Index Universal Life:
Indexed Universal Life is flexible premium universal life insurance with an equity index feature. It offers life insurance protection plus the opportunity for cash value accumulation over time.
Premium – An insurer charges a specified amount of money (premium) in exchange for its promise to pay a policy benefit when a specific loss occurs.
Equity Index – Interest earnings credited are based in part on increases in a specified index or indices, such as the S&P 500 Index. The equity index component of an IUL is not an investment in any securities.
The primary purpose of an Indexed Universal Life Insurance policy is to satisfy a life insurance need and to provide death benefit protection.
IUL is not an investment; rather its primary purpose is insurance protection.
Indexed Universal Life can take care of a client’s life insurance objectives while also providing the potential for cash value accumulation, through the basic and equity index interest accounts.
Some additional advantages of IUL include:
1. Flexibility of premium payment.
2. Safety of cash value.
3. Income tax-deferred growth (possible).
4. Income tax-free death benefit.
5. Tax-free income for retirement (through policy loans from cash value of policy).
6. Minimum interest crediting rates to provide downside protection.
The costs and charges associated with Indexed Universal Life include:
1. Cost of Insurance (COI) / Mortality charges – The insurance component of an IUL is priced based on mortality tables that show life expectancies and death rates among particular groups of people. Some companies and policies have additional charges associated with the COI.
2. Premium expenses – These may include monthly policy charges and other periodic or regular policy fees.
3. Policy riders – Most riders or add-on features have additional charges.
The IUL client should be someone who needs life insurance protection.
The IUL insurance policy is designed to be a long-term product to provide benefits to your client and their beneficiaries. It is not a short-term savings vehicle nor a short-term solution to insurance needs.
Indexed Universal Life products also feature cash accumulation.
These are some of the key concepts you need to understand about this accumulation feature:
Segment: A segment in an indexed product is the period of time over which the index is measured, usually at least a year. One common method is to have a new segment created on the first date of each monthly period. Any premium the company receives during that month would then be subject to the growth rate for that segment as a whole.
Participation rate: A participation rate determines how much of the gain in the index will be credited to the IUL. It is stated as a percentage.
Cap: The cap is the maximum rate of interest credited in an equity index account. The cap may change periodically.
Two common interest options used with different Indexed Universal Life products are:
Basic interest account: The company declares a specified interest rate for each basic interest account segment prior to or on the beginning date of the segment. The basic interest account segment’s interest rate applies for a specified time from the beginning date of the segment and each basic interest account segment may have a different interest rate.
Equity interest account: The company credits interest related to the growth of the underlying index, according to one of the crediting methods available in their product.
Some of the common interest crediting methods of various Indexed Universal Life products include:
High water mark: This measure looks at the index value at various points during the segment and credits interest based on the highest point, and therefore the greatest growth, during the segment.
Point to Point Annual Reset: This measure compares the change in the index at two discrete points in time, such as the beginning and ending dates of the segment. If the change is positive, the company credits the policyholder's cash values according to the participation rate and cap. If the change is negative, they generally apply the minimum interest stipulated by the contract.
Before recommending an IUL policy to your client, and before your client purchases an IUL policy, you both need to consider both insurance and accumulation features.
Insurance considerations:
1. What is the insurable need?
2. Will the premiums be affordable over the long-term?
3. While the premium is flexible, what is the target premium?
(In most cases the client should over-fund the policy; in other words, make the planned or scheduled premium more than the target premium.)
4. What kind of no-lapse guarantees does the company / policy offer?
5. What is the maximum issue age the product will allow?
6. What are the minimum and maximum policy face values permitted?
7. What are the available riders and what are their costs?
8. What are the underwriting requirements?
9. What is the company’s industry rating?
Accumulation considerations:
1. What equity index / indices does the product use?
2. What methods of account crediting / interest rates are used?
3. What are the Caps and Participation Rates?
4. What are the company’s surrender charges and time periods?
5. What is the company’s policy on lapse and how are premiums used to address this?
6. How does the client access the policy’s cash value?
7. How do the policy loans work and what are the interest rates, minimum amounts, etc.?
IUL products are in most cases unsuitable for clients
• whose insurance needs are already met
• who express a preference for a savings vehicle rather than an insurance product
• who cannot afford the premiums long-term.