Indexed Universal Life (IUL) illustrations commonly show 7% to 8+% returns based on historical averages over the last 20 to 30 years. Whether or not an Indexed UL can capture that kind of performance over the coming decades is debatable. 2008 bore an unsettling resemblance to 1929, except officials were able to spread foam on the runway. The Euro’s instability lead to an additional dose of foam for European banks late last year. All this uncertainty can make Indexed ULs more attractive because guarantees eliminate downside market risk while providing a life insurance benefit. But what about the upside Certainly 2011’s index results surveyed were below average. Tops was the Dow Jones Industrial Average at 5.53%. The S & P 500, the most widely used index, came in at 0%, which is the floor for an Indexed UL regardless. But then again, seeing blue sky, 2012 is off to a good start, and historically that’s a very good sign.
When reviewing an Indexed UL, it’s prudent to scenario the possibility of lower returns. I ran a series of comparisons last fall on overfunding an Indexed UL to build cash value for retirement income. Lincoln performed very well compared to the competition. I used the S & P 500 Index, annual point-to-point, and Lincoln assumed on the illustration an 8.45% average return.
Over 8%? How about 5%?
What would returns look like projecting at a more pedestrian 5%? Assume a male, age 44, excellent health, putting in $25,000 a year in premiums for 20 years with the goal tax-free distributions for retirement income at age 65. Initial death benefit $520,000.
| Carrier | S&P 500 Index Return |
Cash Value Year 20, Age 64 |
Death Benefit Year 20, Age 64 |
Retirement Income Yrs. 21-40 Ages 65-84 |
Cash Value Year 41, Age 85 |
Death Benefit year 41, Age 85 |
| ‘ | ||||||
| Lincoln | 8.45% | $1,077,926 | $1,597,926 | $146,326 | $830,516 | $1,120,514 |
| ‘ | ||||||
| 5.00% | $727,834 | $1,247,834 | $51,396 | $219,059 | $317,285 |
Take a different example with less premium. $10,000 premium a year for 20 years: male, age 47, excellent health. Initial death benefit $185,000.
| Carrier | S&P 500 Index Return |
Cash Value Year 20, Age 67 |
Death Benefit Year 20, Age 67 |
Retirement Income Yrs. 21-40, Ages 68-87 |
Cash Value Year 41 Age 88 |
Death Benefit year 41, Age 88 |
| . | ||||||
| Lincoln | 8.45% | $424,913 | $609,913 | $46,590 | $186,833 | $252,943 |
| . | ||||||
| 5.00% | $287,005 | $472,005 | $19,732 | $62,067 | $77,698 |
When shopping for an Indexed Universal Life
All Indexed UL proposals come with full illustrations. They’re required. Brochures are okay as a start, but zero in on the illustration’s chart. An agent can easily generate and email them on .pdf format. Illustrations are based on current assumptions, for example 8.45% for Lincoln, but can be run with interest rate assumptions anywhere from 0% up to current. Make sure to request and review lower interest rate assumptions as a counterpoint.
Carrier: Lincoln National Life Insurance Company; Product: ” Lincoln LifeReserve Indexed UL (2011)”
Quotes run 1/11/2012 and are subject to change.
For your own personalized free quote please contact me.
Sean Drummey
Phone: (910) 328-04447
email: spdrummey@gmail.com