Indexed Universal Life. Disclosure

Transcription

1 Indexed Universal Life Matt Fowler, CLU SVP ISD Brokerage August 11 th, Lincoln National Corporation LCN Disclosure This seminar is for continuing education purposes only. It is intended to be accurate and authoritative in regard to the subject matter covered. It is presented with the understanding that I am not engaged in rendering legal or tax advice. Lincoln Financial Group provides the sales concepts we ll discuss for informational purposes only. While this seminar discusses general tax aspects of planning with insurance, we make no representations as to suitability for individual clients. Interested parties should be strongly encouraged to seek separate tax and legal l advice before implementing a plan of the type described in this presentation. 2 1

2 Disclosure Standard & Poor s, S&P, S&P 500, Standard & Poor s 500, and 500 are trademarks of Standard & Poor s Financial Services LLC, a subsidiary of The McGraw-Hill Companies, Inc. and have been licensed for use by Lincoln Variable Insurance Products Trust and its affiliates. The product is not sponsored, endorsed, sold or promoted by Standard & Poor s and Standard & Poor s makes no representation regarding the advisability of purchasing the product. Agenda IUL Sales Trends Product Overview and Terminology Indexed Account Options Insurance Carrier Hedging Strategies Interest Crediting Methodologies Interest Crediting Examples Death Benefit Options No-lapse Guarantees Withdrawals vs. Loans Illustration Overview Follow the Money 4 2

3 Indexed UL marketplace evolution Transamerica introduces IUL 1997 IUL market: 33 companies 2010 Lincoln enters IUL market IUL market: 7 companies 2009 IUL market: 18 companies 2012 IUL market: 46 companies* * Source: Advantage Group Associates, 5 As UL rates have declined Indexed UL sales have risen Year Average UL % Rate IUL Sales % <$100M % <$150M % $525M % $695M % $974M Source: Advantage Group Associates, numbers based on reported target premium 6 3

4 Indexed Universal Life Source: Advantage Group Associates, numbers based on reported target premium 7 What is Indexed UL? Fixed UL with a fixed account Interest crediting can be tied to performance of a stock market index over a period of time Carrier purchases options to hedge the index and fund crediting Potential for higher crediting rates than traditional UL Downside protection via interest rate floors 4

5 Indexed UL Potential improvement in cash value growth through interest crediting based on the performance of a stock market index or indices. Downside protection through guaranteed minimum crediting rates, regardless of the performance of the index. Option to invest a portion of the premiums, or to transfer cash values to a traditional fixed interest account. 9 Traditional UL and Indexed UL Traditional UL vs Indexed UL BENEFITS TRADITIONAL UL INDEXED UL Flexible Death Benefit X X Flexible Premium X X Payment Options Access to Cash Value X X Interest Credited to the policy Declared by insurance carrier Interest rate risk shifted to client (1% to 4% Floor) Indexed Option: Formula based 0% to 3% floor + upside potential based on index returns - subject to participation rate or interest rate caps Fixed Option: same as Traditional UL 10 5

6 Sales by index Source: Advantage Group Associates, Indexed Sales and Marketing Report (4Q2011) 11 Commonly used indices S&P 500 Index An index of 500 stocks chosen for market size, liquidity and industry grouping, among other factors. The S&P 500 is designed to be a leading indicator of U.S. equities and is meant to reflect the risk/return characteristics of the large cap universe. DJ (Dow Jones) World Ex US - Amarketcapitalization market-capitalization weighted index providing a broad measure of the global equities markets, excluding the U.S. market Russell An index measuring the performance of the 2,000 smallest companies in the Russell 3000 Index, which is made up of 3,000 of the biggest U.S. stocks. The Russell 2000 serves as a benchmark for small cap stocks in the United States. Hang Seng Index Consists of over 45 of the largest companies that trade on the Hong Kong stock exchange. The Hang Seng index is the most widely used barometer for the Hong Kong economy. Due to the close integration between the economies of China and Hong Kong, the Hang Seng also indicates market fluctuations in China. Euro Stoxx 50 - A stock index representing 50 of the largest companies in Europe based on market capitalization. 12 6

7 Interest crediting methodology The underlying indices, (ex. S&P 500 Index), only recognize the changes in stock prices and do not include any dividend id d returns. The policy and the Indexed Accounts do not actually participate in the stock market. You may not invest directly in an Index. 13 Sample S&P 500 indexing methodology 40% 30% Return 20% 10% 0% -10% 13% cap 1% floor -20% -30% -40% S&P 500 actual return volatility S&P 500 capped/floored return volatility Standard Deviation 16.49% 5.54% Annual periods begin and end on December 15. Does not include dividends. S&P 500 data source: Yahoo! Finance. (Jan 2012) 7

