Index UL After 10 Years: Less Volatile, More Robust

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.