Indexed Universal Life vs. Universal Life vs. VUL

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I really want to compare some illustrations here. It's interesting seeing some top company illustrations. You always have to know what your competition is showing. I'll be back to post a Northwestern ACL HECV...

 

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Lets look at a 45 year old client who already has a good bit of term and permanent life insurance in place but could benefit from a bit more. Lets also assume them to be a higher income earner who is diversified & looking for alternative areas to deffer their income for retirement, along with reducing their risk of exposure to the market.

So basically the funds in question are earmarked to deffer for retirement.
They are not earmarked to create a million dollar DB at age 100 no matter what; this is for retirement income purposes, not estate purposes... but you will see that the IUL will come out better for estate purposes if a steady income is taken from it...

At retirement, the IUL has a residual DB of $200K after CV is deducted.
So basically what we are doing here is buying $1million in term insurance for 20 years, and $200K in permanent insurance :
(I am assuming favorable market conditions and comparing contributing to the IUL to contributing to a traditional IRA.
I am assuming a 35% tax bracket)

Pool of money left to deffer after current and traditional insurance and investment commitments = $25K/year

IUL assumptions: 80/20 allocation, 8% return on indexed accounts, 4.55% on fixed

IRA assumptions: 12% rate of return, 1% in yearly fees for an 11% net yearly return

IUL strategy:
$25,000 in yearly IUL contributions
$1.4 million in immediate DB
CV after 21 years = $1.062mill tax free (6.56% internal rate of return)
Residual (after CV) DB of $200K


IRA strategy
$21,650 in contributions to IRA
$3,350 in contributions to 20year $1mill term, and a $200K GUL
CV of IRA after 21 years = $1,542,890
Tax consequences = $540,011
Net CV of IRA after 21 years = $1,002,780
Residual DB of $200K

So not only does the IUL at 8% beat the IRA at 12%; but the IUL hedges a significant amount of risk.
As with all indexed products, the account value in the IUL is not affected by negative years in the market. So when the market rebounds from a negative year, you are working from a higher account balance than in a traditional product where your account balance would be at a lower amount (This is a key benefit to all indexed products; one that I feel is looked over far too often when people in our industry compare indexed products to others.)

Now lets compare the two strategies from an estate planning standpoint... lets say the client dies at age 90 and has used $900K of their CV in retirement by using $37,500 (after tax) of it per year from age 66-90.
Lets also assume that they hedge their IRA portfolio risk after age 65 and only receive 10% returns instead of 12% returns (10% is still a high assumption for retirement, but i will give the IRA the benefit of the doubt).
I will also assume that they are now in a 25% tax bracket instead of a 35% tax bracket. For heirs I will assume a 35% tax bracket

IRA:
$37,500 in after tax income per year = $50K in taxable distributions per year
-Before tax cash value @ 90 = $6.23 million to beneficiaries
-After tax cash value @ 90 = $4.045 million + $200K (GUL) for $4.245 million net to beneficiaries.

IUL:
DB at age 90 after taking yearly distributions of $37,500 = $4.4 million to beneficiaries



So to sum things up; you would have to have over a 12% return in an IRA to match the 8% return of the IUL. And not only does the IUL dramatically reduce your market risk, but it also leaves your heirs with a larger estate.
And using LFGs IUL as an example, it has a yearly p2p cap rate of 12%. Its historical rate is 11.5%. So it has very strong caps associated with it. It also has a guaranteed loan rate of 5% (3.5% using the traditional reserve UL), this is a lifetime guaranteed rate!

So compared to the IRA at 12%, the IUL is giving you more guarantees associated with your retirement savings, dramatically reduced risk, dramatically reduced tax consequences, increased accessibility to savings, and a larger estate to pass on to your loved ones.