How Much Death Benefit Should an IUL Have If You’re Using It for Retirement?

You’re putting $10,000 a year into an indexed universal life policy.

Your main goal isn’t buying the biggest possible life insurance policy.

You want to build policy value and eventually create retirement cash flow.

So why does the death benefit matter so much?

And how much death benefit should the policy actually have?

This is where IUL design gets interesting.

Because if retirement accumulation is one of the primary goals, the answer usually isn’t:

“Buy as much death benefit as possible.”

But it also isn’t:

“Use almost no death benefit and stuff as much money into the policy as you want.”

The death benefit is part of the math.

It can affect insurance costs.

It can affect how much premium the policy can accept before running into Modified Endowment Contract concerns.

It can affect future JUMPs.

And, of course, it determines a major part of what your beneficiaries may receive when you die.

There Isn’t One Correct Death Benefit for Every IUL

If someone tells you:

“Every retirement IUL should have a $500,000 death benefit,”

I’d immediately ask why.

Your age matters.

Your health matters.

Your planned contribution matters.

Your insurance need matters.

Your income and financial underwriting matter.

Your desired retirement timeline matters.

Your legacy goals matter.

And the specific policy design matters.

The death benefit should be designed around the actual job the policy is supposed to do.

Start With the Purpose of the Policy

Suppose two people are both buying an IUL.

The first person says:

“If I die tomorrow, my family needs $2 million.”

The second says:

“My family is already financially secure. I’m primarily evaluating this as a supplemental retirement-income strategy.”

Those are two different planning problems.

The first person has a large immediate insurance need.

The second may be more focused on efficiently funding cash value while maintaining an appropriate death benefit.

You shouldn’t automatically design those policies the same way.

Why Not Just Buy the Biggest Death Benefit Possible?

Because life insurance has a cost.

An IUL can include cost-of-insurance charges and other policy expenses.

If you’re using the policy primarily to accumulate value for retirement, unnecessarily increasing the insurance component can change the economics.

That doesn’t mean death benefit is bad.

It’s life insurance. The death benefit is a core feature.

It means you need to understand what you’re paying for.

If I see a large death benefit, I want to know:

“Why is this amount necessary?”

Why Not Make the Death Benefit as Small as Possible?

Now we hit the other side of the equation.

You can’t simply treat an IUL like an unlimited investment account.

Life insurance has federal tax rules that affect how much premium can be paid relative to the policy’s benefits and design.

One of the major issues is whether a policy becomes a Modified Endowment Contract, or MEC.

A MEC is still life insurance, but distributions from a MEC are subject to different federal tax treatment.

That can materially change a strategy built around accessing policy values later.

So if retirement access is the goal, MEC status matters.

The Death Benefit and Funding Capacity Are Connected

This is the part many people never hear.

The amount of death benefit can affect how much premium can be placed into the policy while maintaining the intended tax classification.

That’s one reason a heavily funded IUL has to be designed carefully.

You can’t look at premium and death benefit as two unrelated numbers.

They’re connected through the policy design and applicable tax testing.

Here’s a Simple Example

Suppose you want to contribute:

$10,000 per year.

The question isn’t simply:

“Can I afford $10,000?”

The policy also needs to be designed appropriately to receive the intended funding.

If you’re trying to push substantial premium into a policy with an insufficient death-benefit structure, you can create tax-classification issues.

So we need to know:

How much insurance is appropriate?

How much premium is planned?

How is the policy being tested?

How close is the design to applicable MEC limits?

Those questions belong together.

This Gets Even More Important With the IUL JUMP Strategy

The IUL JUMP Strategy is unusual because the annual funding shown can potentially increase substantially beyond the client’s original out-of-pocket contribution.

Suppose the client starts by contributing:

$10,000 per year.

Here’s the simplified progression we’ve been discussing:

Look closely at Year 11.

The client isn’t writing a $60,000 check.

The client is still contributing:

$10,000.

The additional:

$50,000

comes from a Matching Indexed Participating Loan.

That loan is an actual policy loan, and its proceeds are redeployed into the policy as additional funding.

Now you can see why death-benefit design becomes such an important part of the JUMP progression.

The Death Benefit Doesn’t Simply Double at Every JUMP

This is an important distinction.

The strategy isn’t:

“Double the death benefit every few years.”

