Understanding Indexed UL – Positioning Your Client For Distributions
With several of our core carriers offering their own flavor of Indexed UL today, positioning your clients in the best possible light for retirement income can be a confusing and lengthy process.
It’s a full time job knowing all the moving parts for each Indexed UL product.
Understanding how the products work and how to sell them most effectively can be a confusing and lengthy process. We have spent many hours working with clients to help them better understand the product’s crediting and accumulation strategies.
However, the second part of educating a client regarding Indexed UL is, understanding the moving parts during the distribution from an IUL policy.
What is the best way to distribute the funds from the policy?
Most Indexed UL policies allow for either fixed or variable loans. The fixed loans have a stated interest rate locked in from the policy issue date on the outstanding loan amount so there is no question about the cost of the loan.
After a number of years, (typically 15) the IUL product will often provide for a “Wash Loan” or “Zero Cost Loan” where the amount being charged on the loan is the same as the interest being credited to the cash value.
The more commonly illustrated policy loan distribution is the “Indexed Loan” or “Preferred Loan”.
Using a positive arbitrage (the illustrated interest crediting rate for cash value is higher than the interest rate being charged on outstanding policy loans) allows an illustration to reflect a gain on the outstanding loan rather than a charge. Because this can make an illustration more attractive due to the higher cash value accumulations during the distribution phase, it is what many producers prefer to show to their clients.
It is imperative that producers understand how these loans features work and communicate to their clients that they also have the potential for a negative arbitrage which can create considerable interest due on outstanding policy loans.
Depending on the client’s risk tolerance and whether they plan on paying outstanding policy loan interest as it accrues or not, either policy loan option can be appropriate.
Be careful!
If you do not have a full understanding of how the clients approach their policy loans and simply elect the variable loans due for the potential of a positive arbitrage, you may be putting the client in a difficult position later if the loan interest charged exceeds the interest crediting rate for cash value and the amount available for distribution decreases well below your clients anticipated income amount.
Producers selling IUL products and highlighting the ability to generate an income stream from the policy should have a thorough understanding of the loan provisions and be able to help their clients to better understand which feature is most appropriate.
Take the time to refer to the product guide you are illustrating to see what the variable loan interest rates are tied to. What are the Cap rates for Variable loans? What is the Fixed Loan rate and is it Participating? This can be valuable information to share with your client when illustrating Indexed UL products with Distributions.
For more information, contact your Life Insurance Specialist today.