What is the best equity indexed universal life policy for your clients?
By Roccy Defrancesco
The Wealth Preservation Institute
The number one question I receive from advisors who use cash value life insurance to help clients build wealth for retirement is, "What is the best equity indexed universal life (EIUL) policy in the marketplace?"
While everyone would like a one-product answer, that is not realistic. By accident or intention, EIUL policies in the market have many different designs that will yield much different results depending on what various stock market indexes return over a 5, 10, or 20+ year period.
Three key factors determine how much money a client can remove tax free from an EIUL policy:
1. Rate of return on cash growing in the policy
2. Internal expenses of the policy
3. The lending rate on variable loans
Because of length issues for articles like this, I thought I would just give the 20 year numbers for the most popular EIUL policy designs.
1. Annual point-to-point crediting, 0 percent credited in negative years, and a 100 percent participation rate.
The average back-tested return is 7.25 percent with a 12 percent cap, 7.65 percent with a 13 percent cap, and 8.01 percent with a 14 percent cap.
2. Annual point-to-point crediting, 0 percent credited in negative years, with a 140 percent participation rate.
The average back-tested return is 7.17 percent with an 11 percent cap, 7.70 percent with a 12 percent cap, and 8.22 percent with a 14 percent cap. The caps are lower or much lower on these product designs because of the 140 percent crediting method.
3. Annual point-to-point crediting, 2 percent credited in years when the index doesn’t return at least 2 percent, with a 100 percent participation rate.
The average back-tested return is 7.38 percent with an 11 percent cap, 7.85 percent with a 12 percent cap, and 8.25 percent with a 14 percent cap. The caps are lower or much lower on these product designs because of the 2 percent annual guarantee.
4. No cap but a limited participation rate using a blend index (one that includes international indexes).
The average back-tested return is 7.97 percent with a 70 percent participation rate and 7.57 percent with a 65 percent participation rate.
5. One product out there uses a blended index (S&P, bonds, etc.) with a 16 percent cap and, when back tested, returned 8 percent, 92 percent of the time (very strong). What do these numbers tell us?
That there are a lot of options for advisors to choose from when it comes to picking the “best” product for their clients.
While this article gives you the back-tested history of five different crediting methods with different caps or participation rates, what it doesn’t do is tell you how much your clients can borrow tax free from each type of policy in retirement (which is the main reason EIUL policies are used).
How much can ultimately be borrowed from a policy varies not only on the caps which drive the returns, but also by the internal expenses in the police and the lending rate. Many policies today do not have fixed lending rates on their loans. Many IMOs and insurance agents are using “default” illustrations that have higher crediting rates than the averages in this article and today's historically low lending rates that are projected out 30+ years.
Hopefully the numbers from this article will help you illustrate EIUL policies in a conservative and realistic manner for your clients.