Episode #10: Test Drive an IUL

When buying a house or purchasing a vehicle, you're usually given the ability to experience it before making your final decision. With most financial vehicles - including IUL - you're not given such freedom... until now! In this episode of Money Script Monday, Brian walks you through a calculator that allows you to enter in a few basic inputs and be able to "test drive" an IUL policy before making the purchase.


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Video transcription

Welcome to another episode of Money Script Monday. My name is Brian Manderscheid. Today we're going to talk about Test Drive an IUL. Now, with any important financial decisions you'll make over your lifetime, whether that's buying a home or buying an automobile, you can sample or experience a product itself before you actually make the buying decision. With financial products like IUL or other investment options you may be considering that may not be the case. You either buy and you're satisfied or you buy it and you're dissatisfied and have buyers' remorse.

Today, what I want to do is share with you a calculator that we developed that allows you to enter in some basic variables about yourself, what you're looking for, and we can generate a custom report that basically shows you if an Indexed Universal Life is the right product for you.

Test drive IUL calculator

I want to run you through the basic inputs of how to run this calculator, as well as what the custom report that is generated. Keep in mind that right below the video, you'll see a link to this calculator that you have access to and you can run an option for yourself as well.

Test Drive an IUL Calculator
  • Basic Inputs - You'd first enter in your age. We go all the way down to age 25 and all the way up to age 65. For this presentation, we're going to show age 40. You also have the ability to enter in your gender, whether female or male. Likewise, you have the ability to change your health. Whether you have good health or average health, you have the ability to select that as well.
  • Annual Contribution - You have the ability to list what you'd like to, or at least look at fund into an IUL on an annual basis. For the demonstration, we're going to show a $20,000 annual contribution. Keep in mind, you may decide to pay that on a different mode, whether that's monthly, quarterly, or semi-annually.
  • Premium Years - In addition to the amount that you'd like to fund, we can also select how long we want to fund those dollar amounts. For this demonstration, we're going to show funding to age 65. You also have the option to fund for 10 years only. Keep in mind that if you're showing ages 56 and above, the only option that we have is a 10-year fund. So, if you're age 60, for example, we couldn't illustrate funding for five years only to age 65. We'd only be able to show a 10-year option of funding.
  • IUL Values @ Age - To view the IUL values at any specific age, we can go all the way up to 95 or down to as low as 65. Basically, if you want to view the values of the IUL, you can choose to select it at any of those years. Typically, we leave it around life expectancy, or an age around there, so it can see what that would look like over your lifetime. The IUL projected values are using a 7% illustrative rate.
  • Expected Interest Percent & Expected Expense Percent - What this calculator does, in addition to show you the projected IUL values, it also compares those values to various financial alternatives. We have the ability to select what we'd like to see the various financial alternatives ran. In this case, we're going to leave defaulted to 7. You also have the ability to enter in the expenses, not of the IUL but of the various financial alternatives that we're going to compare against. For this demonstration, we're going to choose a 1% hypothetical expense, with a 7% expected interest rate, just so we're showing a like-to-like interest rate with the IUL.
  • Working & Retirement Tax Rates - We're able to enter in a tax rate both for your working career, your accumulation phase, as well as your retirement phase, or your distribution phase. In this case, we're just going to go ahead and leave it defaulted at 28% for both phases of life but, again, you have the ability to change those.

Generate report

After you've entered in all these inputs, you just hit this Generate Report button, and in a matter of seconds you're going to receive at the bottom of the page a custom one-page report. Keep in mind, you'll see "This is a demonstration report only" and the reason we have that entered in is...

(1) This doesn't actually run an insurance company or a carrier illustration. It uses big data and analytics to project what an IUL may look like. So, if you're actually going to move forward to the next stage to actually implement and purchase an IUL, you'd have to run an insurance company or carrier illustration to get the actual values. This just does a hypothetical of what those values could look like.

(2) This one-page report is actually a part of a 20-page report called "Your Personal Wealth Report". It goes much more into detail than we can using only these few variables entered in for the Test Drive IUL calculator.

Test drive results

Our key assumptions at the top: we have our age of 40, we're going to fund a $20,000 premium to 65, take distributions at age 66, the following year. Our lifetime investment, our premium that we funded in over that 25-year time frame is $500,000. We left our accumulation and distribution phase tax rates at 28%. Keep in mind, our IUL illustrative rate is defaulted to 7, which is not something that we have the ability to change in this calculator. But, if you wanted to look at other illustrative rates, we can do that with a carrier illustration and a Personal Wealth Report.

Getting into the IUL as well as the various financial alternatives, you can see our 7% illustrate rate with the IUL, and the like-to-like illustrate rates for our three alternatives. For those three alternatives, we have a taxable account which is taxed as earned, we have a tax-deferred account which is grossed up, funded in pre-tax, accumulates tax deferred and distributes taxable basis, and we have a tax-exempt account which is tax-free in the accumulation phase, distribution phase, and transfer phase, similar to an IUL. Again, we are doing like-to-like interest rates, and we're choosing 1% for all our alternatives.

On the right hand side, you can see that the average IUL typically will perform at about a 7.29%. Keep in mind that there's a lot of different IUL products on the market, and, once we actually run your Personal Wealth Report, we can use the cap rates and indexed data from the product that you're selecting to run a back cast report and do a much more in depth back cast analysis.

Key takeaways

For the most part, a lot of individuals decide on an IUL to supplement retirement income with tax-free retirement income from the IUL. In this case, based on our assumptions, we are able to receive just short of $100,000 of illustrated tax-free income, from ages 66 all the way to age 100. Additionally, we start off with a death benefit of over half a million dollars, $518,576 to be exact. Keep in mind that this is the minimum death benefit that the IRS will allow so we can keep the insurance cost low and maximize cash value returns.

