Does IUL Really Offer Stock Market Returns Without Risk?

Since the IUL (Indexed Universal Life insurance) came onto the scene, it's been sold as a way to get stock market returns without taking any of the risk. In this case, the risk in question is losses in the stock market. Companies often have a guaranteed minimum interest rate. In theory, this should make you rich, right? So how come so many IUL policies collapse?

Flexible premiums are not solely to blame. In reality, guaranteed minimum interest rates have to be tempered somehow. For whole life insurance, minimums can be guaranteed because of the companies conservative investment portfolios, combined with guaranteed level premiums that are designed to keep the policy in force. Dividends, while non-guaranteed, have an excellent track record of being paid because they're based on company profits, rather than individual investment performance.

IULs can offer minimum interest rates because they also have a cap on that interest rate. So although you might not lose money, you're still gambling on a volatile asset without its full potential. And you can lose money because after the minimum interest rate pays, there are still insurance costs to consider.

That’s where the “Min” and “Cap” buttons in the Accumulation calculator come in handy. With these buttons, you can simulate the parameters of an Indexed Universal Life policy. Then you can begin to answer: Will your clients have a better chance with IULs?

Getting Accumulation Set Up

Open your Accumulation calculator to begin setting up the illustration. We're going to set the Illustration Period to 85 years, keeping the Present Value at zero. Click the Cash Flow button and in Payment 1, add $10,000. To include this payment in the table, click on the “Pmt 1” button.

From there, we’ll pull up the Market History tool, and copy the S&P 500 without Dividends from 1936 to 2021. Then you can go back into Accumulation, right-click the first box under Annual Earnings Rate, and hit Paste Values. This is going to simulate paying premiums into an IUL, and the resulting cash value. Keep in mind that this is not taking into account the costs of maintaining the policy, which would further lower the cash value.

The account, over 85 years, turns into $61,104,252. What happens when we create a minimum and maximum rate?

Adding Min and Cap to Your IUL

Below the Actual Yield section, you’ll see the two buttons for Min and Cap.

If you click each of the buttons, you’ll be able to set your own rates. For this example, we’ll set the floor at 0%, and the cap at 10%. 

As you'll see above, over 35 million dollars vanished. While minimizing losses is an important factor in growth, you can't completely escape the volatility here.

How to Interpret Rates and Color Changes

When you add these variables, you’ll notice the rates in the columns changing color. Rates that are below your Minimum will turn purple, while rates that are above the Cap will turn light green, yet the numbers remain the same.

This allows you to see where the changes are, while being able to easily compare your original variables to the new parameters you have set (without excessive toggling). So for instance, any rate that is in light purple is effectively 0%, however you can see the original number for comparison.

Below, you’ll see that with the Min set to 0%, the account climbs to the billions. 

And of course, without the 0% Min, losses skyrocket:

If you choose a volatile asset, you'll still experience that volatility even with parameters. On the other hand, whole life insurance provides certainty because it offers certain guarantees and steady growth you can depend on. Experiment with your Min/Cap and try out some IUL scenarios for fun. Even if you don’t use this in front of a client, it is valuable for you to understand the limitations of a volatile asset, even in a “winning” stock environment.

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