Do IULs Ever Perform Close To Illustrations?

[David Shaulson]

IUL is not likely to perform as illustrated. Typically, the insurer first exacts a profit on the block of business and then buys derivatives to produce a return with the balance of their revenue. The derivative pricing is outside of their control and they adjust returns accordingly by changing principally participation rates and caps. Oddly, in the best markets (sustained low cost of money) the derivatives are most expensive and so performance must be the most truncated.

First observation, this is not a market based product, it is driven by the insurer who sets and periodically changes the terms. How many folks are willing to deposit money with an online gambling company and then ask the question, "Did I win?" The gambling company first takes what it wants and distributes enough of the rest to keep the losers coming back to lose more. This is the IUL model. The purported investor puts money in the market and then gets told how much of the winnings they can keep. Seems like a sucker's game.

The right comparison is not whole life, but variable life where one gets all of the market return, albeit with volatility. The volatility is then mitigated by the long-term nature of the product (look at the market's standard deviation over 40-year time periods (average life of a VUL contract) and one will find it's remarkably low). While there is still the risk of COI creep, the investment is unadulterated and historically will produce far more alpha than an IUL under any circumstances.

 

[Allen Trent]

Assuming for MEC limits, can you overfund a WL policy, like you can the IUL? If not, isn't the overfunding concept the real attraction here bc nearly all of it goes into the index? sorry if off-topic

WL can be overfunded via the PUAR riders. MEC limits tend be more liberal for IUL/VUL/UL due to the much lower guarantees of those products impacting the government premium guidelines compared to the higher guarantees of WL. (This has only been the case in last 2 years or so when the IRS finally updated the MEC calculations for the 1st time in 30-40 years.

Also, be careful saying the extra money of an IUL goes directly into the "index". That isn't actually factual for a couple reasons in my opinion. 1- all premium being paid is the same to the carrrier, meaning it goes through the premium loads & policy has fees & cost of insurance. 2- no money actually ever goes into an index or the stock market. The carrier is merely crediting interest on the cash value by applying the change in an index between 2 points along with their cap & participation rates that are set based on what options the carrier could purchase based on their own fixed investment portfolio (bonds, mortgages, treasures). As much, or more of an IUL long term returns will be based on how much money the carrier can make on their own fixed portfolio to afford options with higher caps & participation rates

 

[Sheryl J Moore]

@HappyGuy - neither indexed universal life, nor whole life, will perform as illustrated. sjm

 

[Richard-PDIS]

Yes, you're right. I should have written "matched" the change in the index instead of "go into" - I could have been more accurate. So then, the overfunded portion is also subject to the COI, when the base premium already carries the death benefit? I'm sure the overfunding portion absorbs some fees, just not as much fees as the minimum base premium. I understand that carriers are NOT going to let all that money slip through their coffers and not get a piece of it, lol

 

[Allen Trent]

Yes, you're right. I should have written "matched" the change in the index instead of "go into" - I could have been more accurate. So then, the overfunded portion is also subject to the COI, when the base premium already carries the death benefit? I'm sure the overfunding portion absorbs some fees, just not as much fees as the minimum base premium. I understand that carriers are NOT going to let all that money slip through their coffers and not get a piece of it, lol

With UL products, there really is no differentiation of dollars going in as either going toward base or toward overfunding. Each dollar flows in the same. Collected & load fee deducted, then it goes into CV. There is no separation of a CV that says this came from a base premium & this from overfunding as it wont be known for decades whether it was truly overfunded or not. Once in the cash value, all policy costs & COI are deducted from the cash value. It is best to have some money sitting in the fixed account at all times so that all the fees can be deducted from there rather than the carrier having to take the fees from the index crediting segments as you could lose potential interest credits if portions of the cash value in the index segments had to be surrendered to cover internal charges before the segment expired.

Lots of people overfunded ULs in the 1980s when illustrated at 9-15%, but many of those have or will crash now that they have been earning 3-4.5% the last 20 years in addition to carriers charging more in internal charges. If a policy had base premium like you are thinking & those covered the costs, how could ULs with 3-4.5% lifetime guarantees crash? It is because in hindsight they were underfunded, not overfunded

 

[Producer Patrick]

Assuming for MEC limits, can you overfund a WL policy, like you can the IUL? If not, isn't the overfunding concept the real attraction here bc nearly all of it goes into the index? sorry if off-topic

Yes, even WL plans without PUARs can MEC. All Single Premium plans will MEC. Also WL Limited Pay plans shorter than 8 years* will MEC.
* We actually offer a 10 Payment WL Life that MECs at certain ages.

