Friday, April 19, 2013

Indexed Universal Life: Hot or Not?

Lately you cannot work in this industry without coming across the latest buzz product: Indexed Universal Life (IUL). You certainly know the term, but how much do you really know about it and should you be
Many Indexed UL products base their credited interest on the S&P 500.
selling it?

IUL products combine life insurance with cash accumulation linked to stock market performance. It gives policy owners downside protection, and significant income tax advantages. According to LIMRA, the IUL market has grown from $330 million in 2006 to $1.5 billion in 2012, and IUL sales make up 30% of overall UL premiums.

Illustrations wars may not lead to the best carrier for the client long term if today’s leader is tomorrow’s dog due to lowering of caps on inforce policies or increasing mortality costs etc. We have all been through the days of under-performing products (UL, VUL or WL) due to returns that were much less than projected.  Is it possible that IUL could be tomorrow’s under-performing product?

MVP has developed a certain comfort level with the indexed strategy based upon the fact that no year can be less than zero. On the flip side, you can experience a year as high as 12.  On one product's indexed model, a 20-year historical rolling period doesn't have a single period that was less than 7.47%.  Unlike the VUL product, you don’t have a negative year where the client gets too scared to put his next premium into the policy. The biggest detriment to any plan using life insurance to save money is one where the client stops funding it! It is the kiss of death for the future cash values or income stream.

Learning from the past, we need to illustrate at an alternate return assumption that is lower than the historical average to make sure the plan works. We need to promote it as a product to be used with a high level of premium relative to the death benefit. If the client needs more coverage, they can buy a term policy in addition to the IUL. Let the money accumulate for a 20-year period to get an IRR on cash that is only between 1 to 2% lower than the illustrated gross rate. Monitor the cash values as you go and let the carrier's concierge team help keep track of it. Unlike the under-performing policies of the past, there are over-loan protection riders to guard against the tax time bomb on an income strategy. Products have tools in place now that were not available in the past to make sure the plan works for the client.

IUL products fit the best in the Mass Affluent Market where the client has already maxed out their 401(k) and makes too much money to do a Roth. Remind these clients that the cash values have creditor protection (depending upon the individual state’s laws). Your Doctor, lawyer and business owner clients will love it.