Truth About Index Universal Life Insurance Policies

The first Indexed Universal Life (IUL) policy we marketed in the early 2000’s, they were called Equity Indexed Universal Life (EIUL).

The first Indexed Universal Life (IUL) policy we marketed in the early 2000’s, they were called Equity Indexed Universal Life (EIUL). These policies have come a long way since the early 2000’s but there are still short comings and policy owners need to be aware.

Here is the Hard Truth: More than 90% of new life insurance agents quit within the first year, and more than 95% quit within five years.
This is due to several factors, including:
  • Fear of failure : New agents are often aware of the high risk of failure.
  • Unrealistic expectations : Agents may have unrealistic expectations about what they can earn.
  • Lack of follow-up : Agents may not follow up with customers.
  • Lack of mentorship : Agents may not have a mentor to guide them.
  • Fear of rejection : Agents may be afraid of being rejected.
  • Not adapting to change : Agents may not be able to adapt to change.
  • Not listening to customers : Agents may not listen to what their customers are saying.
  • Feeling undervalued : Agents may feel like they aren’t valued at work.

Life insurance can be a difficult product to sell. Agents are primarily dependent on commissions to make a living, and many don’t have enough reserves in the bank to have a chance. A lot of insurance marketing organizations (IMO’s) operate similar to multi-level marketing organizations, agents hassle their friends and family without ever having a sustainable marketing plan for success.

Everything looks very rosy on the initial illustrations, especially in the days before regulators came and implemented AG 49.

Actuarial Guideline 49 (AG 49) is a regulation that governs how illustrations for indexed universal life (IUL) insurance policies are created. The National Association of Insurance Commissioners (NAIC) adopted AG 49 in 2015 to ensure that illustrations are uniform and to protect policy holders.

AG 49’s main goals are to:
  • Protect policyholders : Ensure a level playing field for policyholders.
  • Provide uniformity : Create consistent illustrations for IUL policies
  • Make it easier to compare policies : Allow clients to more easily compare policies from different companies
AG 49-A was released in 2020 to address features that were not explicitly regulated by AG 49.
AG 49-A includes requirements such as :
  • Limiting the maximum illustrated Annual Rate of Index Credits to a single benchmark index account (BIA)
  • Specifying that BIA cannot exceed 145 percent of annual net investment earned rate (ANIER)
  • Requiring a policy with a participating or index loan to illustrate no more than 0.5% greater than their loan rate

AG 49-B, released in May 2023, focuses on regulating illustrated rates for IUL policies. It aims to improve the regulation of illustrated rates by requiring that illustrated rates for volatility controlled indices consider the same leverage used for the benchmark index account.

It would be prudent to request an “in-force illustration” every year after the policy is put in force. While the regulators are focusing on new IUL policies being sold, who is focusing on the orphaned policy owners? WE ARE! Give us a call if you are stuck and we can assist you with the knowledge needed to analyze your policy. We can’t promise you will like what you hear, but Cassandra Clare said, “Knowing is better than not knowing.”
  • IUL’s are first and foremost LIFE INSURANCE POLICIES – if an agent tells you “the death benefit is coming along for the ride”, run away as fast as you can! If the only focus is “creating a tax-free retirement in order to hedge against higher tax rates in the future”, the agent is not compliant with the insurance company and they will probably lose their insurance license and be fined by the state they do business in.
  • Most IUL’s are not funded properly – it is extremely important to understand what the Guideline Annual Level premium means, this is the maximum premium a poilicyowner can pay into the policy for the life of the policy without making the policy a Modified Endowment Contract (MEC). If the policy becomes a MEC, the policyholder will lose the tax advantages of loans from the policy. The “Non-Mec” premium is the most a policy owner can pay into the policy per year without causing the policy to become a MEC, but a policy owner needs to be careful they don’t go over the Guideline Single Premium, or yep, you guessed it, policy becomes a MEC.
  • Policy owners don’t stick to the plan – IUL’s are loaded with extra fees up front. When policy owners get their first annual statement, they typically get confused with the cost of insurance and other expenses, and do not understand a lot of the expense charges typically go away after the first 10 years. Most agents who sell these policies have no idea how the internal charges on an IUL policy work.
  • Cap rate decreases – cap rates to the S&P 500 annual point-to-point in the mid 2000’s were close to 20% with some companies. Now those same policies can be as low as 7% or worse. This means it is highly unlikely the policy will perform even close to the initial illustration, hence why regulators came out with AG 49. Pay close attention to allocation options and reallocate when needed, call us if you need help.
  • Managing policy loans – understanding the tax ramifications if the policy lapses with any deferred taxable gains is extremely important. An agent may have told you about an overloan protection rider, but did they tell you at what age you can trigger it? Did they also tell you that most companies don’t even have a form created for it? This means you have to write a letter, make sure to sign, date, and include your policy number, with the right verbiage to activate the rider after a certain eligible age.
Index Universal Life policies can be an amazing product for someone who:
    1. Needs the death benefit protection
    2. Understands the long-term nature of the policy and how IUL’s function
    3. Is already maxing out ROTH retirement options through IRA’s and or 401k provisions

If you are considering purchasing an IUL, make sure you get educated on IUL products and regulation around them to make the most informed decision. If you have already purchased an IUL and need assistance, give us a call and set up a time to discuss it in person, over the phone, or over Zoom/Teams. We at Pacific Insurance Group have been helping people purchase these kinds of policies since they first came out and own these kinds of policies ourselves. Give us a call today at 425-246-4222.

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