IUL with a 14.5% CAP and a Published Renewal History Going Back to 2012
If you didn’t see last week’s newsletter on the just released 2019 DALBAR Study (my favorite industry study), click on the following link to download the FREE version. The study indicates what the average investor returned over the last 5-, 10-, 20-years):
http://pomplanning.net/dalbar-2019
If you want to sign up for more information on the IUL (Indexed Universal Life) policy that has a 14.5% cap with a published renewal cap history, click on the following link:
http://strategicmp.net/14-5-percent-cap-iul
There are many positives for clients who want to build wealth using an IUL policy.
1) Money grows tax-free
2) Money can be removed tax-free in retirement (and before age 59 ½ without penalty)
3) No risk of loss (money can’t go backwards due to downturns in the stock market)
4) Free long-term care benefit
5) Gains are locked in annually never to be lost due to a negative stock market.
It’s the last bullet point that can become a point of contention.
Gains in an IUL are typically pegged to the S&P 500 index (without dividends). (Although some IULs use Volatility Control Indexes like the one I talked about a few weeks ago with a 200% participation rate with NO cap. To learn about the 200% par rate IUL, click on the following link):
http://strategicmp.net/iul-with-200-percent-par
In S&P 500 based IULs, caps the last several years with most IULs have ranged from 10-13%.
Renewal Caps—it’s one thing to have a 13% cap at issue, but it’s another to have consistent renewal cap rates that are at the same or higher rate. In fact, I did a newsletter last year titled Midland Dumps Renewal Caps on IUL Policy (to read click on the following link:)
www.strategicmp.net/noa-midland-dumps-caps-on-iul-renewals
Published history—most companies that offer IUL policies do NOT publish their renewal cap history. I wonder why? Could it be because they are not proud of their renewal history?
The following are the published renewal cap rates of the company that is currently issuing policies with a 14.5% cap.
Effective Date Cap Rate
11/15/2012 13.50%
3/15/2013 14.75%
8/15/2013 15.25%
11/15/2014 14.75%
1/15/2015 14.00%
6/15/2017 14.50%
5/15/2018 15.50%
3/15/2019 14.50%
The above chart represents both the cap rate at issue for policies that were issued during the time frames listed and also the renewal rate for all policies that renew in the time frames listed.
If you know anything about IUL policies, you will know that the above is a very impressive chart.
Let’s look at the 10 year returns on cash in IUL depending on the caps:
10% cap would have yielded a return of….7.33%
11% cap would have yielded a return of….7.92%
12% cap would have yielded a return of….8.48%
13% cap would have yielded a return of….8.87%
14% cap would have yielded a return of….9.25%
14.5% cap would have yielded a return of….9.45%
The numbers above come from the OnPointe Risk software. It has a data feed for the S&P 500 without dividends.
While the numbers for a 10-12% cap are nothing to sneeze at in a product with no risk of loss and gains that are locked in annually, the numbers for a 13%-14.5% cap are tremendous.
Renewal Caps Matter—I would submit to readers that the renewal cap is the single most important item to consider when buying an IUL (except crazy high internal expenses in my least favorite policies offered by Pac Life and Lincoln).
Loan Rates—another important issue with IUL policies is the lending rate on loans. FYI, this product happens to also have a 5% maximum lending rate on its participating loans.
If you are currently selling or considering selling IUL, this is a product you need to learn about.
Roccy DeFrancesco, JD
roccy@thewpi.org
269-216-