding the advisability
of purchasing such a policy.
(3) The NASDAQ-100®, NASDAQ-100 INDEX® and NASDAQ® are registered
trademarks of the NASDAQ Stock Market Inc. (which with it affiliates are the “Corporations”).
This product has not been passed on by the Corporations as to their legality
or suitability. This product is not issued, endorsed, sold or promoted by the
Corporations. THE COPORATIONS MAKE NO WARRANTIES AND BEAR NO LIABILITY WITH RESPECT
TO THIS PRODUCT. THE INDEX DOES NOT INCLUDE DIVIDENDS PAID BY THE UNDERLYING
COMPANIES.
