IUL: What agents should know to present an illustration effectively

By Drew Gurley

Indexed universal life insurance is a powerful financial tool that combines life insurance with potential cash value growth linked to a stock index. However, its complexity can make presenting an IUL illustration a challenge.

Here is how agents can break down the most important components and explain them in simple terms to clients.

Know the three key components to an NAIC IUL illustration page

The National Association of Insurance Commissioners illustration page is a vital part of the IUL illustration. It includes three scenarios that help clients visualize the potential outcomes based on varying conditions over time.

However, they can overwhelm clients (and agents in some cases) with projections and unfamiliar terms. Focusing on the following three columns will help simplify what clients need to know as this is what will show you how long the death benefit and cash value will last:

Guaranteed scenario. This column represents the insurance carrier’s most conservative assumptions. It assumes the lowest possible interest rate credited and maximum charges imposed by the insurer. Think of it as the carrier’s worst-case scenario.

Midpoint scenario. The midpoint scenario assumes 50% of the expenses and interest crediting fall between the current assumption and the guaranteed scenarios. While still conservative and not guaranteed, it reflects a more balanced view of possible outcomes.

Current assumption scenario. This scenario assumes current charges and up to the maximum allowable illustration rate, presenting an optimistic view of the policy. While unlikely to occur exactly as projected, it demonstrates the policy’s potential under favorable conditions. Agents should stress this is not guaranteed, however, many companies will offer literature that shows historical performance and the opportunity to achieve certain rates.

Why the NAIC page matters

The NAIC page provides clients with a comprehensive perspective of what could happen over the life of the policy. This is critical to make sure clients have a clear understanding of the range of scenarios to help them make the best decision for their needs.

Also, when you are getting multiple illustrations, this is when you need to review if the policy is illustrated in a way that is meeting the needs of the client. If the midpoint isn’t performing well to match the needs of your client, you need to rework the illustration with your wholesaler or internal sales support from the insurance company.

Breaking down key components of the IUL illustration

When presenting an IUL illustration, agents must balance the client’s stated needs rather than just focusing on the specific assumptions from the illustration.

In short, stay on the task of thinking like the client.

Death benefit. Make sure you are clear on what the client really wants and needs. IULs have features that are perfect for clients looking for cash value growth. However, if a client is simply looking for life insurance for their entire life then maybe they don’t need to pay for an IUL’s bells and whistles.
Cash value growth. If this is their focus, then an IUL should be in the discussion. Unlike whole life insurance, an IUL provides an opportunity to participate in growth markets while providing a floor against market losses.
Client age. This one may take some elbow grease on the agent’s part. Many carriers have different IUL offerings based on a client’s age. For example, an IUL with higher insurance costs in the first 10 years may be best for a younger customer. This could provide greater cash value growth over time. It will also allow the carrier to spread risk over a longer time period. Do your homework and lean on your wholesaler or internal carrier representative.
Mortality tables. Insurance carriers determine the cost of insurance, in part, using these life expectancy projections. The carrier’s risks are reduced as people live longer, and this should lower premiums. Here’s a tip: you should provide policy reviews for current clients with life insurance to determine whether their policy should be replaced based on changing mortality rates, and of course their eligibility.
IUL cost of insurance. Mortality rates and administrative costs are the biggest share of an insurance carrier’s cost of insurance. We all know that the older the applicant, the higher the cost they pay for insurance. This is especially important for customers looking for tax-free retirement income like they can get with an IUL.

Keep the math simple for clients

Illustrations sometimes look and feel like they have been created by an insurance carrier’s sales prevention department. Keep the conversation focused on the most important numbers:

Cap rate. The maximum return a policy can earn in a given year.
Participation rate. The percentage of the index’s return credited to the policy (e.g., an 80% participation rate of a 10% index gain = 8% credited to the policy).
Floor rate: The protection against losses, typically 0%, ensuring the cash value does not decrease due to market downturns.
Fees and expenses. Be specific to help clients understand how the cost of insurance and administrative costs impact cash value growth over time. And don’t forget surrender costs.
Historical performance. Show how past index returns compare to the illustration’s projected rates.
Conservative assumptions. Use realistic growth rates to help clients envision achievable outcomes, avoiding disappointment from overly optimistic projections.
Loans and withdrawals. Define the differences between loans and withdrawals, emphasizing their impact on cash value and death benefit.

Although IUL illustrations can be a challenge to communicate, stay focused on the big picture for your clients. Emphasize transparency and your clear understanding of the risks and limitations of the investment you are asking your client to make.

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.