The Proper Design for Max Cash Value Accumulation with an IUL

The structure of an indexed universal life policy can have a major impact on how the policy performs over time. If the goal is to maximize cash value growth, it is important to understand how the policy is designed and what features may support that objective.

Indexed universal life insurance, or IUL, is a type of permanent life insurance that includes both a death benefit and a cash value component. The cash value may earn interest based in part on the performance of a market index, subject to policy caps, floors, participation rates, and carrier terms. IUL policies are not directly invested in the market.

The way an IUL is designed can affect how much of the premium goes toward policy costs versus how much is allocated toward potential cash value accumulation. A policy designed for cash value accumulation may be structured to reduce insurance costs relative to premium and improve long-term efficiency.

Several factors can impact how an IUL is designed:

• Funding Level
  Many IUL policies are funded at only the minimum premium required to keep the policy active. While this may reduce the upfront cost, it can also limit long-term cash value accumulation because a larger percentage of the premium may go toward policy expenses and cost of insurance charges.

  For clients focused on building cash value, higher premium funding may allow a larger portion of each payment to go toward the cash value component of the policy. However, funding levels should be monitored carefully to avoid exceeding Modified Endowment Contract (MEC) limits. A policy that becomes a MEC can change the tax treatment of loans and withdrawals.

  The TAMRA 7-Pay limit is often used when designing a cash value-focused policy. This is the maximum amount of premium that can be paid into the policy over a 7-year period before it becomes a MEC. In many cases, policies designed for cash value accumulation are funded close to, but below, that limit.

• Death Benefit Option
  The death benefit option selected can affect both policy costs and cash value efficiency. Most IUL policies offer a level death benefit option and an increasing death benefit option.

  An increasing death benefit option may be used in the early years of the policy because it can sometimes improve early cash value accumulation and allow the policy to accept higher premium levels. Later, depending on the policy design and goals, the policy may switch to a level death benefit option to help reduce ongoing insurance costs and improve long-term efficiency.

  In many cash value-focused designs, Option A level death benefit, minimum non-MEC death benefit, and CVAT corridor testing are often used because these features can help keep the death benefit lower relative to premium and improve policy efficiency. The appropriate structure will vary based on age, funding level, goals, and overall policy design.

• Policy Charges and Expenses
  All IUL policies include internal charges and expenses that can affect performance over time. These may include premium loads, monthly administrative fees, rider charges, and cost of insurance charges.

  Cost of insurance charges typically increase as the insured gets older, which can have a greater impact on policy performance in later years if the policy is not properly funded. Policies with higher death benefits relative to premium may also have higher ongoing costs.

  Because these charges vary by carrier, age, gender, health class, underwriting class, and policy structure, it is important to review a full illustration to understand how expenses may impact future cash value growth.

• Carrier and Index Options
  Different carriers can offer significantly different policy features. Some companies may have lower charges, more competitive loan provisions, stronger index options, or more flexible rider choices.

  Index strategies may vary by carrier as well. One company may offer capped strategies, while another may offer uncapped strategies, bonus options, or different participation rates. Carriers may also differ in how they handle loans, distributions, chronic illness riders, lapse protection features, and overloan protection riders.

It is important to understand that IUL policies involve costs, limitations, and risks. Cash value growth is not guaranteed beyond any stated minimum guarantees in the policy. Actual performance will vary based on credited interest, policy expenses, funding levels, loans, withdrawals, and other factors.

This content is for educational purposes only and is not intended as financial, tax, or legal advice.

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