Six Key Steps to Setting up an IUL the Better Money Method Way

Not every IUL is set up to deliver the benefits outlined in The Better Money Method^TM

Unfortunately, not every agent or adviser knows how to structure an IUL to deliver both living and death benefits.  Even if they do, they aren’t always motivated or experienced enough to make sure  you get the maximum return on your investment.  It’s hard for many agents to look at this as a retirement plan and optimize around the variables needed to maximize your return.  The following list of six critical steps to make sure your policy addresses will help you understand if you have a policy that is set up to deliver the benefits discussed within The Better Money Method.^TM

As mentioned in my bio and several other places, I have spent more than 1,000 hours studying and analyzing Indexed Universal Life (IUL) products.  That wasn’t 1,000 hours of haphazard research either, it was 1,000 hours (and honestly, probably a lot more) of serious and focused time making sure that I understood the nuances of this product; the contract variables, the pricing models, the costs, the outcomes, the legalities, and much much more.

While conducting this research I learned many things. One very important take-away I gained was that my perspective and interest in this product is somewhat unique.  Not very many insurance brokers or financial advisers have considered how IULs can deliver clients with both a death benefit AND a living benefit.  And, even those that are interested, have not had significant experience learning how to structure the policies properly to convert them to a living benefit.

If you are working with a broker or a financial adviser, please make sure they are knowledgeable and working in your best interests.  Make sure they are talking with you about the following and feel free to share my website and book summary with them if they are not.

Do your homework. Most of the IUL’s I have seen have not been designed properly. By that I mean in a way that maximizes the client’s rate of return. Retirement is not a dress rehearsal.  It is  one act play. There are many important details to get right when structuring an IUL to deliver the benefits outlined in The Better Money Method^TM and make sure your play is a huge success^.  Below are six for you to consider.

1.    Secure the lowest possible amount of insurance

Common convention when shopping for insurance is to say “Hey, I want the most insurance I can get for the lowest possible premium.”  No one would ever say to a Geico or a Liberty “Give me the least amount of insurance possible on my car, and I’ll pay you as much as your rules allow.”  However, as counter-intuitive as it sounds, that is EXACTLY what you want to do with an IUL.

The insurance industry is regulated by the government and one of the things that’s regulated is the minimum death benefit you must purchase based on the amount of money you plan to invest in your policy. Years ago, when tax rates were through the roof, you used to be able to buy a $5,000 policy and put $1 million dollars into it and many wealthy people used insurance as a tax shelter.  Uncle Sam caught on and you can no longer do that.

The government rightly determined that there must be a realistic connection between the amount of the death benefit you secure and the economic damages your heirs would suffer if you were suddenly to die. There are complex formulas for all of this. Done correctly, specified minimum death benefits are tailored to each individual and depend on your age, gender, and health.

With an IUL you want to buy the least amount of insurance you can and invest the most you can as quickly as possible, or as quickly as makes sense given your savings goals and abilities and restrictions. Depending on your age, you will most likely have to invest your desired amount over a period of four or five years. However, in this manner, you will grow the value of your policy sooner rather than later and start earning interest on the cash value which will become your source of pre-retirement tax-free income when needed, fund your tax-free retirement income and ultimately, a percentage of that cash value will be distributed as a death benefit to your heirs.

2.    Set a floor on loss

While you contribute to your IUL you are building up cash value. That cash value is the amount you can borrow against. You need to make sure that you work with your adviser to determine which account(s) will be tied to that growing cash value.  Within your policy, the cash value will be tied to an interest-bearing account.  Some companies tie that balance to the S&P 500, I tend to favor some policies that tie it to a more balanced index.

Whatever you choose, it’s important to set a floor of zero acceptable loss, meaning if the market goes down, your account balances are not impacted.  In this manner, the cash value of your policy steadily climbs, or it may stay stagnant in times of a recession or market downturn, but it never loses money.

Related Reading:  Zero is Your Hero: The tortoise and the hare analogy for retirement savings

3.    Make sure your policy has a lock and re-set

A lock and re-set is what happens to your money at the end of each year. If you’ve had a positive market gain, it gets locked in as principal at the end of the year. And that principal is contractually guaranteed against any future loss. In other words, the principal can never be reduced because of market loss. That’s the lock.

So, if the market went down the previous year, you don’t have to climb back up to zero before you gain. Instead, you start at zero, and any gain goes into your plus column, up to your cap. If the market went up, all your gain from the previous year, up to your cap, gets locked in as principal, and that’s your new zero point. The year starts when your money is credited into the insurance company and ends three hundred and sixty-five days later.  It’s important to ensure that your policy has this feature and to understand how it works.

4.    Choose the right person(s) to insure

One of the things to consider when setting up your IUL is that you can open a policy at any adult age, starting at 18, when you become eligible to enter into a contract. The top age is 85, at which point insurance companies will not sell life insurance to you any longer. You can however, buy a policy on someone else of any age, so long as you have a close family relationship with that person.

In fact, you could even buy life insurance on a newborn baby, although there would be limits on how much you could put in and on the size of the death benefit. I know a gentleman who owns 32 such policies, one on each of his grand-kids. He gets the tax-free income from all those policies, and when he dies there will be no death benefit paid off, because the policies are on his grandchildren, not on him.

You may decide you want to take the policy out on your own life, your spouse’s life, your children or your grandchildren and there are pros and cons to consider carefully before you decide.

5.    Find the right provider

Not all insurance companies are created equal. There are dozens of companies that provide IUL policies – everyone from North American to Penn Mutual to Voya and Minnesota Life.

Each one of them offers slightly different options. Be sure to ask your adviser about the pros and cons of each policy being suggested and why they are recommending one over the other. Their responses should be very clear and easy to understand, and their recommendations should be based on getting you the greatest possible rate of return on your investment and nothing else. If you don’t understand the options or why one policy is being recommended over another, keep asking questions until you do understand. Again, retirement is not a dress rehearsal. You are setting up your future.  Make sure it’s done right!

6.    Structure the timelines appropriately

You are going to be asked to commit to paying premiums in your policy by a certain time in order, again, to achieve the target rate of return on your investment and begin earning interest and accumulating cash value as soon as possible.

Make sure you understand all the timelines.  Make sure you know when you must contribute what amounts and be confident and comfortable with that timeline. Make sure you also understand when you will be able to borrow against your policy and what the surrender value or costs are if you get into some sort of trouble. All of these considerations and the overarching timeline are something you want to be crystal clear on so you maximize your returns and get to the point where you can borrow against your policy as needed (e.g. to fund your daughter’s wedding, put a down payment on a house or secure funding for any other number of life events.)

Bottom Line

There are many ways that an IUL policy can be structured and not all of them will work for you.  You want to be very clear with your adviser and agent about your goals and what you are looking to do with this policy so he or she can make sure it will deliver what you need.

Don’t be timid about asking questions. Advocate for yourself.  Share the summary of my book if it helps.  Share anything you want that you’ve found on my website.  Ask me a question at any point.  Yes, I sell IUL policies and work with clients who want my help. And, before I got into this business I was first and foremost an educator.  I am more than happy to tell you everything I know in the hopes that you will benefit from what I have learned about this amazing product.

If you’d like to talk with me directly, visit my website and learn how to get started by calling me, setting up a 15-minute meeting or sending me a quick email.