Owning an Indexed universal Life Policy

 IUL is a vehicle, a financial vehicle but still, one that will take you from point A to point B of your financial goals if you “Drive” it correctly.   

Like any vehicle, a car or an airplane, the last thing we want is to crash because we didn’t know how to correctly drive our vehicle, each vehicle is useful for its own purpose, you wouldn’t take an airplane to go to the corner store, each vehicle has its adequate uses. 

Savings accounts and bank accounts give almost no yield on the money that you deposit into them, with current savings accounts at an average of APY at 0.21% , why have your money depreciating with inflation when you can have it tied to the possibility of growing with the market without any risk of loss? Many knowledgeable people in finance use IUL as a way to “become their own Bankers” thru the right use of loans and funding IUL the right way. 

So here are some key elements to always keep in mind in regards to your very powerful IUL: 

KEY ELEMENTS 

Your IUL can “hold” money. Based on the SPECIFIED AMOUNT also known as “DEATH BENEFIT”, your IUL holds more or less money, consider the SA as what determines how many “Passengers” (for an IUL its “Money”) that your vehicle can hold. The bigger the SA or DB, the more money you can contribute to your vehicle. 

 You are free to make contributions or “move” within the minimum and maximum amounts of contributions of your IUL every policy year or policy anniversary. 

There are three important values you should always have in your mind of your IUL: 

MINIMUM: It’s the minimum to sustain your policy, it covers COI (Costs of insurance) expense and rider charges, and although a small portion does go to the cash value, it will not be enough for significant uses or growth and not what the vehicle is designed for, it can be a stepping stone to start out, but keeping an IUL funded at minimum is not the right way to go. 

As we mentioned, you can start out your IUL at minimum funding, but keeping it at minimum is driving “poorly” your vehicle, or would you buy an airplane to go around the block, or a Lamborghini to drive at 5 mph? Just like any vehicle design, IUL is designed to work well after certain value of contributions, this value is known as TARGET 

TARGET: Just like airplanes are designed to fly, IUL are designed to work well from Target values of contributions and above, this sets up the policy so that the COI as years go by will be covered in comparison to what the Cash value is gaining thru compounding, target contributions are anywhere from a 20% to 30% of the maximum that your IUL can hold. 

MAXIMUM: This value will optimize the cash growth of the Cash Value within the policy, the term MAX FUNDED is often used to refer to making the maximum contributions. The more you put into the policy, and the sooner you do it, the more your money will compound and grow, and the more available money you will have for loans. Remember the compound interest formula (The 8th wonder of the world according to Einstein “Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn’t, pays it”) 

A = P(1 + r/n)^nt where P is the principal balance, r is the interest rate, n is the number of times interest is compounded per time period and t is the number of time periods.  

Since t time is the exponent factor, the sooner your money is funded the more it has the time to grow. 

Min, Target and Max are key numbers to keep in mind of your IUL 

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ROLLOVER AMMOUNTS: 

As we just saw, your account can hold a minimum to a maximum amount of funding every year, but lets just say you didn’t use the entirety of your account on a specific year, well whatever amount is not used rolls over to the next year, and to the next and then, you guessed it, the next. Why is this important? Because with time whatever is not used can become a big account to place money from, for example: the selling of your business, or a big real estate deal, your IUL can become one of your most important accounts to place your money, given the possibility of growth for your capital. 

AVAILABLE CASH: 

Just like when you deposit a check there is an amount “available now” and another portion is “on Deposit” this is comparable in your IUL to the “Cash Surrender Value” which is the money you can “use” and the “Net Account Value” which is the actual value of your account, and contrary to what people normally think, you can have money beginning the first year of the policy if you fund your IUL enough. 

When you don’t have any money available it’s because your contributions have been of a lesser amount, but don’t forget, this does not mean your IUL account isn’t growing, always remember this: the money that is in the account is the “Net Account Value”.  

  Each year the “Cash Surrender Value” will Catch up with the “Net Account Value” until in year 10 or 13, depending on your specific IUL where you will have access to the full amount of your account. This does not mean that some portion of your “Net Account Value” was not available before, the only difference is that in year 10 or 13 you will have full access to all of the funds, that’s why the sooner you start your IUL, the better. 

LOANS  

There are two types of loans available from the money in your Cash Value (AKA “The money you can use or “Cash Surrender Value”), these funds are what you will tap into to fund yourself for life projects you will encounter. If you decide to use this feature, the more knowledgeable you become with your specific policy, the better use you will make of these loans. An example of how these loans are structured is:  

FIXED LOANS:  

A Loan account can be credited 2.50% and have a current 2.0% guaranteed for example with changes in subsequent years: 

Years 1-5: Charge 3.38% (current and guaranteed) in advance (equivalent to 3.50% in 

arrears); net rate: 1.00% current (1.50% guaranteed). 

Years 6+: Charge 2.44% (current and guaranteed) in advance (equivalent to 2.50% in 

arrears); net rate: 0.00% current (0.50% guaranteed) 

VARIABLE OR INDEXED LOANS 

In many IUL these types of loans become available beginning in year 3 of the account, yet another reason to start a policy as soon as possible; Where the money you loan (from your own Cash Value) and credited interest on the account REMAIN tied to the index, which can help grow the policy’s full account value while you are still using your money; An extremely important feature because this allows you to use your own money while it’s still growing in your account, given that the index made a good interest that year. 

Is there a risk? If the index was bellow 0% or negative your account will not lose money but it will be charged the percentage rate at which the loan was taken, that’s why it’s important to take into consideration market performance. 

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ALOCATIONS EXAMPLE 

You can place your Funds in a combination of Allocations every year-based on your IUL options, an example is:  

1. Fixed Account  

1. S&P 1-Year Point-to-Point (with Cap)  

1. S&P Monthly Point-to-Point (with Cap)  

1. S&P 2-Year Point-to-Point (with Cap)  

1. S&P 1-Year Point-to-Point (with Par and Cap)  

1. Russell 2000 1-Year Point-to-Point (with Cap) 

1. MSCI EAFE 1-Year Point-to-Point (with Cap)   

1. BNPP MMA 1-Year Point-to-Point (Uncapped)   

1. BNPP MMA 2-Year Point-to-Point (Uncapped) 

Just call in before the policy anniversary (date on your policy contract) and select the best option for you (If you want to learn more about each allocation, talk to your advisor)  

The versatility of where your cash value is placed is UP TO YOU so you can GROW, your own way. 

What is important to always keep in mind is that in the Point-to-Point system your money is credited after a year of averaging. For example, if I deposited money into my IUL in FEB 2022 and again made another deposit or premium payment in JUNE 2022 and I have chosen a 2-year point to point allocation, my FEB deposit will not be credited interest until FEB 2024 and my JUNE deposit will not be credited interest until JUNE 2024 (2-years after the deposit), so the sooner you want your funds credited, the sooner you will fund your policy. 

CONCLUSION 

An IUL is an excellent and powerful vehicle for personal or business uses, and if “Driven” correctly will be a key factor in accomplishing your financial goals. Talk to your advisor if you have any questions or concerns.