With all the inconsistency in the market and low interest rates, equity indexed universal life (EIUL) sales are booming! Savvy baby boomers as well as the upcoming Gen-X better understand the advantages of dealing in the equities market. That being said, your clients should know that they can take a loss when dealing with cash accumulation and lifetime insurance protection.
Enter EIUL, a life insurance contract that offers more upside growth potential without the unpredictable losses. Let me explain. EIUL is like the middle road between fixed universal life insurance and variable universal life. With EIUL, the cash value is linked to a certain index, commonly the S&P 500, but not always. If the index is higher at the end of the year than at the beginning of the year, your client’s cash value goes up. If the index stays flat or goes down, your client’s cash value earns zero, or the minimum guaranteed interest rate, which is typically between 1.5 and 2 percent—the beauty here is that they don’t lose.
Keep in mind that your client may not share in the entire increase because of product design. A particular carrier’s product may credit interest using a point-to-point method that resets annually with either a participation rate in the index that is lower than 100 percent, or they may credit interest at 100 percent with a cap or spread on the overall interest that can be earned. You want to take a look at how many “moving parts” the contract might have—can the participation rate, the cap or spread change from year to year?
Let’s take a look at a basic EIUL product and how the interest rate is credited. As with any universal life contract, premiums are paid, expenses are taken out of the premium, and the net premiums are credited to the index account. In this simple example we calculate the interest rate return by measuring the change in the S&P 500 using the investment date as the starting point and 12 months later as the ending point. The difference in the start point and end point gives us a 10 percent return. We’ll assume the participation rate is 100 percent with a cap of 9 percent, giving your client a return of 9 percent for this 12-month period. Then the start point is reset to the current date, with the 12-month period starting again. This crediting method is commonly referred to as a point-to-point with a cap.
Interest may also be credited using the point-to-point with no cap, but a participation rate that is less than 100 percent, which could equate to about the same return. Some contracts may even use a combination of crediting methods, so you do need to pay attention to the details—not only with the crediting method, but also how often the interest is credited.
So Why Should Your Client Consider EIUL?
Not only does it offer the traditional benefit of a permanent life insurance contract, it offers:
•Tax-advantaged insurance protection
• Tax-deferred interest earnings
• Premium flexibility
• Cash value access, tax-free through policy loans
EIUL also offers:
• Opportunity for higher potential interest return
• Cash value protection against market declines
• Annual lock-in of earnings
Why Should Your Clients Purchase EIUL?
It offers an attractive middle ground for clients who want to share in the potential higher returns but remember the downturn in the market of 2001-2002 and 2008 and do not want the volatility or risk of the variable market. They want the certainty of knowing they’ll earn at least a minimum return in both good and bad times. They also want greater flexibility and control than is available in the fixed market.
If this is what your client is looking for, there are several carriers that offer EIUL for you to explore. But before you make any recommendations to your clients, make sure you review the product and the carrier behind it. You want to make sure you are offering your client a solid product with a strong carrier. Knowing all this, EIUL may be exactly what your client needs.