Each planned JUMP involves increasing the death benefit by the amount needed under the intended design to create additional funding capacity while seeking to maintain the desired policy structure relative to applicable MEC limits.

The actual amount is based on the policy design and applicable requirements.

It isn’t simply a predetermined doubling formula.

And the JUMPs Aren’t Every Third Year

In the example we’re discussing, planned JUMPs occur in:

• Year 3
• Year 5
• Year 7
• Year 9
• Year 11

That’s an every-other-year progression beginning in Year 3 in this specific example.

Each successful JUMP can increase the death benefit and create additional funding capacity under the intended design.

But there’s another major issue.

You have to qualify.

Future Death-Benefit Increases Aren’t Automatically Guaranteed

A future planned JUMP can require a new application and carrier approval for the increased death benefit.

That means the future progression can be affected by underwriting.

The carrier can consider factors such as:

• Health
• Income
• Employment
• Existing insurance
• Financial justification
• Driving history
• Occupation
• Hazardous job duties
• Risky hobbies or extracurricular activities
• Other applicable underwriting factors

So if someone shows you the entire Year 3 through Year 11 JUMP progression, ask:

“Are all of those future death-benefit increases guaranteed today?”

They aren’t something I would assume.

Financial Underwriting Can Matter Too

People tend to think life insurance underwriting is only about health.

It isn’t.

If you’re requesting increasingly larger amounts of life insurance, there generally needs to be financial justification for the death benefit.

Your income, employment, net worth, existing coverage and other financial factors can affect what an insurer is willing to approve.

This becomes especially relevant when the strategy anticipates future death-benefit increases.

What Happens If Your Health Changes?

Imagine you qualify for the original policy.

Then you successfully complete the Year 3 JUMP.

Year 5 works too.

Before Year 7, your health changes.

You apply for the next planned increase and don’t qualify.

What happens?

Under the JUMP mechanics we’re discussing, you don’t automatically lose every successful JUMP you’ve already completed.

The progression can pause at the previously achieved matching-loan level, subject to the actual policy contract and carrier rules.

You may be able to reapply at a later policy anniversary if your situation improves.

A missed JUMP can pause the progression rather than automatically resetting the strategy.

That Changes How I Look at the Initial Death Benefit

I don’t want to evaluate only the insurance you qualify for today.

If the retirement strategy assumes future death-benefit increases, I also want to understand how important those future increases are to the projected result.

What happens if every JUMP is approved?

Fine.

Now show me what happens if the client stops at Year 5.

Or Year 7.

How much projected retirement income changes?

How much funding changes?

How much policy indebtedness changes?

That’s a much more useful analysis.

What Does the Death Benefit Have to Do With the Matching Indexed Participating Loan?

The Matching Indexed Participating Loan is the mechanism creating the additional loan-funded premium in the JUMP example.

It is not free money.

It is borrowed money.

Its proceeds are redeployed into the same policy.

I like to think of the policy as having two conceptual buckets.

Bucket One: the client’s contributed money.

Bucket Two: Matching Indexed Participating Loan money that has been borrowed and redeployed.

Under the indexed strategy we’re discussing, both buckets have the same indexed-crediting potential, subject to the applicable 10% cap and 0% indexed-crediting floor.

Bucket Two also carries the applicable policy-loan cost.

How Much Does That Loan Cost?

With the policy structure we currently use for the IUL JUMP Strategy, the applicable loan rate is currently 5%, with a contractual maximum loan rate of 6% for the applicable loan feature.

The current 5% rate shouldn’t be confused with a guarantee that it will always remain 5%.

That’s why I want to see the strategy modeled at 5%.

Then I want to stress-test it at 6%.

The death-benefit design, loan structure and funding strategy should be evaluated together.

Why Are the Borrowed Dollars Redeployed?

Because the strategy is designed so the Matching Indexed Participating Loan proceeds remain working inside the policy rather than being borrowed and immediately spent outside it.

Under the applicable indexed strategy, those borrowed-and-redeployed dollars have indexed-crediting potential while the loan has an associated cost.

When the credited result exceeds the loan cost, there can be positive economic spread.

When the credited result is below the loan cost, there can be unfavorable spread.

Positive arbitrage isn’t guaranteed.

Here’s the Historical 6.87% Example

One historical analysis we’ve used looks at annual S&P 500 price changes from 2006 through 2020.

Dividends are excluded because the policy isn’t directly invested in the S&P 500 and doesn’t receive index dividends.

