Indexed Universal Life Insurance is well-known for its ability to generate a retirement income stream, but how can you tell a good product from a bad one?
Most attempts to compare company products fail to find a solid basis for comparison or are foiled by marketing gimmicks.
Where Others Have Failed
The problem with most indexed universal life comparisons is that too much variation is allowed across carriers. All carriers have a defaulted interest rate for their various indexing strategies, and these are loosely based on the cap and participation rates stipulated in the policy.
While this may make some intuitive sense, the logical mechanics behind indexed universal life would suggest that, with the exception of some very specific situations, all indexed universal life contracts will yield more or less the same.
Again, this doesn’t mean we should completely ignore specific variations among carriers when it comes to current cap rates (participation rates are mostly the same).
We can still control a macro evaluation of expenses if we assume the same credited interest rate. Whether or not the additional cap rates justify the additional expenses is part of a fine-tuning process of selecting the best contract for a given situation.
So, failure number one is the lack of a universally assumed interest rate.
Death Benefit Assumptions
While this isn’t a universal problem, it is a prevalent one. For income comparison purposes, death benefit should be solved to minimum non-MEC and use the Guideline Premium Test to qualify as life insurance in compliance with DEFRA.
Some comparisons have specified premiums and solved the death benefit to the “target premium” – bad idea.
Maximum income is our goal. As such, we want the minimum death benefit in order to mitigate insurance costs as much as possible and build the best-performing universal life contract.
Preferred Best Assumptions
More important than comparing companies with each other is choosing among scenario comparisons for an individual who wants to apply for life insurance.
Most comparisons (including those run by the life insurance companies themselves) assume best-case scenarios with a preferred plus (best) risk class.
The truth is, most carriers issue a large portion of their policies as standard, and that’s where most assumptions should start.
It is true that this life insurance as an asset class thing gets better the healthier one happens to be – longer life expectancy begets lower insurance costs – so again, better risk classes are one of the fine tuning considerations.
Our comparison takes a 40-year-old male standard-issue placing $10,000 annually into an indexed universal life contract for 25 years.
After 25 years, he begins an income stream until he reaches age 100 (years 26 to 60).
We solve the death benefit for minimum non-MEC and DEFRA compliance, increasing until the year income starts, at which point we switch the death benefit option to level.
The only rider we’ve included is the over-loan protection rider (sometimes, this is not a selectable rider but rather a built in feature; regardless, it’s included with all policies compared).
We’ve sorted the results by income derived.
What the Results Tell Us
While it’s tempting to draw definitive conclusions about who has the best product and who doesn’t, it’s important to remember that this is a narrow evaluation of a specific circumstance.
Still, the comparison gets us started and pointing in the right direction.
There are certain less easily quantifiable considerations.
For example, Life of the Southwest (LSW) tops the chart quite impressively, but with a disappointing Comdex and a junk bond position that totals 75% of the company’s surplus position, we remain hesitant to strongly recommend them in most cases.
It’s important to keep in mind that this is merely a starting point, and further consideration of company/contract specifics is always in order.
Some Notable Omissions
Due to problems with company software, a few companies are missing from this list. We’re working on this and hope to update have an update for you once these issues are resolved.
The missing companies include Prudential, Transamerica, Pacific Life, and Aviva.
If you feel we’ve neglected someone, we'd be happy to hear from you.
The Next Step
From here, it would be prudent to evaluate such specifics as available riders, premium loads, caps, minimum guarantees, additional contract benefits/options, and company strength.
Though many agents skip it, there’s also lots of reasons to pay attention to the fixed account.
Lastly, keep death benefit performance in mind. This asset can be leveraged for more than just its potential income. Among companies with similar incomes, favor could fall to the one that performs markedly better in terms of death benefit.