What I learned from my Research and Studies regarding IUL by UsuSepulcher

[tannerking1]

Disclaimer: Keep in mind this is only information I gathered from brief research into an IUL

This is what I gathered from my research into IULs

1. Grows tax deferred
2. Money withdrew is taxed so tax free income
3. Out performs Variable products into a S&P due to not having a fluctuation so you never will lose you will only gain and if you're feeling more bold you can increase the percent of income you receive for that year with the potential of losing your guaranteed interest amount but you will still have a the money you kept at ceiling. So if I put in 100k you will keep that 100k even if that year is bad.
4. Requires a few years to get going.
5. A superior retirement option.
6. Has living benefits just like a regular life insurance policy
7. Requires a non greedy agent or a for client agent

Main problem with an IUL is that Agents typically write it so that the death benefit is high, which increases your commissions and lowers the cash value generated to the client. Pretty much lower yearly Agent commission the better the IUL product for the client.

Example: You put in 100k into a IUL, but you have a 300k death benefit payout. This greatly reduces amount of cash value you generated. Reduce that death benefit to 200k will supercharge your cash value. Building that 100k into a monster into the later years and may be all you need for your retirement.

 

[ativyl]

@tannerking1

Money withdrew is taxed so tax free income

Money withdrawn to basis is tax free because of FIFO (first in first out) applying to life insurance rather than the more common LIFO. Money withdrawn after basis is taxed as income. What I think you mean is that via. policy loans one can use the money tax free, and then the death benefit pays the tax.

Out performs Variable products into a S&P due to not having a fluctuation

You will see this claimed. At around a 17% cap that's almost certainly true. At about a 13% cap it is potentially true. At say 10% caps it is not remotely true. It is worth noting since you mention income later the safe draw rate from a lower returning less variable assets can be (and is in this case higher) than a more variable higher returning asset. So for a fixed level of risk the income, especially initially, is higher than the VUL equivalent,

A superior retirement option.

Way too general.

Main problem with an IUL is that Agents typically write it so that the death benefit is high, which increases your commissions and lowers the cash value generated to the client. Pretty much lower yearly Agent commission the better the IUL product for the client.

Also term blends as in whole life matter. You want to boost the MEC to the maximum with a term blend.

You put in 100k into a IUL, but you have a 300k death benefit payout.

That is definitely a MEC even for a 100 year old with cancer. Adjust the 300k to 1m and you are (very approximately) talking a moderate healthy 60 year old male.

 

[mahyrah]

@tannerking1

3) Out performs Variable products into a S&P due to not having a fluctuation so you never will lose you will only gain

That's impossible. If you don't understand why it's impossible it's time to do more research.

 

[tannerking1]

@mahyrah Pretty much market has fluctuation and you have up and down period of loss, while iul has no downs only ups.

 

[mahyrah]

@tannerking1 Whoever is "teaching" you has a significant bias you need to be aware of. There is simply no free lunch and there is always a cost of hedging. Getting a year of zero percent returns will still be a (very) negative year because of fees. And if caps don't allow you to participate in the full upside of good years, the products internal fees will be much higher over time. Even years within the cap/ spread/ etc you'll underperform due to lack of dividends.

Do yourself a favor and grab 30 years of market returns from whatever index you're considering. To keep it simple start with $100k. Figure out what that grows to. Now, go back and substitute 0% for any down years and the cap rate for any years above the cap (ie 30% becomes 9% or whatever).

You see immediately that most indexes tend to make long term averages through occasional large yearly gains (rather than averages) and giving up those upsides will have a much larger impact than downside protection. Try it with multiple indexes and time periods to convince yourself.

 

[tannerking1]

@mahyrah thanks ill look into it

 

[gill82]

@tannerking1 It’s not that simple.

Generally, the higher you go on early year CVs, the lower your premiums will have to be later on to avoid MEC. This is true in Whole Life, too.

In some policies, the high early CV option actually decreases performance later on due to expense loads being spread out over a longer period of time.

So, maybe the early “break even” points make sense if you only want a “10-pay” or “7-pay” policy, but if you want to contribute premiums for 20+ years, it’s going to be difficult to design a policy to do that and have super high early-year CVs. DB is needed for that corridor. The tighter you make it from the get-go, the higher your risk of MEC. Don’t get me wrong. There’s definitely an advantage to having your agent build in a higher than normal CV in the early years, but it can be overdone to the point where you screw yourself later on in the policy.

 

[tannerking1]

@gill82 what does cv stand for?oh cash value

but ya the idea is that they more pay more early and develop higher cash value for retirement.

i just need to figure out the math of everything

 

[gill82]

@tannerking1 Think of it like a bucket. There’s only a certain amount of prem that can go into the bucket. If you buy a $1 mill death benefit, your max lifetime prem is going to be a fraction of that.

Lowering the DB lowers the total prems payable.

I can, for example, juice cash value in the first 10-15 years, and this will improve IRR on the policy.

But I can also raise the DB, increase total prems payable, cut the IRR by between 0.10-0.40% and dramatically increase net cash value over the long term.

Really depends on when the client wants or needs the money. If the time horizon was 20 years, a 10-pay might make more sense. If this is a 30yr old, more prem probably makes sense, even at a slightly reduced IRR.