Kevin Nuber

If you are in the IUL marketplace, then you hear it all the time—indexed universal life policies will never come true. The criticisms are usually the same. That the illustrations and projections are unrealistic and so unbelievable that they can’t possibly come true. They say caps and participation rates will be reduced and the client will end up unhappy. One can easily argue truth to these statements because an illustration can be manipulated in all sorts of ways to over promise performance. Many years ago, our company founder Bill Zimmerman was tired of hearing these criticisms because he knew from his personal experience that IUL policies would perform. He set out on a mission to prove this to our advisors and their clients, and over the last 15 years, and tens of thousands of IUL policies later, we have found that if an advisor follows three simple rules, then the IUL illustrations should come true.

With Bill’s mission in mind we designed and created a system to illustrate policy performance in an easy-to-digest format. The chart below is an example of an actual inforce IUL policy that was written in 2008. If all the myths and misconceptions said about IUL were true, this policy would serve as the perfect example of poor policy performance predictions, but it, in fact, isn’t. Instead, it shows that IUL’s can not only perform as expected, but can perform better than the original illustration. The comparison chart shows the original illustration and its values on the right-hand side. On the left-hand side, the chart also shows the benchmark we use at LifePro to compare the actual year-by-year values from the actual inforce policy statement. This ledger is used to show the client if their policy is performing as expected, better than expected, or worse than originally illustrated. As you can see the timing of the crediting for the first two years couldn’t have been any worse. The client received two consecutive years of a zero percent index return in the policy. I remember not looking forward to conducting the policy review after the second zero percent index return because of how far behind the original plan was from the policy illustration. However, the client wasn’t upset. They said they had lost so much of their other risk-based money in the market and saw this IUL policy as a win. We also talked about how two years was too short of a timeframe to know how the policy would perform over time. Notice in Year three the client received an 18.8 percent index credit–making them suddenly ahead of the original plan. Fast forward 12 years later to the end of 2022 and the client had $30,000 more cash value than the original illustration, even after earning a zero percent index credit over the last year.

The questions this case might produce are: Why was this policy so successful? What did the advisor and client do to make this policy perform better than expected? Why do we hear so much bad publicity and opinions about IUL if we have these success stories? To help answer those questions, I’d like to share three rules you can follow to help ensure your client’s IUL policies will perform better than expected.

Rule #1–The IUL Policy Must be Designed to be Maximum Efficient. There are potentially a thousand different ways to design an IUL policy, but there is only one way to design the contract to be maximum funded and maximum efficient. In the example provided, the planned premiums were equal to the 7-Pay Premium, and the client wasn’t allowed to pay a dollar more without creating a modified endowment contract (MEC). The client paid premiums over five years because the Guideline Single Premium was $220,000, however the client then couldn’t pay any more premium in year six. This type of IUL design helps to reduce the cost of insurance, maximizes the amount of cash value in the policy, and reduces some of the risk that can cause a policy to underperform. In my opinion this is the most important rule. Designing a maximum funded IUL policy will help create the best chance for success.

Rule #2–The Planned Premiums Must be Paid by the Client. At first glance this is obvious. No policy can come true if a person doesn’t pay the planned premiums. The responsibility is on the advisor to structure an IUL policy around a premium payment they know the client can actually pay. In our example the client had $220,000 sitting in cash that they wanted to put to work, so the money was carved out and dedicated specifically to this IUL policy. The IUL was structured perfectly to allow 100 percent of the money to fund a maximum efficient policy (Rule #1) and all the premiums were paid. Where advisors run into problems is when they assume that the client can pay more than they can. If the client’s money was invested in risk-based assets and the market went down, then the money might not be there to fund the plan. If the advisor and client are too aggressive on the monthly premiums they say they can afford, then the risk of reducing or stopping payments becomes very high. Premiums can be missed and caught up so there is flexibility to this rule, but the cumulative contributions must eventually be maintained. Therefore it’s important to design an IUL around an amount of premium the client can actually pay so the likelihood that the client will follow through with the planned premiums is drastically increased.

