How to use IUL bonuses and multipliers

Indexed universal life insurance policies are increasingly popular, offering a unique blend of life insurance coverage and investment potential. As IUL’s popularity grows, the marketplace has become crowded with numerous new products touting exciting and enticing features to differentiate themselves from the rest.

One key feature that can significantly enhance the value of these policies is the inclusion of bonuses and multipliers. These enhancements can boost the interest credited to the policy, making IUL more attractive for consumers. However, not all bonuses and multipliers are created equally.

As the IUL market has evolved, the products and features have become more complex and challenging for consumers to understand. The agent or financial professional who takes the time to explain why a policy’s bonuses and multipliers may or may not suit a client’s needs will earn their trust and business.

Defining IUL terms for clarity 

In recent years, an increasing number of insurance carriers have entered the IUL market, driving innovations in product design. To compete with other carriers, many have introduced bonuses and eventually multiplier features to their products. Understanding the different kinds of bonuses and multipliers offered in today’s market is essential.

Interest bonuses 

Simple interest bonuses are perhaps the most basic form of bonus found in IUL products, although you may also hear them referred to as “persistency credits” or “account value enhancements.” These bonuses apply additional interest credit to the policy value based on a specific period.

While it provides a steady, albeit modest, boost to the policy's growth, it’s not dependent on the annual index credit, unlike many existing multipliers. It’s a conservative addition to the policy's value, typically ranging from 0.5% to 1.5% over a specified period.

Multiplier bonuses

More advanced bonuses, known as multipliers, have become common in the IUL market. These bonuses can take many forms, but they all operate by multiplying indexed credits by a percentage and adding the result to the policy.

The multiplying percentage can range from 10% to 15%, depending on the carrier and product. These bonuses can be easily identified by the year in which the multiplier takes effect, typically beginning in year 6 or 11.

Multiplier accounts or riders

As complexities in IUL product design have increased, there has been a notable shift away from simple interest or a multiplier bonus and toward multiplier accounts and riders. These start in the policy's first year and work by crediting an additional percentage of annual indexed credits based on the selected account or rider.

Unlike more straightforward interest or multiplier bonuses, multiplier accounts and riders usually have an additional charge. This charge covers the higher multiplier if a client chooses to pay for the extra leverage, allowing them to allocate funds into that account or rider, a different account with no charge, or a combination of the two.

The untold truth about multipliers and bonuses 

The emergence of new product design innovations has been a net positive for the IUL market. However, multipliers and bonuses can vary significantly from carrier to carrier, as can the potential outcomes for specific consumers. To avoid a mismatched IUL recommendation, agents and financial professionals must be transparent about the hidden charges and risks that may apply.

For starters, producers must be cautious when discussing guaranteed multipliers. The term “guarantee” about multiplier bonuses and accounts/riders can be misleading to consumers who often believe the positive index credit is what’s being guaranteed. The guarantee is that it will be applied on top of the actual index credit only in years of growth. When indexed growth isn’t positive, that guarantee is no longer valid.

Another issue with a guaranteed multiplier is its high associated cost to support. A multiplier bonus can significantly boost the maximum illustrated rate and the potential growth of the policy. However, as the multiplier percentage grows, so do its effects on the max IR. It also increases the sensitivity to market volatility and the charges taken out as the cash value grows. Although the multiplier is fixed and may not incur an associated charge, other specifications, such as the cap or participation rate, may be subject to increases if it becomes too expensive to maintain.

Being transparent is the only way to avoid ramifications down the road. Imagine you sold your client an IUL policy with a guaranteed 15% multiplier bonus, but the indexed growth was not positive, and they received a 0% credit. You can receive some angry phone calls and possibly lose your client.

Embracing transparency to enhance trust 

Life insurance agents and financial professionals play a vital role in assessing the suitability of IUL bonuses and multipliers for their clients' risk profiles.

The first step is to understand the product's details, ensuring you can openly and honestly assess its applicability to individual client needs. Every carrier may approach these bonus features differently, even though they use the same terminology. Understanding how bonuses and multipliers are applied to the policy is crucial, as some bonuses may apply to the entire account balance. In contrast, others may only affect the unborrowed or surrender value.

Don’t overlook the client's existing policies in favor of new ones. It’s essential to compare the benefits and drawbacks of any new IUL policy with the client's current coverage to ensure that a switch would be beneficial.

Finally, assessing the client's risk tolerance is equally essential. While potentially more rewarding, multiplier bonuses come with higher risk and volatility.

Life insurance agents and financial professionals must thoroughly review the details of these bonuses, understand their impact on the policy's value, and align them with the client's financial goals and risk tolerance. By doing so, agents can provide their clients with the best possible advice and help them make informed decisions about their life insurance coverage.

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Mark Milbrod, CLU, CLTC, is the vice president of ASG, a multi-company insurance brokerage agency and an Amerilife Company. Contact him at [email protected].