When shopping for Indexed Universal Life (IUL) agents ought to provide quotes with full illustrations. Indexed UL illustration are easy for an experienced agent to quickly run. They’re about 10 pages long, can be generated in a pdf file format and emailed. Insist on a full illustration, not a summary. Insist on the illustration being emailed for review. That’s what you’ll get if you contact me. Agents have the latitude to present these illustrations with maximum index interest rate assumptions, which for the S & P 500 Index interest rates ranging from 7.50% to over 8.25%. Not unlikely to see the highest allowed rate assumption, since it’s the default rate on the quote software, and especially because the results look better. Those maximum rates are justified by the index’s historical average over the last 25, 30 or 40 years.
The most common index used is the S & P 500. Here is S & P 500 yearly returns since 1975. Since we’re dealing here with Indexed ULs, translate those numbers to a cap, current caps generally run 11% to 16% percent, and a floor usually 0% or with a few carriers 1%. Now after seeing how the S & P has moved historically, factor in unguaranteed double digit caps, how can an illustration showing 8% interest rate returns in all years be justified? All years for a 35 year old means 65 years in a row, out to age 100, or even longer.
0, 1, 2, 8, 11
The S & P 500 had zero or negative returns in 2000, 2001, 2002, 2008 and 2011. How would that 15 year historical performance translate in IUL performance? For someone for example 40 years old having an accumulation phase of 25 years, some down years over that time span has a chance to be absorbed by positive years, but what about the distribution phase when some are targeting IULs for maximum loans? That could be a real problem, and that sort of scenario is masked by maximum interest rate assumptions in all years.
Penn Mutual has an excellent quote illustration system that allows the agent to put in either the maximum interest rate or an assumed interest rate and two alternate assumed interest rate scenarios, so illustrations can show a total of three interest rate assumptions. Also interest rates can be input year by year. Penn Mutual also can generate a IUL historical report which shows 20, 30, 40, 50 or 60 years historical index returns and how that translated to their current 13% cap and guaranteed 1% floor.
Request lower interest rates for added realism
Illustrations should be run in the 5% to 5.5% range to take into account years where the floor is met, if caps rates come down, or if cost of insurance is increased. Even better, run an illustration, as possible with Penn Mutual, with multiple interest rate assumptions plugged in year by year. Regardless, of how they are run, all IUL illustrations should be view as very hypothetical, at best a general projection.