The analysis applies a 10% cap and 0% indexed-crediting floor.

Negative annual index changes are treated as 0% for the indexed-crediting calculation.

Positive annual changes above 10% are limited to the 10% cap used in the example.

Under those assumptions, the historical period produced a 6.87% average indexed-crediting result.

That’s not the historical return of the S&P 500.

It’s not a guaranteed policy return.

It’s not a prediction.

It’s a historical indexed-crediting example using the stated assumptions.

Then There’s the 1.87% Modeled Spread

Using the 6.87% historical indexed-crediting example and the current applicable 5% loan rate:

6.87% – 5.00% = 1.87 percentage points of modeled positive spread.

Now flip it around.

If indexed crediting is 0% for a period and the applicable loan cost is 5%, the loan economics are unfavorable for that period.

That’s why death-benefit design alone doesn’t make JUMP work.

The entire system has to be evaluated.

Does a Bigger Death Benefit Mean More Retirement Income?

Not automatically.

This is another place where people can make the wrong assumption.

Increasing death benefit may create additional funding capacity under the intended policy design.

But increasing insurance can also affect policy economics.

The question isn’t:

“How big can we make the death benefit?”

It’s:

“What death-benefit structure supports the intended funding and retirement strategy while meeting the client’s insurance needs?”

That’s a very different question.

What If You Actually Need a Large Death Benefit?

Then don’t pretend the insurance need doesn’t exist just because retirement accumulation is important.

Maybe you have a spouse who relies on your income.

Maybe you own a business.

Maybe you have significant debts.

Maybe you’re trying to create a specific legacy.

Maybe estate liquidity is part of the planning objective.

Then a larger death benefit may be intentional.

The policy has to solve your actual problem.

What If Your Children Are Already Financially Independent?

This is common for people approaching retirement.

Your kids have careers.

They own homes.

They’re raising their own families.

You may think:

“They don’t need $2 million from us. We need retirement income.”

That’s a legitimate planning conversation.

But don’t eliminate the legacy discussion completely.

If policy loans will be used during retirement, the remaining net death benefit can change over time.

You should know what your family is projected to receive at 70, 80, 90 and 95.

Gross Death Benefit Is Not the Same as Net Death Benefit

This matters once policy loans exist.

Suppose the applicable death benefit at death is $1,000,000.

Suppose there is $300,000 of outstanding policy indebtedness.

A simplified conceptual example would be:

$1,000,000 gross death benefit

minus

$300,000 outstanding policy indebtedness

equals

$700,000 before considering any other applicable contractual adjustments.

The actual death claim is governed by the policy contract.

But this is why I don’t want to see only the headline death benefit.

I want the projected net amount too.

Could You Have Too Much Death Benefit?

From a retirement-accumulation perspective, you can certainly have a policy design where more insurance is being purchased than the strategy actually calls for.

That can affect costs and accumulation economics.

But don’t reduce this to:

“Lower death benefit is always better.”

It isn’t that simple.

The policy still has to satisfy the insurance objective, tax requirements, funding design and underwriting constraints.

We’re looking for an efficient structure, not simply the smallest number possible.

Could You Have Too Little Death Benefit?

Yes, from a policy-design standpoint.

If you’re attempting to put substantial premium into a policy, the death-benefit structure needs to support the intended funding under applicable tax rules.

This is especially important when you’re trying to heavily fund an IUL for retirement accumulation.

Again:

Premium and death benefit have to be designed together.

What About the Up-to-300% Projected Retirement-Income Comparison?

In certain modeled comparisons we’ve evaluated, the IUL JUMP Strategy has produced up to approximately 300% more projected retirement income than the 401(k), Traditional IRA or comparable tax-deferred retirement strategy being evaluated.

That’s a significant difference.

But the death-benefit design is one of the assumptions sitting underneath the JUMP model.

So don’t hear 300% and stop asking questions.

Ask:

What was the initial death benefit?

What future death-benefit increases were assumed?

Which JUMPs were assumed to be approved?

How much did the client contribute?

How much Matching Indexed Participating Loan funding occurred?

What loan rate was used?

What indexed-crediting assumption was used?

What policy charges were included?

What tax assumptions were made for the 401(k) or IRA?

How long did retirement last?

What net death benefit remained?

Don’t just believe the 300% number. Make the strategy prove where the difference comes from with the math.

