This blog post explores the essential components of properly structuring an Indexed Universal Life Insurance (IUL) policy, focusing on maximizing cash accumulation rather than death benefits. Key factors include initial death benefits, death benefit options, index choices, loan provisions, and costs involved. The article also provides guidance for policyholders on how to address improperly structured IULs.
Indexed Universal Life Insurance (IUL) is often misunderstood, with many focusing solely on the death benefit. However, the primary goal of an IUL should be to maximize cash accumulation. This blog post will clarify how to determine if your IUL is structured properly and optimized for the best performance.
The initial death benefit is a crucial component of an IUL. It is important to note that an IUL is not primarily about the death benefit; rather, it is about maximizing cash accumulation. Most life insurance carriers will not issue a policy with a death benefit below $100,000 for adults. Therefore, it is advisable to aim for the lowest death benefit the IRS allows.
If your IUL illustration shows any zeros in the surrender values column during the first years of the policy, it indicates that your IUL is not structured properly. A zero in year one is not unusual, depending on your age and premium amount, but ideally, there should be no zeros. For instance, if you are contributing $400 per month or less, your initial death benefit should not exceed $100,000. For a $500 monthly premium, the initial death benefit could also be around $100,000 but may reach up to $130,000. Notably, the initial death benefit does not reach a million dollars until contributions reach approximately $5,000 per month.
For children, some carriers may offer initial death benefits as low as $50,000.
There are two primary death benefit options available in an IUL:
For optimal performance, it is recommended to choose the increasing death benefit option while you are still contributing premiums. Although this option is slightly more expensive than the level death benefit, it allows for a greater portion of your premium dollars to be allocated towards the index. Many illustrations show a level death benefit for all years, which can quadruple the initial death benefit. However, once you choose the level option, you cannot switch back to increasing; you can only switch from increasing to level.
The index selection is a vital aspect of an IUL. Many agents default to the S&P 500 Index with a cap, but there are better options available. It is advisable to select a volatility control index with a high participation rate, ideally guaranteed at 100%, and preferably rebalanced daily rather than monthly or annually. Avoid indices with caps or spreads, as they can limit your potential gains.
Understanding loan provisions is essential when structuring your IUL. For example, the IUL I offer includes three loan options: fixed, indexed, and variable. The fixed loan is typically the only option available in the first year and is often referred to as a wash loan. In this case, you may be charged 4% for the loan but credited back 3%, resulting in a net cost of 1% for the first ten years.
The indexed loan allows the loan amount to remain in the index loan account, where it can earn interest based on the account's performance over the past year. However, it is crucial to avoid taking or keeping an indexed loan during poor stock market performance.
The variable loan is based on Moody's corporate bond yield and is interest-sensitive. Currently, it may charge 4.5% for the loan while crediting back 5%, ensuring you earn an extra half percent.
When selecting an IUL, look for a high participation rate, preferably guaranteed at 100%. Some carriers may only guarantee participation rates at lower percentages, which can significantly affect your returns. Additionally, while most carriers guarantee a 0% floor, some offer guarantees above that, such as 0.10% or 2% in worst-case scenarios.
Costs associated with IULs can vary significantly. Many agents structure these products for their own commissions rather than for the client's maximum cash accumulation. It is essential to review the charge report attached to the illustration, as many policyholders are unaware of the costs involved. If the illustration does not clearly show these costs, it is advisable not to proceed with the policy.
If you already own an IUL that is not structured properly, there are steps you can take:
In conclusion, properly structuring an Indexed Universal Life Insurance policy is crucial for maximizing cash accumulation. By understanding the components such as initial death benefits, death benefit options, index choices, loan provisions, and associated costs, policyholders can ensure they are making informed decisions. If you suspect your IUL is not structured correctly, take proactive steps to address the issue and optimize your policy for better performance.