8 Sample S&P 500 indexing methodology Actual Capped/ Year Return Floored % 9.96% % 13.00% Actual Capped/ Year Return Floored % 12.51% % 6.77% Actual Capped/ Year Return Floored % 1.00% % 13.00% % 1.21% % 1.00% % 12.89% % 13.00% % 13.00% % 5.41% % 13.00% % 13.00% % 12.29% % 1.00% % 13.00% % 1.32% % 12.96% % 13.00% % 1.00% % 13.00% % 13.00% % 13.00% % 1.00% % 1.00% % 11.49% % 13.00% % 1.00% % 1.00% S&P 500 actual return volatility S&P 500 capped/floored return volatility Standard Deviation 16.49% 5.54% Annual periods begin and end on December 15. Does not include dividends. S&P 500 data source: Yahoo! Finance. (Jan 2012) Terminology Index Basis for the indexed account crediting. Examples: S&P 500, NASDAQ-100, DJIA Index account Derives a crediting rate based on the index, timeframe, and interest rate rules. Examples: 1 Year Point-to-Point, 1 Year Monthly Cap segment Within an indexed account, tracks a separate performance timeframe which matures at the end of the term. Example: 12 month segment term 8

9 Terminology allocate To move a portion of fixed account value to a segment. floor The guaranteed minimum interest rate. cap The upper limit to the interest credited. spread The interest rate subtracted from the interest rate calculation. Terminology participation rate Determines the percentage of the Index performance used in the interest crediting calculation. Examples Participation rate = 80% Indexed performance = 8.22% Segment value at maturity = $10,000 Participation rate = 100% Indexed performance = 8.22% Segment value at maturity = $10,000 Participation rate = 120% Indexed performance = 8.22% Segment value at maturity = $10,000 $10,000 x 0.8 x Interest credited $658 $10,000 x 1.0 x Interest credited $822 $10,000 x 1.2 x Interest credited $986 9

10 Insurance carrier hedging strategies Options To guard against loss, insurance carriers purchase options that payoff in the event the index returns less than the specified floor (ex. 1%). For example, a put option gives the owner of the put the right, but not the obligation, to sell the underlying asset at the agreed upon strike price at the expiration of the option (1 year in most cases). This would allow the insurance carrier to realize a 1% return on the S&P 500 index even if the index actually returns less than that. Reserves All premiums are held in the carrier s general account and carriers set aside required amount to pay future death benefits. 19 Rate cap change risk factors Market Volatility Although hedging costs can be easily calculated at any given time, future hedging costs may change substantially due to changes in market volatility. Other things being equal, higher market volatility can significantly increase the hedging costs to the carrier. Interest Rate Risk - Carrier Earnings on General Account The amount that the carrier would earn as interest in the general account is what is available to pay for the cost of the hedge Declining interest rates may reduce the amount of funds available for hedging 20 10

11 Crediting methods Ranges from 1-5 year point-to-point 1 year monthly cap 1 year monthly average 21 Q: What makes Indexed UL indexed? A: The way interest is credited. Segment value Caps Spreads Floors Crediting methodology Participation rate S&P 500 performance 22 11

12 Review 2 crediting methods 1-year point-to-point indexed account 1-year monthly cap indexed account 23 1-year point-to-point indexed account After a one-year term, the beginning and ending values of the S&P 500 Index are calculated for a percentage change. If the change is positive, the account is credited the full percentage change up to a cap. Assuming a floor of 1%: if the change is less than 1%, the account still earns a full 1%

13 1-year point-to-point indexed account Cap 13% Floor 1.0% 30% Date of close Close Actual % change Capped/ Floored Dec 17, , Dec 15, % 1.00% Dec 15, , % Dec 15, , % 13.00% 11.49% 10% 13% cap 1% floor -10% -30% 25 1-year monthly cap indexed account The percentage change of the S&P 500 Index is calculated for each month during the one-year indexed term. The monthly percentage change, up to a cap, is recorded for each of the 12 months. The monthly percentage change has no minimum or floor. But, assuming a 1% floor, if the cumulative 12-month change is less than 1%, the account still earns a full 1%

14 1-year monthly cap indexed account Date of close Close Dec 15, , Jan 15, , Actual % change Cap 3% Calculation only Floor 1.0% Crediting only 27 1-year monthly cap indexed account Cap 3% Date of close Close Dec 15, , Jan Date 15, 2010 of close 1, Actual % change Close Dec 15, , Jan 15, , }2.54% Calculation only Floor 1.0% Crediting only 28 14

15 1-year monthly cap indexed account Cap 3.2% Calculation only Floor 1.0% Crediting only Date of close Close Actual % change Capped Dec 15, , Jan 15, , % 2.54% Feb 16, , % -3.62% Mar 15, , % 3.00% Apr 15, , % 3.00% May 17, , % -6.17% Jun 15, , % -1.91% Jul 15, , % -1.68% Aug 16, , % -1.56% Sep 15, , % 3.00% Oct 15, , % 3.00% Nov 15, , % 1.83% Dec 15, , % 3.13% 2010 total 4.56% 2010 credited 4.56% 29 1-year monthly cap indexed account Cap 3% Calculation only Floor 1.0% Crediting only Date of close Close Actual % change Capped Dec 17, , Jan 15, , % -4.49% Feb 15, , % -2.24% Mar 17, , % -5.44% Apr 15, , % 3.00% May 15, , % 3.00% Jun 16, , % -4.46% Jul 15, , % % Aug 15, , % 3.00% Sep 15, , % -8.13% Oct 15, % % Nov 17, % -6.29% Dec 15, % 2.09% 2008 total % 2008 credited 1.00% 30 15