Rule #3–The Policy Must be Illustrated at a Reasonable Rate. Let’s be honest. Back-tested returns are an exercise in mathematics on how to engineer a proprietary index to show high returns. Do not use the insurance company’s default illustrated rate. If you ask an honest actuary, they may say that a safe expectation of performance would be at plus two percent over the fixed rate of the IUL. This is the risk premium the client should expect if they forgo taking the fixed rate allocation. When properly designing a policy, we should also consider that rates could change and that caps and participation rates can be lowered, so using an illustrated rate of plus two percent of the fixed rate still may not work out. In our example we illustrated at six percent when the original fixed rate was 4.5 percent, and it should be noted that this was when the insurance company’s default illustrated rate was eight percent. If we would have illustrated at eight percent then the policy would not have performed as illustrated but, since we used a reasonable rate of return, the actual IUL policy performed better than expected.

This policy is not just a cherry-picked policy that we combed through to prove our point. We have an entire library dedicated to IUL success stories. We’ve run annual policy review reports on most of our active IUL contracts that were written over the last twelve years. We have run a total of 14,842 of these reports, which are then sent to our advisors automatically. Every week we see examples of policies that are performing as planned, but also policies that are not performing as expected. We have found that in almost every case where there is an underperforming policy, one or more of the three rules were not followed. If a policy was not maximum funded, then it has a higher chance of not performing well. If the advisor uses a nine percent illustrated rate, then the policy has not lived up to the expectation. If the client didn’t or was unable to follow through with the planned premiums, then the policy would likely fall behind the projection.

Fifteen years ago, Bill Zimmerman was extremely frustrated seeing so many articles and opinions about IUL that were overwhelmingly negative and set out on a mission to prove that the promises of indexed universal life policies do come true. One result of this mission is what I have shared today. Like I mentioned, we have thousands of inforce policies that have performed as illustrated or better. Again, in order to position the IUL to have the higher likelihood of performing as expected or better than expected then you should follow the three rules: (1) the policy should be designed to be maximum efficient; (2) the planned premium should be paid; and, (3) the premiums should be an amount the client can afford to pay. The illustration also should use a reasonable rate of return. We have many IUL stories to share at http://www.lifepro.com/stories. You’ll be able to see successful policies that followed these rules, and policies that have fallen behind because they didn’t follow the rules. With this knowledge as a guide to follow you could have these same success stories that our advisors do.

The most common objections we hear from the talking heads against permanent life insurance and indexed annuities is that the fees are too high, it’s expensive and only pays the broker a high commission. If you are concerned over costs it doesn’t mean life insurance is out of the question. Instead, speak to someone like Pennbrook Insurance to find out more about the options available to you. The uninformed say this far too often so I’d like to dispel this myth once and for all by comparing insurance products to traditional products and investments.

Expenses in Universal Life Insurance
To set the record straight I must first say that life insurance can be expensive. The fees are based on the amount of insurance you are purchasing, or more specifically, the net amount at risk. In other words, you have to pay for only the amount of insurance that would be paid by the insurance company at death, which is the amount of insurance over and above your policy cash value. Traditional life insurance planning has you purchasing the most amount of insurance possible, which results in lower cash values and higher costs, so this myth of high costs has merit because most agents structure insurance this way. The truth is that a properly structured indexed life insurance policy with the minimum amount of death benefit the IRS will allow you to purchase will be cheaper over the long run than other traditional investments.

For our example, we will use a 45 year old male, preferred non tobacco, with a $100,000 premium paid into the policy as fast as the IRS will allow in order to maintain the favorable taxation of life insurance. There are multiple fees inside the policy which include a premium load of six percent, $90 per year administration fee, policy issue charge of $2,070 for ten years and a mortality charge that is based on the net amount at risk. After totaling up the fees in the first year it comes out to 16 percent of the premiums paid in year one. If this is where the story ended, then we would conclude that insurance is expensive. Fortunately, that is not where the story ends.

