With all of the recent government tax and spending proposals, some of which may be signed into law in some form or another, the concept of tax advantaged growth and supplemental tax-free retirement income from a properly structured indexed universal life is certainly continuing to gain steam. Of course, coming out of a major pandemic, prospects and clients also can better see the value of owning life insurance. As a 15-year veteran in the indexed universal life space I can tell you that today there is no shortage of IUL products in our industry. Each tend to fit inside a particular niche, whether that is accumulation-focused, death benefit protection or even living benefits such as chronic and critical illness. Out of the roughly three dozen indexed universal life products, there are a handful, maybe just two, of top tier IUL’s that excel in the cash value accumulation space.
However, you can have the best IUL in the marketplace, and if it’s not structured within the best interests of the client with the minimum amount of life insurance that the IRS will allow, funding right up to the maximum Internal Revenue Code guidelines, it could actually be a poor addition to a client’s overall financial plan. It’s important advisors work with a qualified independent marketing organization who can shop around insurance companies to find the best product for a client’s situation, are leaders in the IUL space, and can set these up correctly.
One of the best, top-tier, accumulation focused IUL policies is actually one you may have never heard about. The reason being it’s a proprietary product only available to a select group of high-quality organizations and their respective advisors.
First, to backtrack to 2015, and again to 2020, there were two different regulations that were put in place to help minimize the illustrated values and loan proceeds of IULs. This was an attempt to get rid of some of the abusive sales practices in our industry, all of which were great steps for prospects and consumers alike. However, some insurance carriers reacted by making this great product more confusing, introducing various bonus options (some guaranteed while others being non-guaranteed) and adding significantly higher policy costs to an already somewhat expensive product.
Really their goal was to provide the best looking illustration and ledger to the prospect in hopes of winning the “illustration war.” The company I want to focus on today did things the exact opposite. Rather than focusing on the best looking illustration, they took the path of focusing on the best long term consumer value. To do this they’re not relying upon bonuses to provide the value. Instead they’re focusing on a simple design, low policy costs, high uncapped performance, loan flexibility and a proven history of high renewal rates.
This insurance company has one of the lowest policy costs in the industry, and to highlight that, the premium load is only 5.5 percent. The reason I point this out specifically is that premium loads have increased substantially with some of these new generation IUL products. Those premium loads are used to cover state premium taxes, the cost of bonus features, even profitability for the insurance company and of course advisor commissions.
This company has also updated their IUL product with the updated 7702 guidelines. January 1, 2021, the IRS updated the 7702 guidelines which dictate the level of life insurance that needs to exist in order to receive all of the tax benefits permanent life insurance provides. Resultantly, insurance companies were able to update their products and basically reduce the amount of life insurance that must exist for the dollar of premium funding. The benefit for this IUL is they’ve already updated it with the new 7702 guidelines which further reduces the life insurance cost structure. Additionally, they’re a highly rated insurance company. They have a 96 Comdex. Comdex is a 1 to 100 score, and 96 is one of the top ratings for a life insurance company offering an indexed universal life.
Let’s next talk about the fact that it’s a proprietary product with proven performance. Now, to give you an analogy, there are other low cost IULs in the industry, but think of them more like a Prius. You’re going to have the efficiency and high miles per gallon, but you are not going to have the horsepower or performance. This IUL not only has the efficiency in the low policy expenses, but it also has the performance upside. So think of this IUL more like a Tesla, where you have the efficiency of the electric engine but you also have a high amount of horsepower.
To do this, this product has three different uncapped index strategies all with participation rates greater than 100 percent. Let’s say the underlying index provided a 10 percent return and your participation rate was 125 percent. Your client would receive a 12.5 percent rate of return with no cap or upside limit. They also have three different index crediting segments: A one-year, a two-year, and a three-year, all with impressive 30-year lookback returns. As we know, past performance doesn’t predict any future results. While the averages look great, they look at past index data and current participation rates. We don’t know what the next 30 years of index data will look like and what participation rates will be. The low interest rate environment may continue to cause a drag on the insurance companies’ general portfolio yields causing participation rate pressure.
30 Year Average: One-year segment 7.55 percent, two-year 8.18 percent, and the three-year 10.63 percent.
Again, all very strong returns, but I’d take that with sort of a grain of salt considering we don’t know what the next 30 years will look like. The way these indexed allocations are structured is that the insurance company can provide higher cap and participation rates based on the cost of the options. These options and derivatives are based on the volatility of the underlying index and the time length of the index segment. Longer indexed segments essentially allow the insurance company or investment bank to offer greater cap or participation rates.
However, there is some risk with longer-term segments. Let’s say you have two really good years where the underlying benchmark is having a solid run. But a bad third year comes along that may potentially wipe out all your gains for the entire three-year segment. One way we mitigate against that is a very diversified approach. We recommend allocating a third into each of these indexed segments. Not only are we diversifying allocations, but we are also diversifying time. One key differentiator of this IUL is that it provides partial index credits for three reasons: Monthly deductions, withdrawals and death. With most insurance companies, if your client dies halfway through the segment, their beneficiaries are not going to receive an index return. With this policy, let’s say you’re two years in on a three-year segment and your client passess away. Their beneficiaries will still receive proportionate credit for the time they were in that index segment. Again, not only are we recommending diversifying the indexed strategies, but we also have a feature in this IUL to help mitigate against some of the risk of longer-term segments.
Lastly, loan types and rates are crucially important for a top-tier accumulation IUL. The way these policies work is you’re not actually withdrawing money from your life insurance policy, you’re merely taking a loan from the insurance company with your life insurance cash value and death benefit as collateral. Additionally, the amount you borrow from the insurance company continues to earn index returns in the contract, which can be quite substantial. The way to win with an accumulation IUL policy is to have low borrowing costs from the insurance company and high upside on the index.
This insurance company has three different loan types. A fixed loan (net wash after 10 years), an indexed loan and a variable rate loan. The index loan has a contractually set guaranteed rate of 4.75 percent. No matter what happens with interest rates, the insurance company can never charge more than that stated rate in the contract. The variable loan works a little differently, as the rate is based on the Moody’s Corporate Bond Yield Average, which as of right now is historically extremely low.
You may ask yourself, what happens if interest rates increase with a variable rate loan? Well, that is going to increase the variable loan rate. However, there is a cap in this policy of one percent over and above the fixed rate, which is similar to a moving target. The fixed rate currently is 3.25 percent, so one percent above that creates a current 4.25 percent cap. The nice thing about this IUL is it allows for the ability to switch loan types once per year. Hypothetically if your variable rate loan starts to exceed 4.75 percent you can switch loan types to the index loan and lock in that 4.75 percent rate. The nice thing again is this insurance company gives you the flexibility to decide that.
To summarize, this proprietary IUL offers a simple, low cost design, high indexed upside performance and great loan options with plenty of flexibility. To top it off, it’s offered by a highly rated carrier that has plenty of experience in the IUL market place. Our high net worth and high-income earning clients are looking for solutions to mitigate current and future taxation. If you aren’t delivering this message, they will surely be hearing it from someone else.
