Earlier this year, we wrote about how to illustrate IUL returns in the Accumulation calculator. The reality is, IUL’s are sold as something they just aren’t—there are fewer guarantees, and a lot is still left up to risk.
Now, we have a new button that illustrates another “lesser-known” provision of an IUL policy: participation ratios/rates. The insurance company sets the participation ratio, and is non-guaranteed, which means it can change from year to year.
A participation rate controls how much dividend a policyholder will receive. For example, say the index earned 4%. If the participation rate is only 50%, the actual gain will feel like 2%. So 4% on a $10,000 cash value with 100% participation would be $400. However, with only 50% participation, the gain is only $200.
Below, we’ll show how to use the “Par” button.
Setting Up Accumulation
Like the first IUL illustration we did, we’ll set up by adding $10,000 in the Pmt 1 box in Accumulation. To add Pmt 1, click the Cash Flow box and enter your value into “Pmt 1” in the box that appears.
From there, open Market History, and copy the S&P 500 without Dividends. We’ll illustrate over 85 years, so for this illustration, you can copy values from 1936 to 2020.
Adding a Min/Cap
Next, you’ll want to click Min/Cap to turn them on. For this example, we’ll use a Min of 0% and a Cap of 10% again. Notice how the value has decreased by roughly $35,000,000 just by restricting the interest window.
While having a minimum, in theory, should protect from loss, having a Cap also keeps the policy from achieving what it’s meant to achieve: “stock market returns.”
The Participation Ratio
Now, we get to the real eye-opener. What if the participation ratio was 75%? That seems like a relatively strong number, yet let’s see what happens.
When you turn on the “Par” button, next to Min and Cap, it will start at 100% participation. Replace that with 75, and look at what happens.
The account value goes from more than $25,000,000 down to just under $10,000,000. The account is less than half of it’s original value, even though the participation rate was $75,000,000.
Note: To get a better understanding of how money can seemingly “vanish,” read our post on the Laffer Curve.
So what happens if the participation ratio is as low as 50%?
At 100% participation, the account was more than $25,000,000 and at 50% participation it’s barely more than $4,000,000. A 50% participation ratio reduces the policy to roughly 1/ 6 of its potential, in this scenario.
This doesn’t even factor in the costs of maintaining the policy.
So why would you put your money into something with more risk, less certainty, and a possibility that the policy cannot sustain itself?
When you choose an asset with volatility—i.e., something correlated to the stock market—prepare for it to be volatile. If your objective is liquidity, certainty, and asset enhancement, an IUL is not going to get you where you want to be. If you’re seeking to play the stock market game, then an IUL may be what you want. It’s just important that you understand the distinction. Whole life insurance and IULs are different assets, and should be treated as such.
If you want to learn more about the Truth Concepts Calculators, join us at our next 3-day Truth Training event for live training from Todd, so that you can learn how top advisors are getting results, and use Truth Concepts with confidence