16 Allocation dates Premium Paid February 21, 2012 Fixed Account Allocation (March 15, 2012) Indexed Segment Initial allocation date Drives the future allocation dates 31 Follow the money Premium Load Premium Paid February 21, 2012 Expenses Interest credited daily Expenses deducted monthly Fixed Account Expenses Allocation (March 15, 2012) Indexed Segment Maturity Date: March 15, 2013 Expenses deducted monthly if insufficient funds in the Fixed Account March 15, % = Interest credited on segment funds Never less than Interest Rate Floor S&P 500 performance Participation rate Floor Cap Spread 16

17 Death Benefit options Option 1 (Level) Specified Amount remains level throughout the lifetime of the insured (unless growth due to corridor) Option 2 (Increasing) Specified amount Increases by Accumulated Cash Value Option 3 (Increasing) Specified Amount Increases by Premiums Paid Death Benefit guarantees Premium Based Guarantees Death Benefit guarantee typically ranges from 5 years to lifetime Policy Guarantees Death Benefit Guarantee based on floor rate and guaranteed policy charges 17

18 DB guarantees based on floor and guar. charges Policy is guaranteed to year 20 even with distributions ib ti beginning i in year 16 Distributions of $240K are guaranteed - policy values are based on a guaranteed floor and guaranteed charges Withdrawals vs. Loans Withdrawals Loans Tax-free to basis s on non-mec contracts Funds removed from the policy Funds removed prior to indexed maturity may not receive indexed crediting Partial surrender May incur surrender charge Specified amount is lowered Loans and withdrawals reduce your policy s cash surrender value and death benefit, may cause the policy to lapse, and may have tax implications Tax-free on non-mec contracts Funds remain in the policy, possibly in a separate account Not a surrender Death benefit is net of outstanding loan Interest continues to accrue 36 18

19 Not all loans are created equal Standard loans Borrowed funds moved to a separate fixed account Interest charged against the loan May be zero-net cost loans Variable participating loans Borrowed funds stay in the Indexed accounts Charged a variable interest rate, often tied to the Moody s Corporate Bond Index Guaranteed participating loans Borrowed funds stay in the Indexed accounts Charged a fixed interest rate Loans and withdrawals reduce your policy s cash surrender value and death benefit, may cause the policy to lapse, and may have tax implications 37 Not all loans are created equal Example: Indexed crediting returns 8% Standard loans 3.25% interest rate % loan rate 0% zero-net cost Variable participating loans 8% return -5%loan rate + 3% gain on borrowed funds 1% return -7%loan rate -6%cost on borrowed funds Guaranteed participating loans 8% return -5%loan rate + 3% gain on borrowed funds 1% return -5%loan rate -4%cost on borrowed funds Loans and withdrawals reduce your policy s cash surrender value and death benefit, may cause the policy to lapse, and may have tax implications 38 19

20 Illustration samples No Lapse Guarantees and Premium Requirements Hypothetical Interest Rates and Maximum Illustrated Rates Hypothetical Rates of Return by Indexed Account Indexed Account Allocations Indexed Account Descriptions Interest Crediting Examples 39 Illustrations No Lapse Guarantees No-lapse Premium Requirements 40 20

21 Illustrations Maximum Illustrated Rates Maximum illustrated rates based on historical returns 41 Illustrations Look Back Rates Maximum illustrated rates based on historical returns 42 21

22 Illustrations Look Back Rates 14% Cap 100% Participation 9% Cap 140% Participation 13% Cap 100% Participation 43 Illustrations Indexed Account Allocations 100% Allocation to the 1-Year Annual S&P 500 Index 44 22

23 Illustrations Indexed Account Descriptions 50% of the best performing index growth plus 30% of the second best performing index growth plus 20% of the third best performing index growth equals the Multi-index change. 45 Illustrations Interest Crediting Examples 46 23

24 Illustrations sample summary of values Page #1 Page #2 Policy Lapse Year 38 at Guaranteed Charges 47 Who is a typical Indexed UL client? Needs life insurance protection Heavy funding capability Could benefit from policy distributions Needs greater crediting potential than UL may provide Has market volatility concerns Doubtful they can outperform the market themselves Wants upside potential and limited downside 24

25 Conclusion Questions? Securities distributed by Lincoln Financial Distributors, Inc., a broker dealer and wholesale distribution organization of Lincoln Financial Group. Lincoln Financial Group is the marketing name for Lincoln National Corporation and its affiliates