There is no other financial vehicle in the marketplace today that offers you the combination of three unique tax benefits - tax-free death benefit, tax-deferred cash accumulation, and tax-free loans - than an indexed universal life (IUL) policy. This life insurance product could truly be a valuable asset to your portfolio... when designed properly. In this episode of Money Script Monday, Brian shows you the three areas to evaluate when making sure your indexed universal life policy is properly structured for maximum potential.

Click on the whiteboard image above to open a high-resolution version of it!

Video transcription

Hi. Welcome to another episode of Money Script Monday. My name is Brian Manderscheid. Today, we're going to talk about the three pitfalls to avoid when properly structuring an IUL policy.

I've been analyzing IUL policies for over ten years now and when I first started, there were maybe 5-10 carriers on the marketplace. Fast-forward to today, there are dozens and dozens of carriers, and new entries on the marketplace each and every day.

With all these new products, there's more competition, which is great for you considering an IUL. However, there are also things to look out for when purchasing an IUL. Those three things are poor design, high expenses and performance bonuses.

#1: Poor design

First, let's talk about poor design. Let's back up a step from talking about IUL to instead talk about an investment. This investment we're going to talk about is a five-story apartment complex.

Let's say we're to build this complex. There's going to be a lot of costs up-front. We're going to have all the labor and construction costs to build this building. Let's say we're only to fill up three out of the five floors with renters.

That's likely not going to be a very profitable endeavor.

Now, an IUL policy could potentially be like this five-story apartment complex if it's not designed appropriately. The best product in the marketplace can actually be a poor investment if it's not done correctly.

The two things we want to focus on with design, number one is minimum death benefit and second is maximum premium.

Minimum Death Benefit

You actually want to buy the least amount of death benefit that the IRS will allow. The reason being is because the policy fees are actually based on the death benefit amount that you purchase.

If you buy more than the minimum, you're going to be buying more floors without renting them out.

Maximum Premium

The second thing is maximum premium. The great thing about an IUL policy is you have the ability to fund up to the maximum line that the IRS will allow, or the minimum premium to just barely cover the policy expenses, and of course everything in between. You also have the ability to miss premiums and catch up in latter years.

While those features are great, if we don't pay up to the maximum premium each and every year, we're going to be buying the five-story apartment complex and only renting out three floors.

A good question to ask an advisor you're working with is, "Is this policy structured with the minimum death benefit, funded up to the maximum guidelines?"

We talked about poor design. The second thing we want to talk about are high expenses.

#2: High expenses

Now, again, I mentioned that there are many IUL products in the marketplace, and they're actually not designed equally. Some products have notoriously very high policy expenses, when compared to other products on the marketplace.

For an example, we have a case with a client:

• In his early 40s
• Funding 50,000 dollars a year in premium for 10 years
• A total of 500,000 dollars in premiums

Now, this company, Company A, had total costs of 116,000, roughly. Policy B had very whale-like policy costs with almost 750,000 dollars in expenses over the same period of time!

Again, some companies have very high expenses, very whale-like costs, when compared to other products in the marketplace.

This product had a 643% increase in costs when compared to the other option.

A few good questions to ask your advisor are, "What are the fees on the contract?" and, “May I ask for a disclosure of what those fees are as well.”

If those costs sound high and fishy, you may want to look for another option.

So, we talked about poor design. We talked about high expenses. The last thing we want to talk about are performance bonuses.

#3: Performance bonuses

In general, performance bonuses are actually a good thing to have on an IUL policy. However, there are definitely things you want to look out for, such as, are they guaranteed or are they non-guaranteed, as well as are they transparent or non-transparent?

Some companies actually will have benefits that they project on the illustration that are both non-guaranteed as well as non-transparent.

This would be sort of like going to an auto dealership and asking the car salesman to buy a car, however, the car salesman refuses to let you look under the hood.

With an IUL policy, we definitely want to make sure that the benefits that we're having - the performance bonuses that we're receiving - are guaranteed as well as there's a clear, transparent formula on how those benefits are calculated.

Guaranteed vs. Non-Guaranteed

With guaranteed bonuses, what that means is the insurance company has a contractual obligation to pay those benefits to you.

Many companies will also set aside the appropriate reserves so that they can afford to pay those benefits without reducing cap rates or increasing cost.

Other companies however choose to offer non-guaranteed bonuses.

What that means is they can actually include it in the projection, in the illustration, but they don't actually have an obligation to pay for those benefits.

They could pay them or they could not pay them. It's really up to the insurance company.

The second thing I want to bring up with performance bonuses is are they transparent or are they non-transparent?

Transparent vs. Non-Transparent

An example of a transparent bonus would be something like, "This benefit starts in any specific year. It's a guaranteed percent, or a guaranteed multiplier up to a specific cap rate that is contractually guaranteed."

This is what we want in a performance bonus. We want a clear, understandable formula that is guaranteed and that we can easily calculate.

Some companies offer non-transparent bonuses. What that means is they are bonuses based on a number of different factors and the insurance company has the ability to pull the strings to modify those factors so they can actually pay a lower benefit than what they originally illustrated.

A couple of good questions to ask the advisor are, "Does this product have a performance bonus? If so, is this benefit guaranteed or is it non-guaranteed?" and, “How is the benefit calculated?”

So, we talked about three pitfalls to avoid when properly structuring an IUL policy. Those again are poor design, high expenses and performance bonuses.

Make sure when you’re deciding on which IUL policy and carrier to go with, that you’re reviewing these three pitfalls and holding the advisor accountable by asking them these tough questions.

At the end of the day, you want to select an IUL policy that is properly structured and works efficiently to provide the results you are looking for.

Thank you very much for tuning into another episode of Money Script Monday. Thanks again and we'll see you next time.