Of course, since we do not give Tax Advice, we only state to the client that the plan may be a MEC.

 

[DHK]

* We actually offer a 10 Payment WL Life that MECs at certain ages.

I was pretty sure that MassMutual fixed that with their newest 10-pay?

 

[Allen Trent]

All Single Premium plans will MEC

Funded with non MEC 1035 & no additional Premium paid should retain non MEC status. Done that many times over the years with crashing VUL or IUL being 1035 exchanged to Single Pay WL or 1 payment into no lapse UL/IUL

 

[me112233]

Thanks Walt. I just want to know if anyone has seen an IUL perform like the illustrations just once after a few years. I understand the product fairly well, certainly not an expert. Still I was looking for some verification from someone who has sold them to have proof they do as they illustrate. Thanks again.

The answer to your question is that there is probably one IUL out there somewhere that, 15 years after the fact, actually was living up to what was promised; and that's only because someone got lucky and picked just the right index and the policy was written on a very young insured (like a wealthy man buying a policy on his child). But reality is that the only ultimate guarantee of an IUL is that it will pay NOTHING and have no cash value if you live a long long time. I had a couple in their early 70's wanting a place to park some safe money, and have a million dollar benefit for their kids after both of them (the couple of their 70's) are dead. A single-premium second-to-die policy was in order. I called the Big Bad Brokerage that is constantly pitching IUL policies as the cure to every problem. So, he sent me an illustration. It "illustrated" a million dollar payout, but that guarantee column showed a lapse by age 95 with no cash value. I called the Big Bad Brokerage on the phone, and told Mr. Big Bad that he must not have understood me, I needed a GUARANTEED policy. I then inquired about a participating whole life through Penn Mutual or Mass Mutual or the like, and he poo-poo'ed that idea, and said the IUL was the way to go. I then asked how much premium would have to be paid to get a guaranteed death benefit, no matter how old [at least one] of these folks lived to be. He sent me another illustration with a higher premium, but even it wasn't guaranteed. IUL is a garbage product. You might get lucky and it not crash and burn on you. That said, I have never ever even once seen an IUL that lived up to its hype. Moral of the story is either buy term or buy whole life; both have a stellar track record of doing what they promised. That so-called "universal" stuff is garbage, and used by silver-tongued hucksters to separate wealthy, yet gullible, people from their money.

 

[Allen Trent]

The answer to your question is that there is probably one IUL out there somewhere that, 15 years after the fact, actually was living up to what was promised; and that's only because someone got lucky and picked just the right index and the policy was written on a very young insured (like a wealthy man buying a policy on his child). But reality is that the only ultimate guarantee of an IUL is that it will pay NOTHING and have no cash value if you live a long long time. I had a couple in their early 70's wanting a place to park some safe money, and have a million dollar benefit for their kids after both of them (the couple of their 70's) are dead. A single-premium second-to-die policy was in order. I called the Big Bad Brokerage that is constantly pitching IUL policies as the cure to every problem. So, he sent me an illustration. It "illustrated" a million dollar payout, but that guarantee column showed a lapse by age 95 with no cash value. I called the Big Bad Brokerage on the phone, and told Mr. Big Bad that he must not have understood me, I needed a GUARANTEED policy. I then inquired about a participating whole life through Penn Mutual or Mass Mutual or the like, and he poo-poo'ed that idea, and said the IUL was the way to go. I then asked how much premium would have to be paid to get a guaranteed death benefit, no matter how old [at least one] of these folks lived to be. He sent me another illustration with a higher premium, but even it wasn't guaranteed. IUL is a garbage product. You might get lucky and it not crash and burn on you. That said, I have never ever even once seen an IUL that lived up to its hype. Moral of the story is either buy term or buy whole life; both have a stellar track record of doing what they promised. That so-called "universal" stuff is garbage, and used by silver-tongued hucksters to separate wealthy, yet gullible, people from their money.

There are no lapse IUL & no lapse UL to afe 120. Both individual & 2nd to die. Your broker must only have access to carriers to age 95.

I am not a huge fan of IUL, but i have been involved in a $7M 2nd to die this year with $800k single payment that provides no lapse guarantee to age 120 & several individual policies with chronic illness riders that were single funded with no lapse to 120.

The bigger issue today for someone in ther late 60s or older is getting them approved. I used to do a lot of work in single premium WL, but since Covid it is near impossible to get anyone approved as almost everyone over 70 has developed some long term autoimmune inflammatory illness, A-fib, cancer, ,etc.