IUL Policy Survives Twelve Year Test

This episode examines real-world data from a 12-year-old indexed universal life insurance policy. We track how the policy performed despite significant changes to its original parameters. The case study reveals insights about IUL resilience and flexibility.

The policy started with a 12% cap rate and 2% floor on the S&P 500. Over the 12 years, the cap rate dropped to 7.75%, yet the policy still achieved an average return of 7.37%. This exceeded the original 6% assumption used in the planning process.

We break down the frequency of hitting caps versus floors over the policy's lifetime. The data show that the policy hit the floor 18% of the time and fell within the moderate 2-7% range only 12% of the time. Most performance landed at higher levels.

The episode explains how insurance companies set cap rates and why they change over time. We cover the role of bond yields and options pricing in determining these rates. The discussion clarifies why cap rate adjustments aren't arbitrary profit-grabs by insurers.

This particular policy stopped receiving premium payments after just two years. Despite this dramatic departure from the original plan, the policy continues to grow and remain viable. We examine the options available when funding plans undergo a complete change.

The performance data offers a comparison of IUL versus whole life insurance during the same period. While cap rates declined for IUL policies, they rebounded more quickly than whole life dividend increases. The comparison highlights different product characteristics. ______________________________

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