It should be noted that some experts still consider even this limit to be a bit optimistic. Larry Rybka, president and chief executive of ValMark Securities Inc., an independent broker-dealer voiced his concern over this limit, saying that: “Even today, with these rules, I think there's still an over-promised risk with the product.” His concern may be well grounded. For example, someone who takes out a policy loan that charges 5% may think that they are still making money since the illustration showed a 7% return each year. But if the policy underperforms due to poor market conditions, then the policy owner may actually start to lose cash value over time and the policy could eventually lapse. But this type of possibility is seldom found in the illustrations that are shown to clients. AG 49 has therefore sought to redress this issue by limiting the rate of earned interest in these policy illustrations to no more than 1% more than the loan rate. Therefore a policy that will charge 5% on any loan balance cannot earn more than 6% in the illustration. Of course, the policy may earn substantially less in reality depending upon market conditions, but this will help to curtail the more unrealistic illustrations that were previously allowed. (For more, see: Pros and Cons of Indexed Universal Life Insurance.)
This new rule will have a much larger impact on clients who intend to access their cash values as retirement income than those who simply intend to use the insurance benefits and let their policies grow.
The Bottom Line
Indexed universal life insurance can be an excellent tool that clients can use to achieve multiple objectives. AG 49 has been enacted in order to protect clients from being shown unrealistic scenarios where they can take out substantial loans and still come out way ahead, or earn returns that would normally require them to risk their principal. IUL illustrations are required by law to show a guaranteed rate of return scenario, a best-case scenario and one that falls about halfway in between the two. The first or third options are probably the safest for advisors to use when they show these projections to their clients.
Post a Comment