Don’t believe the hype: FIUL is too good to be true!
This seems to be the common refrain from the majority of articles and commentary directed toward fixed index universal life insurance (FIUL), usually made in response to claims that sales people too often promise the moon whenever FIUL is discussed as an option for their client’s financial portfolio.
True, FIUL has been over-hyped at times and its reputation has suffered as a result of hyperbole from those who lack a complete understanding of the product and the value it can bring to a holistic financial strategy. This can make it difficult for both financial professionals and consumers to get a clear picture of whether or not FIUL is a good fit for their situation.
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In addition to offering an income-tax-free death benefit that can help address immediate and future needs, FIUL also has the potential to accumulate tax-deferred cash accumulation. Clearly, this combination of benefits is answering a need in the marketplace.
Since it was first introduced, FIUL sales have been steadily growing. New carriers have been entering the market and launching new products that continue to drive sales each year.
New guidelines have also been introduced, such as Actuarial Guideline 49 (AG 49), to address past inconsistencies among carriers with how FIUL policies are illustrated and sold. Yet, as the market grows, so do the misconceptions about FIUL insurance.
A closer look at some of these myths can help bring clarity to this topic and demonstrate the opportunities FIUL may offer your clients.
Most FIUL insurance policies offer the potential for cash value accumulation, which is protected from negative index performance. (Photo: Thinkstock)
Myth 1: The ability to offer cash value accumulation potential with a level of protection is too good to be true.
Reality: Most FIUL insurance policies offer the potential for cash value accumulation, which is protected from negative index performance (however, fees and charges will reduce cash value). The insurer achieves this by putting a portion of the premium into a general portfolio.
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Generally, this portfolio is conservative and made up mostly of bonds. This helps the life insurer provide a level of protection with the policy; if the index performance is flat or negative, the client will not lose cash value due to the index performance.
A smaller portion of the premium is used to purchase options. These options help provide the insurer with the ability to offer cash value accumulation potential based on the positive performance of an external market index. When the external market index has positive performance, the cash value is credited with indexed interest (typically subject to a cap or participation rate).
The insurer generally spends the same amount regardless of the index allocations chosen. If the chosen index increases, the option will provide a return that is equal to the amount needed for the policy. If the chosen index decreases, the option will not provide credited interest to the policy.
Another misconception in the industry is that, if the external market’s performance is greater than the cap on the life insurance policy, the carrier makes money. This is not true.
Most carriers transfer away their investment risk with hedging, either internally or through investment banks. The carriers’ goal is to immunize themselves from market movements, focusing on their core business: insurance risk.
AG 49 sets parameters for calculating a carrier’s maximum illustrated rate, but insurers are still competing to offer the highest cap. (Photo: Thinkstock)
Myth 2: The product with the highest cap has the most accumulation potential.
Reality: Even though a carrier offers the highest cap, it may not yield the most cash value accumulation potential. With the goal to standardize illustrations across the life insurance industry, AG 49 set parameters for calculating a carrier’s maximum illustrated rate; however, carriers are still competing to offer the highest cap.
There are ways that the carrier’s options budget may be unrealistically inflated. For example:
Artificially inflating caps, which can cause a product to have high charges or poor benefits.
Aggressive investing, which is risky, and the carrier may not be able to sustain the caps in times of crisis.
Minimizing the investment component, which can create an unbalanced product.
The cap is no indication of future cash value accumulation that a client could realize.