Indexed Universal Life has become a star of the cash value life insurance world, but oddly this relatively simplistic product has been the center of a little confusion–unfortunately in large part on the behalf of the agents that sell them.
The biggest problem surrounding IUL is that agents/brokers have committed the same mistake we often criticize investment salesmen of committing…falling in love too much with the stock market.
On a Scale of 1 to 10…
When it comes to IUL the most typical approach is to offer it with the hopes of generating future income. There are some (key word some) decently designed IUL’s for premium to endow and death benefit purposes. But by and large indexed universal life is a product designed to generate income at a future date. And it does this very well, when it’s designed and implemented correctly. That of course is the primary contingency behind the majority of universal life problem, poor design and execution.
When it comes to evaluating IUL’s overall fit with a client I typically ask them on a scale of 1 to 10, where 1 means if it wasn’t even there I wouldn’t care and 10 being I can’t do this without it, what they’d rank a specific death benefit.
If they answer anything below a 6 I begin to give IUL serious consideration for them. Alternatively if they lay out their list of priorities and death benefit isn’t at least a top two issue, I begin to think indexed universal life could be the right fit.
Design, Design, Design
It’s all about design and commonly agents don’t know how to do it. So, here’s a freebie.
We take a specified premium (outlay) and we solve for the Guideline Death Benefit (Note: guideline death benefit would imply we are using the Guideline Premium–aka the corridor–Test to qualify as life insurance, this will be true 99% of the time). We choose an increasing death benefit (more on that in a little bit) and we’re in pretty good shape.
Remember all that Stuff I Wrote on Whole Life Blending?
We blend whole life for one specific reason, it allows us to buy up cheap life insurance needed for additional paid-up additions we’re adding by the paid up additions rider. We keep the base whole life portion as low as we can reasonably make it under company rules. This is the most efficient way to build a cash rich whole life policy
Guideline Death Benefit Solve is to Universal Life what Blending is to Whole Life
Solving for the guideline death benefit on universal life is the efficiency equivalent of using a large term rider on a whole life policy. It’s the most efficient way to build the policy a la cash value maximization.
Increasing Death Benefit?
This one is not intuitive. It should be the case that the death benefit should be level. That after all would ensure the lowest cost of insurance. This is true, but the problem arrives when we start to run into the maximum amount of cash that can be in the policy relative to the death benefit (which will happen rather quickly).
Remember the guideline premium test is both a premium test and a cash value relative to death benefit test. So while it allows for a more optimal cash policy due to the higher premium limits, it can quickly work in the opposite direction if we’re not careful.
I should note that I might be making this all appear more complicated than it really is. In truth anyone with a moderate understanding of cash value life insurance mechanics ought to be able to set this up easily, it’s the ones who don’t know–or who think they know more than they really do–that cause harm.
We allow the death benefit to increase to accommodate the much larger than normal amount of money flowing into the policy. Remember, this increasing death benefit is merely a function of the additional cash in the policy. You mean you really can buy cash value life insurance and receive all of the additional death benefit created by the cash when you die? Termites be damned!
When it comes time to take income from the policy, we’ll make the death benefit level (for those of you who all wondered why there was an ability to switch in your illustration software, you now have the answer).
The next option I’ll employ (perhaps not on an illustration, but need to be ready to look at when actually managing one of these policies) is a reduction in death benefit. It’s entirely possible that I can shrink down costs even further by decreasing the death benefit a little bit more once we plan to begin income. This is determined with a quick call to the insurance company to find out, yet again, where the guideline death benefit is, and if it’s lower than the current death benefit, time to request a reduction (quick user’s note: do not do this if the policy is still in surrender as almost all reduction in death benefit are counted as a partial surrender and as such will be subject to a pro rata surrender charge).
One of the other problems dooming some universal life policies is the outright refusal of some agents/brokers to manage these policies (gee you’d think they’d care enough to do that, nope).
This product is going to require a little more checking in. It’s no more than the average time good agents/brokers spends simply keeping themselves apprised on the regular performance of a policy they put in force. So with a little bit of care, indexed universal life can make a great choice for clients given it’s laser focus on generating income.