How to Cure What Ails Indexed Universal Life

◆ "10-15% Returns — Without Market Losses!"

◆ "Outperform the S&P 500 — With No Risk!"

◆ "Never Pay Taxes Again — The Government Doesn't Want You to Know This!"

Look, these are nonsensical statements which, if I had my way, I'd ban.

Not because I am against free speech, but rather because they harm the life insurance industry and the very notion of indexed universal life.

Here's the reality: There's nothing wrong with IUL.

The problem arises from the misuse of the policy by agents who either wish to maximize the commission payout to the extent possible, or misdescribe the policy as part of a flawed sales process.

Add to this the projection of long-term cash accumulation performance that is almost certainly unrealistic, and you create a noxious cocktail of unmet expectations.

It's time to move past this. Here's how.

Policy Management Technology: The Missing Link

I created a monster in 1986, when I invented the first example of universal life insurance configured to produce systematic policy loans for funding retirement income.

This "private pension" I named the Alternative Plan.

It was offered by E.F. Hutton Life, the subsidiary of the then-big Wall Street firm.

At that time, projections of long-term cash value growth based on double-digit interest rates were common. Sales were made based on which insurer illustrated the highest cash value over decades into the future.

To capture more sales, insurers found ways to "out-illustrate" competitors.

Agents could not foresee a structural, multi-decade decline in interest rates.

The underperformance of that necessitated large increases in premiums and caused many policies to lapse.

A tragic outcome.

Now, 38 years later, we're about to see the solution to the underperformance problem, via technology that manages the insurance policy.

Active Tracking

One of the saddest dimensions of so many policies lapsing in recent years is that, if such a management system had existed, small adjustments to the premiums, made early and regularly, could have preserved the policies.

The lapsation problem arose when years passed, and unattended policies got so underwater that they could not be salvaged.

The new technology that can make IUL live up to its potential monitors policy performance.

The system then informs the policy owner about any premium adjustments needed to keep the policy on track for the desired outcome.

How It Works

The technology that overlays the policy enables the policy owner to define the parameters of a personal defined benefit plan.

In addition to going through the normal application process, the insurance applicant makes four decisions that regulate the forward-looking management of the IUL policy.

◆ 1. Define the amount of desired retirement income.

◆ 2. Choose the age at which income payments begin.

◆ 3. Select the number of years to pay premiums.

◆ 4. Choose a baseline interest crediting assumption.

The tracking system can then use those assumptions to keep the policy owner on track toward generating a lifetime guaranteed annual income via policy loans, or to warn the policy owner early if achieving that goal will be difficult.

That kind of tracking system can take what looks like a passive asset and make it an active component of lifelong retirement security. It can enhance life insurance policy owners' connection to their policies and make use of life insurance in income planning more meaningful and outcome-driven.

David Macchia, the founder of Wealth2k/Persuazo, developed The Income for Life Model retirement planning solution and the Constrained Investor retirement planning framework.

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