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.