There are a few important features that affect how much money grows and can be removed tax-free from an EIUL policy. The number one factor in growing wealth in an EIUL
is the annual rate-of-return cap.
As you may know, EIUL returns are pegged to certain measuring indexes like the S&P 500. Companies typically guarantee no down years when the market goes negative; but due to how the returns are credited, there is typically a cap on the gains. The caps vary per company and range from 10 percent to 16 percent for their first-year caps.
Annual cap adjustments
Each EIUL company reserves the right to change the cap at renewal. Many companies contractually can dump their caps down to as low as 3 percent on renewal.
Many agents sell an EIUL and then never think of the client again. If this is how you operate, you might want to start looking at your clients' renewal caps. What you will find should upset you.
See also: EIUL policies: Which one has the potential for the highest rate of return?
The best way to point out the importance/problems with renewal caps is to simply look at what real-life clients have received. I had an agent I work with call out of frustration and then forward me the renewal letter his client received.
The policy was issued with a 12 percent cap (not a great one to start with).
His last annual renewal cap was 8.5 percent.
Every year I put out an EIUL special rate of return report. This report shows what different policies with different caps would have returned going back 20 years. When I did the 2014 report, I didn’t even bother showing numbers for an annual point-to-point cap of less than 12 percent. If a product has a 12 percent cap going back 20 years, the average rate of return would have been +7.5 percent
(respectable but not great).
If the product only had an 8.5 percent annual cap, the average rate of return would have been a measly +5.56 percent.
If you’ve ever seen an EIUL policy illustration with a crediting rate less than +7.5 percent, you’ll know that it doesn’t look very good (or at +5.56 percent it will look awful, and the client will wish he/she never put money into the policy).
My favorite policy boasts the following statistics: Eighty-five percent of the current renewal caps/participation rates are the same or greater than the initial cap. Seventeen percent of the caps are higher than when the policies were issued. That’s strong and gives you confidence when selling a product to your clients.
If you were pushing this EIUL policy on clients, I’d submit to you that you’d have to research and disclose the renewal history
now that you’ve read this article. What do you think your clients would say?
You owe it to your clients to know the products you are selling, and that includes the renewal history when it comes to their caps. It’s my opinion that, when you learn the renewal rates at the company(ies) you are selling, you will be surprised and will seek out better/alternative EIUL products to use for your clients.