An indexed universal life (IUL) policy can be an integral role in your overall financial strategy. In addition to its financial protection for your family, it also offers you the opportunity to build an accumulation value in which you can access the cash value through policy loans or withdrawals.

But IULs are not invulnerable to market volatility. Which is why it’s important to understand the sequence of interest rate risk when accessing the policy’s cash value.

In this episode of Money Script Monday, Sean shows you how interest rate variations and timing of those interest rates can significantly impact the accumulation value of your policy.

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Video transcription

Hello, and welcome to another edition of Money Script Monday.

My name is Sean Brady, and today's topic is discover how the sequence of returns will impact your IUL loans.

As you're planning for your financial future, you're probably like many of Americans out there where you have concerns about protecting your family from the unexpected, safeguarding your assets from market losses, finding different ways to supplement your retirement savings, as well as avoiding those emergencies in which you're depleting your savings.

That's why an IUL can help be an integral role in your overall financial strategy.

And that's because it provides that protection to your family, it offers an additional resource to supplement your retirement income or various other financial needs.

It gives you that life insurance coverage that protects your beneficiaries, and it also offers the opportunity to build an accumulation value in which you can access the cash value through policy loans or withdrawals into the future.

But IULs are not invulnerable to market volatility, especially when you're accessing the policy's cash value.

And that's because interest rate variations and timing of those interest rates can significantly impact the accumulation value of your policy.

And that's why it's important for you to understand how these interest rate variations can affect your policy overall.

Now, what does the sequence of interest rates means?

The sequence of interest rates refers to how much is being credited, and when that interest is being credited.

And this can impact any type of financial vehicle out there that's building an accumulation value based on the market.

Interest Rates

Now when you're building an accumulation value, assuming fees and charges are not applied, then the interest rates that are being credited, the timing, and the variations don't really matter that much; they're not as significant as you would think.

I'll demonstrate that in these examples here.

We're showing three different scenarios showing varying interest rates but the average annual non-guaranteed interest rate that's being credited, they're all equal to 6%.

Now while the account is experiencing varying interest rates, you'll notice that the ending value in all three scenarios are all really close.

For example, if you have an initial investment of $10,000 over the course of four years, in scenario one, the ending value would be $12,580.

Scenario number two, ending value would be $12,574.

And finally, scenario number three, the ending value would be $12,625.

Now again showing varying interest rates, all averaging 6%, and you'll notice all ending values very similar, very close.

But the same is not true when you have a financial vehicle that has fees and charges that are being applied.

And with an IUL policy, you can experience market volatility to a certain extent, especially when you're accessing the policy's cash value.

Now once you start policy loans or withdrawals, you become much more vulnerable to market volatility and sequence of interest rates.

And that's why it's very important to understand that these variations in interest rates, how they affect not only the amount you can access from your policy but also how long your policy will remain in force.

Index Allocations

And that's why in these three examples here, I want to show you how the sequence of interest rates really affects not only the amount you can access but the duration in which the policy will last.

Now on all three examples, we're going to show you three different types of index allocations.

Number one is an index allocation that has no interest rate bonus.

Number two in each of the examples is an index allocation that has a 15% interest rate bonus.

And number three is the largest bonus, it has a 40% interest rate bonus with a 1% annual charge, asset charge.

Now in this first example, I want to show you how the potential policy loan that the client would be able to enjoy if the account was experiencing a 6% non-guaranteed interest rate every single year, so 6% consistently every single year.

If that were the case, the client would be able to enjoy over $53,000 a year annual loan policy loan to age 120. Index number two, over $80,000 to age 120. And index number three over $96,000 in annual policy loans to age 120.

Now in the second example, I want to show you how introducing a different sequence of interest rates can affect the policy.

We're introducing a 0% credit every fourth year, but the policy still averaging that 6% on guaranteed interest rates.

By just showing variance in the interest rates, you'll notice that the policy has the potential to lapse much earlier.

For example, in index allocation number one, that same $53,000 loan as before, would lapse at age 95. Number two, that same 80,000 as before would lapse at age 87. And finally, index allocation number three, that policy would lapse at age 83.

And it's important to note that the higher the bonus, the higher the impact on the amount you could take out and the duration.

It could lapse much sooner if you have a bigger bonus on your particular policy.

Now, one of the things we can do to safeguard yourself from a potential policy lapse which is really important because you would not want your policy to lapse because the tax implications could be astronomical in those later years.

And one way to safeguard that is by reducing the loan amount.

Now in the first example, by reducing the loan amount by 2.8%, that policy would be safeguarded and would continue to age 120.

Example number two, index allocation number two, a reduction of 3.5% would safeguard that policy to age 120.

And finally, index option number three, it has the biggest bonus, so it's going to require the biggest reduction, a reduction in the loan amount by 5.5% annually would help protect that policy from a potential lapse.

Now it's important to note that reducing the loan amount won't eliminate the sequence of interest rate risk, but it's still something you need to account for each year based on the index performance if you're accessing the policy's cash value.

And that's why I really want to stress the importance of annual reviews, you should meet with your financial professional, review your IUL policies each and every year, just so you can make adjustments based on market conditions or if you have any changing needs in your policy or in your future.

Now, if you want to learn anything more about how the sequence of interest rates and how they can affect your particular policy, I urge you to contact your financial professional today.

Thank you, and I'll see you again next time on Money Script Monday.