You can’t have your cake and eat it too, but index universal life insurance has enabled many policyholders to come close.
The product started with detractors and an uncertain future in 1997, but sales today have never been stronger. The number and types of indices the products now offer and the increase in look-back periods they now provide are lessening volatility and providing for more robust returns, making for a 10th anniversary worth celebrating.
When IUL was introduced, index annuities had already been around for a few years, so people were comfortable with basic indexing theory–i.e., the amount of interest the policy credits is tied, in part, to the performance of a particular index. The policyholder doesn’t purchase any shares in the index, but in years when the index performs well, the interest crediting rate rises; in off years, it falls, usually subject to a minimum crediting rate floor.
From the start, IUL satisfied a basic need in the marketplace. Consumers wanted higher returns, but also a guaranteed minimum interest rate. This is still the case.
In addition, consumers don’t want to be bothered with–nor are some clients equipped with–the ability to undertake managing a product that has variables requiring a constant eye. Think of an IUL as a wrist watch: When it comes to a watch, most people don’t want to know, or even care, how it works, only that it does, particularly when they need it. Similarly, consumers want performance, guarantees and a product they don’t have to babysit.
IUL has helped to fill that void, and as such, fits nicely between variable universal life insurance and regular UL insurance.
Today’s IULs offer multiple indices, even from multiple countries, to further reduce volatility and increase potential for gains through diversification. A variety of “look-back periods” (which are used in computing changes in the index value) are also available in today’s designs. Add to that the automatic crediting methodologies of some IULs and the overall inherent flexibility of ULs in general, and it is clear this product has come far in just 10 years.
IUL’s most appealing advantage is its upside cash accumulation potential with downside protection. Particularly for those who experienced the stock market of 2001-2002, those advantages are quite attractive.
If IUL has one disadvantage, it’s that the carrier has to pay for the guarantee it provides on the downside. The carrier does this by using a cap rate or a participation rate. The cap rate limits the upside potential compared to that of a variable product. However, IUL is designed for a specific market–particularly clients who need the safety and security of life insurance but also want to accumulate cash value with competitive interest.
Clients have to be comfortable with a long-term financial commitment to ensure their cash accumulation gains can be realized. That means the IUL must be kept in force an average of 15+ years. As such, consumers must have the means to properly fund their IUL, and though there are opportunities to build cash value as the IUL’s flexibility allows, they must also have the patience to let it accumulate.
While not a product disadvantage, there is another disadvantage, one that concerns producers. IUL’s growing popularity has resulted in a wealth of products being issued by carriers trying to capitalize on that popularity. Many are good products, but there are just as many not-so-good products. So the message is, in today’s IUL market, “buyer (read “producer”) beware.”
One market, in particular, may find the IUL attractive. This is the affluent market–people with a net worth of at least $5 million. This group controls a significant percentage of the nation’s investable assets. Purchasing life insurance has traditionally been a low priority in this market, because its liquid assets alone have enabled the heirs to be financially secure. This group would naturally gravitate more toward investing their money where they could possibly receive a much higher return.
However, IUL offers the high net worth group a powerful opportunity: Use the policy to preserve existing estates through permanent death protection, while enjoying cash accumulation–which can lead to premium financing–on a tax-deferred basis (based on current federal income tax laws).
An old saying has it that, to know where you’re going, you’ve got to know where you’ve come from. This applies to the IUL market as well. IUL sales have steadily increased from nearly $65 million in 1998 to almost triple that amount in 2005 ($185+ million), according to AnnuitySpecs.com. (See National Underwriter, July 3, 2006.) However, from 2004 to 2005, sales increased more than 50%, the largest one-year jump ever.
By offering multiple and global indices, a variety of look-back periods (including multiple years), and a variety of death benefit options (including return of premium riders), the jump from 2005 to 2006 could be even higher.