Total Benefits

There are three metrics we look at age 85. The first metrics is the total benefit, and the total benefit is a sum of the total income to age 85 and the death benefit at age 85. The total benefit of the IUL is about $3.2 million. Again, that's the sum of the income we took over our lifetime, and the death benefit we left over for our family. When we fund the same $20,000 a year into our alternatives, and we take the same net income of roughly $98,000, you can see that the total income generated from the taxable account is just over $1 million. We don't have a death benefit because we actually ran out of money at age 76, so our total benefit is just over $1 million. With our tax-deferred account and tax-exempt account, our total income is roughly $1.8 million. There's no death benefit left over because we ran out of money prior to age 85. So, that's the first piece of information we'll look at is our total benefit.

Total Fees & Taxes

These are all the policy costs associated with the contract - the administrative fees, the loads, the cost of insurance, etc. - are $180,000 to age 85, all the fees included, and those would go for the death benefit for your family. There's no taxes on the accumulation phase, distribution phase, and transfer phase, as long as the IUL is designed properly. Our total fees and taxes with the IUL are $180,000. Now that may sound like a lot of money but, again, we can't look at those fees in a vacuum, and we have to compare those to the other alternatives that you may be considering. For example, the taxable account, if we're paying 1% in fees, we pay $141,000 in fees plus taxes on the gains, on the earnings, of $263,000, our total fees and tax is over $400,000. It's important to note that if this account actually lasted to age 85, didn't run out of money at 76, we actually would have more taxes and fees. But, we actually have nine years of no values, which is one of the reasons why this number is actually lower.

The tax-deferred account, we have total fees of $331,000 at our 1% assumption. Keep in mind that not only are we paying taxes on our portion of the tax-deferred account, we're also paying the fees on Uncle Sam's portion there as well, because we are grossing up our account and we have a tax bill that's looming on the tax-deferred account as well. When we go to pay taxes on a distribution phase, when we take distributions to receive that $98,000 net income stream, we have cumulative taxes of over $700,000. Our total fees and taxes are over $1 million. On our tax-exempt account, we didn't have taxes. But, at 1%, we had fees of $238,000, so, again, no taxes but we still have more fees than we would pay in the IUL.

Age You Run out of Money

Again, the last metrics we'd look at is when you actually run out of money. Now, the IUL is able to support the $98,000 of income and not run out of money, whereas, we looked at the taxable account, ran out at 76, and the tax-deferred and tax-exempt ran out of money at ages 84 respectively.

Account value by age

On the bottom of this section, you'll see some more graphical representations of the values, and one thing I always point out is the tax-deferred account on the accumulation phase always has the highest values. That's because we gross up a $20,000 contribution to the tax-deferred accounts, and we're assuming that is going in pre-tax, and there's a tax lean, essentially, on the tax-deferred account, which will be paid off when either you transfer that money to a non-spousal beneficiary or take distributions from that account. While this value is highest in the accumulation phase, it's important to note that not all that is your money. Part of that's your money, part of that is taxes you owe to the IRS.

Total income at age 85

On the right hand side, you'll see the total income, cumulative income, at our selected age, 85. Now that we have went through the report, the last thing I want to point out is on page two. If you go to the next page, you'll actually see some important disclosures there as well.

Now that we've ran through the Test Drive IUL calculator, you may want to go back to your original assumptions and make some modifications. You can stress test the policy with various changes in the other alternatives, you can change the funding amount, and all the other things that we mentioned. You may want view the IUL values at 85, you may want to show the IUL values sooner, or maybe even later there as well. Or, maybe you think, well, since the IUL has a limiting factor, whether that's a cap or participation rate, albeit it does have floor of 0%, you may want to see what the other alternatives look like at a higher rate than the IUL, just to see what that would look like. Or, conversely, if you wanted to see what the comparison would look like if you showed a lower illustrated rate on the other alternatives, you have the ability to do so as well. Additionally, let's say you're investing in low-cost indexed funds and you wanted to show lower expense assumption for the other alternatives; you have the ability to do so there as well.

Lastly, let's say, hypothetically, you want to show how tax rates will affect your retirement income. Let's say, if you think you're going to be receiving less income and therefore be in a lower tax rate, you have the ability to modify the tax rate in retirement. Or you may actually think, well since we have trillions of dollars in under-funded liabilities and a massive amount of federal debt, there's a possibility that tax rates may be, in fact, higher, would that effect be on our account? It's important to note that for the IUL, since the distributions come out tax free. Whether you put this at 28%, 35%, or 50%, the IUL values won't change. The values for the taxable and tax-deferred accounts will be the ones that are hurt most.

The next step would actually be to scroll down below this video to the link so you can run a custom scenario for yourself.

Request a custom "Your Personal Wealth Report"

I strongly urge you to use this tool to see if an Indexed Universal Life is the right policy for you. In addition, keep in mind that the Test Drive calculator is only one page of up to a 20-page report we offer called "Your Personal Wealth Report". This goes much more in-depth as far as the alternatives that are concerned, the policy fees and comparisons, as well as the backcasting of the returns.

Test Drive an IUL Calculator

If you're interested in receiving a free copy of "Your Personal Wealth Report", please use the information on this page to request one for yourself. Thank you very much for tuning into another episode of Money Script Monday. We'll see you next time.

About Brian Manderscheid

Brian Manderscheid is the Vice President of Case Design at LifePro. He works with financial professionals designing advanced case illustrations that are built for longevity and are always in the best interest of the client.