21 May 2013 0 Comments

Today’s Hot Product – IUL

applauseIndexed Universal Life (IUL) is the hottest product being sold today.  The policy has been around for a few years, but it is just now beginning to take off.  Why the sudden surge?  It’s because of the incredibly low interest rate environment we have been in for a prolonged period of time.  As a point of reference, U.S. Treasury 20 Year rates on April 30, 2013 were 2.49%.  In 2000 those same rates were 6.31%.  That’s a 60% drop in the past 13 years!  This has impacted the earning ability of insurance companies and especially the pricing of their permanent life insurance portfolios.  No one has a crystal ball to determine where future rates will go, but there is little likelihood of a significant, immediate upturn.

Participating Whole Life dividends are impacted big time!  Long term death benefit guarantees on Universal Life policies are also being affected.  So, IUL suddenly becomes the product of choice for the long term returns required in life insurance pricing.  This policy takes advantage of the potential of the equity market without requiring the insurance companies to invest directly in those markets and, at the same time, provides down-side protection for the policy owner.

The cash values of these IUL policies are tied to outside, published indexes.  The most popular is the Standard & Poors 500.  Many companies are also offering the choice of other indexes such as the Dow Jones IA, NASDAQ-100, Hange Seng, Euro Stoxx and Barclay, Russell 2000.  The insurance companies are not actually investing in the stocks included in these indexes; they are buying options.  The policy owner is protected from the down side possible when dealing with equities by a guarantee that in a down period there will be no negative impact on policy values.  This is accomplished by placing a ceiling on maximum earnings in periods where there is a large upswing in values and by possibly limiting the percentage of participation passed on to the policy owner.

All of this sounds very complicated and it is!  The IUL can be a great alternative for many potential buyers of life insurance, but it does not come without a “warning label.”  The pages of small print in the illustrations speak volumes to consumer concerns.

Moving forward, I’ll cover the good, bad and everything in-between about IUL.

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