The Sensitivity of Indexed Universal Life – Part 1

January 13th, 2021 No comments

Build it right or you’ll be walking on eggshells.

In the course of reviewing so many premium financing proposals and transactions, I have the opportunity to dive deep into many indexed universal life (IUL) contracts.  While premium financing has many complexities that go unrealized by consumers, even fewer understand the complexities of the life insurance product the already complex transaction is built on.

I’ll focus on a recent case in which my services were procured through the estate-planning attorney for a potential premium financed policy owner.  I’m not going to muddy the waters by naming the insurance company or the product because it really doesn’t matter.  I’ve seen the same thing over and over through the years and have written about it before.

In the course of review, one of multiple focuses is generally on the assumed crediting rate of the proposed policy and the crediting rate sensitivity to policy success.  To set the stage, in today’s market, a typical crediting rate is in the 6% range based on specific policy features and AG49A rules.  In the specific contract I was reviewing, the assumed rate was 5.92%.

One thing I find interesting is that while there may be spreadsheets presented to the consumer and advisors assuming different loan interest rates, I seldom see spreadsheets assuming different policy crediting rates.  While the given rate may seem rather conservative to the typical uneducated consumer (uneducated in the fine points of IUL contracts that is) who sees a crediting rate hundreds of basis points lower than the long-term return of the stock market, that consumer has almost no idea of how that rate comes to be.  The short answer is that the rate is nowhere near as conservative as it appears or is purported to be.  Also, the real life sequencing of returns makes a bigger difference than most people understand. (For a deeper dive into this you may want to read these articles:  Digging Into the Black Box of Life Insurance and IUL: Backtesting and Cap Rates and Averages, Oh My!).

Sensitivity Testing

To drive this point home, I’ll often do a bit of sensitivity testing.  This is really quite simple and involves running multiple projections at a variety of assumed crediting rates.  As would be relatively obvious, running a projection assuming 4%, for example, would result in a dramatically different outcome.  However, what if we run much smaller deviations?

In the case at hand, in addition to the 5.92% I ran 5.85%, 5.80%, 5.75%, 5.5%, 5.0% and 4.5%.  Here are the results:


At the 5.92% assumption, we see a very healthy contract with tens of millions of cash value and a growing death benefit.  At 5.85% and 5.80%, things still look attractive at a glance though the death benefit at age 100 is reduced by over $10 million, not an insignificant amount.  At 5.75%, the story starts to change.  At this rate, the policy lapses at age 102.  While you specifically might not think you’ll make it to 102, let’s still look at the numbers.  At 5.92% and 5.80%, the cash value at 102 was $53,170,000 and $33,703,000, respectively; a $20 million spread in death benefit for a 12-basis-point spread in crediting. That’s a 38% drop in death benefit for a 2% drop in crediting.  Ouch!   At 5.75%, the cash value is $0 at the same age.  So a drop of five basis points more burns through $33 million in cash value and the death benefit is gone.  That’s a crediting drop of less than 1%, resulting in a drop in death benefit of 100%.  Interesting.

At 5.5%, the policy succumbs at age 98 so we see a 25-basis-point drop burn through $25 million at age 98.  Now let’s ask the question that begs to be asked:  If you invested in anything else assuming or modeling a 5.8% return and experienced a 5.75% return, would you be disappointed?  I don’t think so.  Who really cares about a five basis point spread?  After all, the fees in the contract are already hundreds of basis points, and the fees paid to your financial advisors on your investments are likely 10, 20 or 30 times that percentage.

While this is admittedly oversimplifying things, would you ever enter a transaction in which the distinction between success and financial ruin is defined by a razor thin margin?  Assuming you understood this, of course you wouldn’t.  But that’s the key … do you understand this?  Most don’t.

Don’t Rely on the Ledger

Let’s focus on some other truisms here.  What’s the one thing we’re absolutely and supremely confident in regarding the ledger underscoring the entire transaction?  It’s guaranteed to be wrong.  That’s right.  We all intellectually know that there is a 0% chance the proposal will turn out the way it is projected.  Statistically, it will be either better than or worse than what we see on paper.  Again, that’s a certainty.  Unless you’re willing to state that the entire stock market will perform on a perfectly level basis day in and day out, year after year forever and at a level that nets precisely 5.92% after all charges and that those charges never change and the cap rate of the policy and options charges in the market never change, the only thing the sales ledger proves is that ink sticks to paper.

