Is it better not to offer an EIUL policy or is it better to offer one that is not any good? It’s sort of like, if a tree falls in the forest with no one around, does it make a noise? It does make a noise, and the noise I hear from the new Prudential product is "Taps."
The specs of the product foreshadow what the performance will be (which should be significantly lower returns than other products that are currently avialable).
Comparison between Pru’s new EIUL and one my favorite EIUL products
- 10.75 percent annual cap (way below the industry standard)
- No variable loan option
- Default crediting rate = 6.83 percent (which is just terrible, but makes sense considering the cap rate)
Let’s just get to the meat of it with an example. Assume we have a 45-year-old who is preferred and pays a $15,000 a year premium from ages 45-64. Then assume he borrows from the policy from ages 65-80.
I’ll use Pru’s 6.83 percent default rate with both policies (even though the default rate is actually 8.78 percent with the other policy).
$33,909 = Tax-free loans from Pru
$45,979 = Tax-free loans from the other policy
Difference = $12,070 each year, or $241,400 over the 20-year borrowing phase. To put it a different way, the other policy would generate 35 percent more money each year in retirement.
What if I used the “default rate” with the other policy?
The client could borrow $91,976 each year in retirement. That number is absurd, which is why I don’t use default rates when doing illustrations. But if I don’t use the default rate with Pru’s policy, it will look even worse. That is only a problem for Pru agents and, unfortunately, the unsuspecting clients who will buy Pru’s new policy.
Why did Pru even bother rolling out a mathematically inferior product?
I say this with a wry smile on my face, but it’s probably because they have their own built-in sales force to sell it. It is an outrage to have a bunch of under informed Prudential agents peddling this product to clients when, if they weren't restricted, they could be offering a good EIUL policy
this new product is just another classic example of broker/dealers
who don’t get it, and is yet another reason why advisors should consider leaving the broker/dealer environment and going the RIA