IUL sales: How to overcome ‘it’s too complicated’

Universal life insurance has always been a slippery slope for agents and, consequently, slippery for clients as well. Especially when you consider it was only created in 1979 and term life has been around since being issued in the Royal Exchange, London, in June1583.

UL is one of the more complex types of life insurance for clients to understand because there are multiple levers that can be pulled to customize a policy.

As Sheryl Moore, CEO of Wink Inc., told InsuranceNewsNet: “While the mechanics of indexed life may initially be overwhelming, the value proposition is simple. Earn interest based upon limited market performance and never be subjected to market declines.”

Overcoming “it’s too complicated” is not just about knowing which levers you can pull when designing a case, but why and when those levers should be pulled.

So, let’s pivot to UL’s more complex sibling, indexed universal life insurance.

What is IUL?

Indexed universal life insurance is a type of permanent life insurance that offers flexible premiums, a death benefit and a cash value component that’s tied to a stock market index that includes caps and floor protection. In some instances, there are paths to higher returns that make distributions in retirement even more appealing.

Wow! That’s a mouthful!

It’s no surprise that clients are often confused. IULs present a dizzying number of components beyond the death benefit amount that can make clients want to scream “no mas” at multiple points in a discussion. I’ve seen it happen.

Let’s demystify the five areas that I believe create the most confusion for clients when discussing IUL policies with their insurance agent.

1. IUL cash value and its link to the stock market index performance

The complication: News flash: words matter! Many clients can’t get past the notion that the insurance company is investing their money in the stock market. Well, we as insurance agents use a lot of the same words financial advisors use, such as “linked” and “tied.” Why wouldn’t clients be just a little confused?

The breakdown: Most reading this know that the client’s money is not directly invested in the market. The life insurance company determines a target range for interest to be credited to the IUL policy’s cash value based on the performance of a stock market index, such as the S&P 500 or Russell 2000. It also provides a guaranteed minimum floor to protect against market downturns.

In simple terms, the returns in the policyholder’s indexed account grow based on the index’s performance, but it will always be lower than the full performance of the market index due to the cap set by the insurance carrier. On the low end, most IUL policies guarantee interest in the 0% to 1% range. In effect, no losses; the principal is intact.

The bottom line: I often explain that IUL insurance is a safe middle ground. It offers growth potential when markets have higher returns, while protecting against downturns. This balance makes it appealing to risk-averse clients who still want some exposure to market gains.

2. Floor and cap features

Floors and caps are two of the key benefits when using an IUL as a cash accumulation tool.

The complication: The positioning of these in the conversation is critical. The cap, which is set by the life insurance company, is the maximum return that can be credited to the policy, regardless of the actual performance of the index.

The floor guarantees a minimum interest rate return, typically 0% to 1%, ensuring your client’s account values aren’t participating in market downturns.

The breakdown: The floor is pretty easy to explain, but it’s not unusual for clients to see the cap as a limitation rather than a stop gap for increased risk management. At that point, you probably haven’t spent enough time educating on the safety aspect of an IUL, or you have misread their risk tolerance.

The bottom line: Think of this as a balanced growth opportunity with less risk than if you were traditionally invested in the market. This feature is a major selling point for those looking for growth, protection, and the potential for growing cash value outside of traditional retirement accounts.

3. Premium flexibility

The complication: Like investment terms, premium flexibility doesn’t easily roll off the tongue in a discussion about life insurance. Let’s use an overused phrase: the devil is in the details.

The breakdown: As insurance products go, premium flexibility is a great feature that gained popularity in the 1980s. Unlike term life insurance or whole life insurance, IUL policy holders can adjust their policy premium payments based on various scenarios. But there is more to it.

If policy holders are facing a financial setback, they can reduce premiums. If they have a windfall, they can increase them. However, unlike traditional policies and financial products with fixed monthly payments and benefits, IUL policies must be closely monitored to ensure the policy is not being underfunded and reducing its lifespan or overfunding and creating an unknown taxable event.

This is a great opportunity for an agent to be the trusted advisor by taking the time to educate on the illustration that shows the minimum guarantee, the midpoint, and the illustrated rate in relation to how far out the death benefit and cash value remain intact.

The bottom line: The key is regular monitoring to ensure the client’s premium payments are on track to meet long-term goals. Insurance agents should complete annual reviews to ensure the policies are on track.

4. Cash value accumulation

Lots of buzzwords such as tax-free, higher premiums, financial strength, distributions, withdrawals and policy loans are commonly used when discussing cash value accumulation.

The complication: Understanding how an IUL policy’s cash value grows can be tricky. Yes, it is tied to the performance of a market index, but it is also impacted by a variety of internal costs. This is where clients get confused. Make sure you have fully explained that their cash value will not grow like a traditional, fixed-rate savings account.

The breakdown: As stated above, the cash value in an IUL grows based on how the linked index performs, but again, it’s not a direct market investment. Clients are protected by a floor, which ensures their cash value doesn’t decrease during market downturns. However, because growth is capped, they may not see what they view as substantial gains during strong market years.

It is important to remember that internal costs, such as administrative fees and insurance charges, reduce the amount that goes into the cash value account. Be on guard for clients confusing this with how traditional whole life insurance policies work.

The bottom line: I explain to clients that while their policy is tied to market performance, it’s not a “set-it-and-forget-it” insurance product. The cash value growth can be substantial compared to other savings vehicles, particularly over the long term.

It’s important to show clients how the growth potential of an IUL insurance policy can provide competitive benefits over traditional term life policies by leveraging both death benefit paired with the ability to safely accumulate cash values that are protected from market declines.

5. IUL insurance crediting methodology

The complication: Terms such as participation rate, spread and margin confuse many clients. No surprise, right?

The breakdown: The participation rate determines the percentage of market returns the client gets, but internal fees like spread and margin can reduce this return. While these concepts are essential, the end result is what matters most: the client’s return and their perception of their gains in comparison to the market performance.

Understanding these concepts is key to grasping how IUL policies credit interest to the cash value component. These rates can vary, and different life insurance providers may have different ways of calculating the interest, which can be another area of confusion.

The bottom line: I always simplify this by explaining how the interest crediting works in terms of outcomes for each policy. Clients need to clearly understand their gains will be impacted by internal costs and participation rates. For example, if the market performs well, they will see tax-deferred growth in their cash value; however, fees and participation rates will affect how much of that growth they actually receive.

IULs can be complex, but they are also powerful insurance products that offer flexibility, growth and protection, and positively supplement traditional financial planning.

By simplifying and explaining the risks, rewards and benefits, you can help clients better understand their options. This will help them choose the right coverage, decide on the death benefit for their beneficiaries, and plan how much cash value they want to build that compliments their other retirement planning solutions.

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Drew Gurley is a licensed life insurance expert with nearly 15 years of experience. During his career as both a licensed life insurance agent and industry executive he has helped thousands of clients with their life insurance needs through his work at Redbird Advisors and Senior Market Advisors.