New EIUL Product Review

NEW EIUL Product Review–Another Class Action Waiting to Happen?

                Before I start this newsletter, I wanted to remind readers about Mike Steranka’s 28-page 7 Steps to Creating a Powerful Appointment Process PDF that you can download by clicking on the following link:   

                To download the two-day EIUL training agenda, please click on the following link:   

New EIUL Product 

                 If you’ve not been hit on yet, you will about a “new” EIUL product that is now available to the entire industry. Before, one IMO had a national exclusive on it which is why most agents haven’t heard about it (although the IMO is still receiving a national override on ALL sales from what I hear).

                 Oh, agents love this new product. Why? Because it illustrates well.

                 However, if you’ve been reading my newsletters or have read my books, you’ll know that I really don’t care what a company’s “default” illustration looks like. I break down the design of the policy to determine what I think it will realistically return.              

                What’s the skinny on this new product?

                The default crediting rate is 9% (meaning when you run a typical illustration the software defaults to a 9% rate of return over the life of the policy).

                The policy has a 1% non-guaranteed bonus on premiums paid. The word on the street is that this was added late in the policy design phase because without it, the product illustrated worse than most of its major competitors. The bonus, IF it kicks in, will do so for policy years 11 + on all index credits received in the previous 10 years ending at the prior policy anniversary.

                Three policy loan options              

                1) Traditional fixed-loan option.

                2) Variable loan. The variable loan is much different in that it is tied to the Moody’s corporate bond rate (which has a 50-year average in excess of 7%) with a cap on the rate of 1% more than the fixed crediting rate in the policy.              

                This one needs a little explanation, and I’ll do so with an example. If today’s fixed crediting rate on the policy is 4.25% and if the Moody’s corporate bond rate is 5.25%, the maximum lending rate in the policy would be 5.25%.

                 As interest rates rise (which everyone believes they will), both the fixed crediting rate in the policy will rise as well as the Moody’s corporate bond rate. Therefore, it’s possible with this loan strategy to have a loan rate on policy loans in excess of 7% when interest rates go back to normal.

                3) Indexed Loan. The indexed loan option is a fixed 5%. That’s pretty good. The only problem is that, when you pick this loan rate, you are stuck in one crediting method and can’t switch.

                Additionally, this loan option can have a different (lower) cap rate on the index used for the borrowed funds (remember, the client borrows money from the company not from his/her policy which stays invested in an index). This makes total sense for a company looking to hedge its risk with a fixed lending rate.

                Lawsuits waiting to happen?              

                If you didn’t read one of my recent newsletters, I ran one on F&G Getting Sued in a Class-Action Lawsuit over the Sale of its EIUL Policies. To read that newsletter, click on the following link:  

                The lawsuit was over the disclosure of how the policy crediting worked. I can see a similar problem with explaining how this new EIUL policy works.              

                Problem #1-explaining the 1% non-guaranteed bonus. When you explain this, you have to tell the client that the bonus should have a huge effect on the insurance company’s ability to keep the rate cap high on the crediting index and that it’s likely the caps will fall if that bonus is paid.              

                When you explain this to clients, they, of course, will want to see an illustration without the 1% non-guaranteed bonus. When they do, it will significantly underperform other policies in the market; and the client will probably not want to use this new product.

                Problem #2-explaining the variable loan options and problems with them. Most clients struggle with understanding how EIUL policies work. I can’t imagine trying to explain the variable loan option that has a floating rate with the Moody’s corporate bond index with a cap at 1% over the fixed crediting rate in the policy (whatever that happens to be in the future).              

                Then trying to explain the indexed loan option that is fixed at 5% but that the indexed used for the borrowed funds can only be one index, and the cap on that index will probably be lower due to the fact that the company fixed the lending rate at 5%.

                Problem #3-ethical illustrations. How should an agent illustrate this policy? Should you use a default illustration? In my opinion, you’d have to be smoking crack to give out a default illustration on this policy to a potential buyer.

                Problem #4-the policy claims to reduce the COIs (Cost of Insurance) by annuitizing the death benefit. The COIs have never been a problem to explain, it’s the monthly per thousand charges that are problematic and unaffected by this design. Many other products when illustrated at the same ROR will outperform this “new” product.              

                Do you think it’s a good idea to run a 9% illustration with a non-guaranteed 1% bonus using today’s historically low lending rate on the variable loan or using the indexed loan when you have no idea what the index cap is going to be on the borrowed funds in 10, 20, 30+ years?

                 Again, I think you’d have to be smoking crack to give out a default illustration. Having said that, guess what’s been coming across my desk from agents who are asking my opinion about this new product? You guessed it–default illustrations given to them by different IMOs.

                 Full Disclosure–if you are selling this product (and as you can tell, I don’t like it), I would have the client sign one heck of a full-disclosure statement. One that said I went over all the moving parts of the product and that the default illustration given to the client was one that used today’s default crediting rate and cap (which will not change in these policies for the better) and a non-guaranteed 1% bonus.

                Believe me, if an agent fully discloses how this new product works, few, if any, clients will actually buy it.              

                If I wanted to make a bunch of money, I’d go back into the practice of law and specialize in class-action lawsuits against insurance agents selling products they don’t understand to clients who don’t understand them.              

                So, my summary on this product is that it’s possible it could turn out to be a good product for the consumer. I don’t think it will do nearly as well as the other non-tricked up EIUL policies in the market; and I think if an agent gives proper disclosure on this product, few will buy it.

                Could this policy give rise to the next class action lawsuit in our industry? It could, but only time will tell. The question is do you want to run that risk?

                My reminder to readers are the two sayings you hear quite a bit in the insurance industry:

                -pigs get slaughtered

                -if it’s sound too good to be true, it probably is.

               IRA rescue-one last comment. The company that sells this new product is the one I’ve seen illustrating IRA rescue using life insurance. This is a mathematical loser for the client, and I’ve warned agents against it. Additionally, there are many in the industry who think the manipulation of the life policy (dropping the death benefit significantly in year four) violates the MEC and/or Defra/Tefra rules. I highly recommend you stay away from this sales pitch.

                To read my cautionary article on using EIUL as part of an IRA rescue plan, click on the following link:   

Roccy DeFrancesco, JD, CWPP™, CAPP™, CMP™
Founder, The Wealth Preservation Institute
144 Grand Blvd
Benton Harbor, MI 49022

Author of The Doctor’s Wealth Preservation Guide; The Home Equity Management Guidebook; The Home Equity Acceleration Plan; Retiring Without Risk; Bad Advisors: How to Identify Them; How to Avoid Them; and Peace of Mind Planning: Losing Money is No Longer an Option.