Understanding IUL Mechanics

[De-risked]

Hi All,

New here. I sell primarily whole life insurance. I am simply trying to understand the mechanics of IUL's as I have clients that ask me about them, and may potentially want to add this to my product offering. I understand on a rudimentary level how they work, but that's about it.

As IUL's can be a pretty hot topic of discussion, I'm having trouble finding info that's objective. What I'm coming to understand is that like any other insurance product, proper design is the primary factor in determining whether they are or are not a good product for the client.

If this info is already here somewhere, apologies, I couldn't find it. I'm just looking for the best source of info for a deeper dive into this. Any resources that those with a good understanding of IUL's can point me towards would be greatly appreciated.

No interest in starting a discussion about whether IUL's are or are not a good product.

TIA!

 

[Allen Trent]

I understand on a rudimentary level how they work, but that's about it.

Let's start with the parts you understand. Tell me what you understand about UL products in general.

 

[De-risked]

Let's start with the parts you understand. Tell me what you understand about UL products in general.

My understanding of IUL’s is that they’re based on a life insurance engine of 1 year renewable term and are paired with a separate account that is based upon some sort of index (or options purchased for that index). The returns are typically capped (maybe 8-12%), and there is a floor as well (maybe 0-1%). There are two, options, A and B, one with a level death benefit, and one that grows (I could be wrong on this one)

I know there are different options that provide the policy owner with flexibility in payments to keep the policy active, much more so than a standard whole life policy. I believe costs may also vary and are typically pulled from the separate account. Policy owners can take policy loans as they would with a whole life policy.

Correct me if any of that’s wrong, but beyond that, anything beyond that is conjecture on my part.

 

[PrivClientSG]

Here's a few places to check -- first, I think Steve Leimberg wrote an "objective" (and "introductory") article on IUL. Anything he ever wrote was objective, and of and on the highest level of integrity. A true legend in our industry. He is known to write about the non-sales, non-propaganda, non-hype -- in other words -- the truth! Second, I think Vince D'addona, a member of the Life Insurance Hall of Fame, may have written an article on this, and while it might not have been introductory, it certainly spoke from an honest and objective way. Lastly, I think Eric Abramson wrote an article on an introduction of life insurance products, and I think he spoke to IUL.

Perhaps the biggest problem here -- when it comes to product -- is that most people contribute sales and propaganda to further their own agenda, support their own position, etc. When a product is misunderstood, there will certainly be trouble. When a product is not sold properly -- there will certainly be trouble. Good luck!

 

[De-risked]

Here's a few places to check -- first, I think Steve Leimberg wrote an "objective" (and "introductory") article on IUL. Anything he ever wrote was objective, and of and on the highest level of integrity. A true legend in our industry. He is known to write about the non-sales, non-propaganda, non-hype -- in other words -- the truth! Second, I think Vince D'addona, a member of the Life Insurance Hall of Fame, may have written an article on this, and while it might not have been introductory, it certainly spoke from an honest and objective way. Lastly, I think Eric Abramson wrote an article on an introduction of life insurance products, and I think he spoke to IUL.

Perhaps the biggest problem here -- when it comes to product -- is that most people contribute sales and propaganda to further their own agenda, support their own position, etc. When a product is misunderstood, there will certainly be trouble. When a product is not sold properly -- there will certainly be trouble. Good luck!

Thank you, I greatly appreciate it. And I agree whole heartedly with your last sentence

 

[Allen Trent]

My understanding of IUL’s is that they’re based on a life insurance engine of 1 year renewable term and are paired with a separate account that is based upon some sort of index (or options purchased for that index). The returns are typically capped (maybe 8-12%), and there is a floor as well (maybe 0-1%). There are two, options, A and B, one with a level death benefit, and one that grows (I could be wrong on this one)

I know there are different options that provide the policy owner with flexibility in payments to keep the policy active, much more so than a standard whole life policy. I believe costs may also vary and are typically pulled from the separate account. Policy owners can take policy loans as they would with a whole life policy.

Correct me if any of that’s wrong, but beyond that, anything beyond that is conjecture on my part.

You have a very good handle on how ULs & even IUL tend to work....even more so than most of the agents currently selling it as many don't know ULs are ART term costs, have load fees, policy fees, etc.

You are in very good shape. If for cash accumulation cases, always design policy with lowest face amount that the IRS will allow your client to be able to fit the premium the client wants to pay so that the policy is funded to max non MEC premium levels

 

[De-risked]

You have a very good handle on how ULs & even IUL tend to work....even more so than most of the agents currently selling it as many don't know ULs are ART term costs, have load fees, policy fees, etc.

You are in very good shape. If for cash accumulation cases, always design policy with lowest face amount that the IRS will allow your client to be able to fit the premium the client wants to pay so that the policy is funded to max non MEC premium levels

Thank you for the tip. Most of my clients purchase whole life policies for cash accumulation purposes. My main concern is that whatever I write is viable long term. With traditional whole life this isn’t nearly as much of a concern.

Would the advice you provided be in line with what I described above? We all know the horror stories of people whose IUL’s implode when they’re 85 because the COI exceeds the cash value of the policy. I know this is almost certainly due to poor policy design resting on a foundation of unrealistic expected crediting rates. Does Max funding to the MEC limit help to minimize or eliminate this risk?

 

[Allen Trent]

My main concern is that whatever I write is viable long term. With traditional whole life this isn’t nearly as much of a concern

Agree & that is extremely difficult to predict. Max funding helps both a WL or an IUL to have the best chance at a positive long term outcome. However, WL is a much better worst case scenario & IUL will project better at current projected interest & current COI.....but that assumes both the COI & the participation rates stay as illustrated......for 50 -70 years & that the carrier is still in business & wanting to sell/service that type of product. On the flip side, as we saw with Ohio National, dividends are not guaranteed & a carrieray not just slightly lower the dividend, theyay end it all together & may sell off their company or take on investors like pension/hedge funds.

 

[De-risked]

Agree & that is extremely difficult to predict. Max funding helps both a WL or an IUL to have the best chance at a positive long term outcome. However, WL is a much better worst case scenario & IUL will project better at current projected interest & current COI.....but that assumes both the COI & the participation rates stay as illustrated......for 50 -70 years & that the carrier is still in business & wanting to sell/service that type of product. On the flip side, as we saw with Ohio National, dividends are not guaranteed & a carrieray not just slightly lower the dividend, theyay end it all together & may sell off their company or take on investors like pension/hedge funds.

yeah I think my main concern when I look at IUL design is that there could be too much riding on illustrated/ assumed COI and crediting rates. It sounds like if you design the policy for the least possibly death benefit, this provided for the largest margin of error/ protection?

I’m also guessing this pays the least commission and probably isn’t often designed this way for that reason?

 

[DHK]

I don't like Option B DB policies that are designed for them to switch to Option A in the future for one reason:

Who is going to remember to do that?

An illustration is not a letter of instruction to the insurance company. It has to be requested.