So the question now is more about the likelihood that the transaction will perform better than or worse than the proposal over time.  To answer that, let’s look at where the 5.92% in the proposal came from.  The short answer is that it came from the Actuarial Guidelines 49A rules.  These are based on the 65 most recent 25-year durations of the S&P 500.  There’s more to it than that but I’ll leave it there.  Furthermore, the maximum allowable crediting rate is based on the geometric mean of these thousands of data points, which means the maximum illustratable rate is an average which means that 50% of the time the policy would historically have done better and 50% of the time it would have done worse.  A 50/50 shot is what you’re looking at.

Knowing this, I’d certainly want to know where the 5.92% lines up relative to that maximum allowable projection rate.  The answer … 5.92% is the maximum allowable projection rate.  That’s right, the supposedly reasonably conservative projection is based on the regulatory maximum assumption, which itself is based on a 50/50 proposition.

I’m not picking on this transaction because it’s built like it is.  This is how I always see it.  In my writing, I generally use a lot of qualifiers and seldom say always, never, etc.  However, the maximum allowable rate is the rate I always see.  That’s not to say that’s the rate that everyone in the market uses.  It’s only that this is the situation for what hits my desk.

As I wrap up this piece, I’ll share another interesting observation regarding the multiple projections I ran.  While the differences in the outcomes resulting from tiny spreads in presumed crediting rates at the higher end are in the tens of millions of dollars, on the other end the projections for 4.5% and 5% show the policy lapsing in the same policy year.  In other words, a 50-basis-point difference, 10 times as much as the spread between 5.75% and 5.80% that results in a difference measured in tens of millions of dollars, doesn’t even change the lapse year.

In Part 2 I’ll delve into the details of why this is.

Bill Boersma is a CLU, AEP and LIC. More information can be found at,, or email at

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Life Insurance Appraisal Brings Confidence to Planning

December 8th, 2020 No comments
Paying for a policy appraisal can have a great return on investment.

Recently, the attorney for a family office asked for my help with a situation. The family wanted to transfer/sell two $10 million survivor life policies to another trust for planning purposes. The policy owner went to the two insurance carriers to ask for the 712 values or Interpolated Terminal Reserve (ITR). Though the two policies had the same death benefit on the same couple issued at the same time for the same kind of policy, the numbers came back very different from the two insurance carriers, each of which is one of the top rated and recognized carriers in the market.

A Difference of Opinion

The cash value of each policy was roughly $1.5 million, and one carrier came back with a number exactly the same as the cash value and even stated on its communication “Please note that ABC Life uses the Net Cash Value as a proxy for the ITR.” The other carrier came back with $3 million.. For full post, click here…

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Success Stories: Policy Appraisal Brings Confidence to Planning

November 24th, 2020 No comments

Recently I was brought a situation by a family office through their attorney.  The family wants to transfer/sell two $10,000,000 survivor life policies to another trust for planning purposes.  The policy owner went to the two insurance carriers to ask for the 712 values or Interpolated Terminal Reserve (ITR).  Though the two policies w

ere the same death benefit on the same couple issued at the same time for the same kind of policy, the numbers came back very, very different from the two insurance carriers, each of which is one of the top rated and recognized carriers in the market.

The cash value of each policy was roughly $1,500,000 and one carrier came back with a number exactly the same as the cash value and even stated on their communication “Please note that ABC Life uses the Net Cash Value as a proxy for the ITR.”  However, the other carrier came back with a $3,000,000 number. For full post, click here…

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Comparing Term Life Insurance Policies

November 18th, 2020 No comments

Though the following piece I wrote on term insurance with Professor Gregg Dimkoff may seem very basic, sometimes it’s the basics that bear reviewing so we don’t miss something while focusing on the “high end” stuff.  In numerous recent situations clients have suffered significant harm because the basics weren’t a focus.  Also, the market is changing and we can’t take for granted our old assumptions are still accurate.  Enjoy.

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The Worst Life Insurance Deal Ever – Annual Renewable Term

October 27th, 2020 No comments

Why your client should never buy annual renewable term.