Life insurance has some unique tax benefits such as tax deferred interest, tax free access via loans and tax free death benefit to your beneficiary. However, in exchange for these tax benefits, the IRS has put limits on how much money you can put into a life insurance policy and how fast you can pay that premium in. A better way to explain this is through a story. Let’s say you could buy a five-story apartment building that would produce tax free income. Sounds great right? There’s a catch to this building though-you are only allowed to fill it with tenants one floor per year. If there was no such rule everyone would buy these apartment buildings and the IRS wouldn’t collect any taxes. In the first year you fill up the first floor, but you are paying for the overhead on the entire building, so this investment would be expensive the first year just like this insurance policy. With each new year, more and more sign a lease agreement and you fill up the building floor by floor with tenants, and by year five you have a full building and all the rent and profits are completely tax free. This is how a maximum funded life insurance policy works.

The first year of a maximum funded IUL is expensive, but each year the cost goes down and eventually it will become incredibly inexpensive just like the hypothetical apartment building. In the sixth year of the policy the cost is two percent of the account value and by year 11 it’s only .57 percent. By year 20 the cost is .5 percent and by year 30 it’s .1 percent. Over a 30 year period, the total fees for this policy are only $75,000. This might seem like it’s expensive, but compared to other types of investments and account types life insurance is not expensive.

Expenses for Traditional Investments
To prove my point that indexed universal life is not expensive we must look at other types of places you could put your money. First, we’ll start with a mutual fund account. If you put the same $100,000 into mutual funds or an advisory account, over a 30-year period at a 1.5 percent per year expense, the total fees in that account would be over $130,000. So relative to other types of investments, and over the long run, a maximum funded indexed universal life insurance policy is incredibly cheap versus the cost in our example which can be up to 30 percent for these investments. Life insurance is not expensive.

Okay, so mutual funds and advisory accounts might be more expensive than an IUL, but a cost-conscious investor is going to just put his money into another type of retirement account and choose cheaper investments and not pay a person to manage it for them. Let’s assume that the same person had $100,000 in an IRA or 401k that had no fees whatsoever (now this type of investment doesn’t exist because all investments will have some sort of fee or expense, but please play along with me). If that account grew at seven percent for 30 years it would be worth over $1 million. The problem with any sort of pre-tax account like an IRA or 401k is that when you take the money out you will have to pay taxes and taxes are an expense. An IRA is the most expensive of all types of investments because this $1 million account has a tax liability attached to it. Essentially, the IRS has a lien on that account and they are going to determine what tax rate you will pay on the IRA at some future point. If you pay 15 percent in taxes, the expense would be $150,000, at 25 percent it would be $250,000 and at 35 percent it would be $350,000. Even if you purchased a product within the IRA that had no expenses, the IRA itself has an incredibly high expense in the form of taxes, and ultimately will be much more expensive than the indexed universal life policy because life insurance is not expensive.

What You Are Paying For?
Life insurance provides a useful social service by paying a beneficiary a death benefit when the insured passes away, so the IRS allows this to be tax free. This tax favored payment is given to us as an incentive to buy life insurance so the government doesn’t have to take care of widows or young children. Regardless of whatever fees are charged inside a life insurance policy, we always must remember what those fees are paying for. These fees aren’t paying for a mutual fund manager that might or might not outperform an index or benchmark, and they aren’t going to an advisor who might or might not get your money out of the market before it crashes next time. You aren’t paying a person by the hour every time they meet with you about your money, and you’re not paying a bank. With indexed universal life insurance you are paying less than you would have for these other investments, and what are you getting out of it? You are getting tax deferred growth, tax free access to the money and most important a tax free death benefit to ensure that your family is taken care of in their greatest time of need. In my opinion this is the cheapest purchase you can ever make because indexed universal life products are not expensive.