I’ve written about how expensive association term and group term is, how poor the policy features are and the tremendous amount of money that can be saved by going with a better underwritten product. But there’s another term insurance situation that’s even more insidious in my estimation. Annual renewable term (ART) or yearly renewable term (YRT) can take the cake.

Creeping Up Premiums

This was brought back to me vividly during a recent client conversation. An attorney had a $750,000 ART term policy, and his wife had one for $550,000. The premiums were only about $500 and $300, respectively, which isn’t much money for a couple making the income they do. However, let’s look forward a bit.

They’re in the seventh year of their policies, which already tells me a lot. By the second or third year, most ART policies already exceed the premium of a 10-year level term product. In 10 years the premiums on his and hers, respectively, are $1,200 and $700. In 20 years, they’re $2,900 and $1,700. In 30 years, the numbers are $6,800 and $3,400. Of course, almost no one plans on keeping an ART in force for many years, but plans don’t always pan out. What I see too often is that ART that was so cheap in the early years, like association term, has a premium that slowly creeps up without anyone noticing. It’s like the proverbial frog in the water on the stove. 

I’ve seen cases in which the ART had been in force for over 20 years. Even this one at seven years is a travesty. For this couple, a new 20-year level policy with a high-quality, well-respected insurance carrier issuing policies with very good contractual features would cost less every year for the next 20 years than the existing ART will cost this year. Ten years from now, the 20-year level term premium will be less than half the ART premium, and in 20 years, it will be less than 20% of the ART premium. The savings are ridiculous.

For full post, click here…
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Beware… of Inforce Illustrations and Loans

October 22nd, 2020 No comments

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Insuring Life Insurance

October 13th, 2020 No comments

Clients should create their own disclaimers.

Consumers procure life insurance for protection, but do they need to be protected from it at the same time? Too often the answer is yes. Maybe it’s because I’m on the consulting side of the market that train wrecks disproportionately end up on my desk.

For full post, click here…
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Is Term Insurance a Commodity?

September 30th, 2020 No comments


When it comes to term insurance, can’t I treat that as a commodity, at least when I’m dealing with quality insurance companies?  Why should I pay any more than I need to?


Many people have the same mentality when it comes to term insurance but I will caution you about that mindset.  There’s a chance that things will turn out fine but it’s the future unknowns that you want to be ready for and can be better handled by a product that has flexibility.

It’s more important today than ever before to understand the contractual features of your life insurance policy. In the past, many insurance companies had practices regarding policy language that they do not follow today. For example, they may have allowed a policy split or a reduction in face value by practice but not by contract.  It was taken for granted that these practices before would be honored but many companies are going back to contractual language and dismissing former and traditional flexibility.

A huge issue today is what a term policy is convertible to.  Over the years, most current policies were convertible to any permanent product the carrier was issuing at that time. Nowadays many insurance companies are only allowing conversion to certain products, sometimes terribly uncompetitive products that only exist for the purpose of converting to when someone has no other choice.

I’ve seen conversion options from a preferred best rated term policy to a permanent policy where the pricing was equivalent to a couple of tables down the substandard risk scale for their more popular products available today.  Some contracts are convertible to certain policies in the first number of years then only to other policies after that.

Another big issue is conversion features relative to age of the insured and of the duration of the level term policy. One term policy might be convertible to age 65 while a policy with another company to age 70 or age 75. One policy may be convertible for the full duration of the level term product while the next is only convertible for the first five years. 

This may not seem like big issues and they aren’t until they are… When you are 48 years old and discover you have a disease, that if it doesn’t kill you it will certainly leave you uninsurable for the foreseeable future, and still have a family that is depending on your income and you are getting close to the end of your 20 year level term policy that was only convertible for the first 10,  don’t tell me you don’t really care that it’s not convertible when you realize that you’ll shortly be leaving yourself uninsured and your family at risk. I’ve seen it happen. I am all too familiar with the regrets.

As an aside, if you have group or association term, don’t think these issues don’t affect you.  You are at the most risk as those term products are some of the worst that exists in the market. Please do yourself a favor and learn what they really are and what they aren’t.

The bottom line is that term can be viewed as a commodity no more than any other life insurance product.

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Beware…of Inforce Illustration System Error

September 23rd, 2020 No comments

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Beware…Of Group and Association Term Insurance

September 21st, 2020 No comments

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