And What About Approximately 40% More Than a Traditional IUL?

We’ve also evaluated certain modeled comparisons where the JUMP structure produced approximately 40% more projected retirement income than the traditional IUL structure being compared.

Again, the death-benefit structures need to be included in the comparison.

If Policy A and Policy B have different insurance amounts, different charges, different funding capacity and different loan mechanics, don’t pretend you’re comparing only one feature.

Compare the whole policy.

The Death Benefit Isn’t Just a Number for Your Kids

That’s the bigger point.

When an IUL is being designed for retirement, death benefit can play several roles.

It provides life insurance protection.

It affects policy economics.

It interacts with funding capacity.

It can affect applicable MEC testing.

It can be changed as part of future JUMP applications, subject to approval.

And later, it provides the pool from which outstanding policy indebtedness may affect the net benefit paid to beneficiaries.

So I don’t treat death benefit like a throwaway column.

What Would I Ask Before Approving the Policy Design?

I would want answers to questions like:

• Why is the initial death benefit set at this amount?
• How much am I contributing?
• How close is the policy being funded relative to applicable MEC limits?
• What insurance costs am I paying?
• How do those costs change over time?
• What future death-benefit increases are assumed?
• Are those future increases already guaranteed?
• What happens if I’m not approved for a future JUMP?
• What happens if my health changes?
• What happens if my income changes?
• What happens if I stop funding early?
• What projected net death benefit remains after retirement loans?

Those questions tell you much more than:

“How much life insurance am I getting?”

Why This Matters More at 55 or 60

When you’re approaching retirement, you don’t have unlimited time to fix a badly designed policy.

You might be looking at the illustration thinking:

“What if we mess this up and regret it?”

That’s a reasonable concern.

You spent decades becoming financially independent.

“We should be able to handle this ourselves.”

And the last thing you want is to create a financial problem that eventually lands on your children.

“I don’t want to ask my kids for help.”

That’s why I want the policy designed around more than an attractive retirement-income projection.

I want to see what happens if life doesn’t follow the illustration perfectly.

How We Evaluate Death Benefit at FPP Financial

At FPP Financial, we use our Retirement Math Method™.

If an IUL is being considered for retirement, I want to know what job the death benefit is doing.

Show me the client’s actual insurance need.

Show me the planned contribution.

Show me the initial death benefit.

Show me the applicable funding limits.

Show me the policy charges.

Show me the future planned JUMPs.

Then remove one.

What happens?

Show me the Matching Indexed Participating Loans.

Show me the accumulated indebtedness.

Show me the current applicable 5% loan rate.

Then stress-test the applicable contractual maximum of 6%.

Show me lower indexed-crediting results.

Show me retirement at 65.

Then 62.

Show me the projected net death benefit at 75, 85 and 95.

Then compare the projected retirement cash flow with the strategy you’re already using.

I don’t try to sell you on the strategy. I make the strategy prove itself with the math.

So, How Much Death Benefit Should an IUL Have?

Enough to accomplish the insurance objective.

Enough to support the intended policy funding and design under applicable rules.

Structured with awareness of insurance costs.

And, when the JUMP Strategy is being used, designed with an understanding that future planned death-benefit increases can require additional underwriting and approval.

It’s not:

“As much death benefit as possible.”

And it’s not:

“As little death benefit as possible.”

It’s:

“Show me why this death benefit is the right amount for what we’re trying to accomplish.”

That’s the question I want the policy design to answer.

Want to See How the Death Benefit Changes Your Retirement Math?

If you’re considering an IUL for retirement, we can model the policy from both sides.

We’ll look at the contribution, death-benefit structure, funding capacity, policy charges, JUMP progression, Matching Indexed Participating Loans, loan costs, projected retirement distributions and projected net death benefit.

Then we’ll compare those results with the retirement strategy you’re already using.

The biggest death benefit isn’t automatically the best policy.

The biggest projected retirement-income number isn’t automatically the best policy either.

The design has to prove itself.

Let the math do the talking.

Schedule Your Tax-Free Retirement Strategy Meeting

Explore More

• What Is a MEC in an IUL and Why Does It Matter?
• How Can $10,000 a Year Turn Into $60,000 of Annual IUL Funding?
• What Happens to IUL Policy Loans When You Die?

Disclosure

This material is for educational purposes only and is not intended as individualized investment, tax, legal or insurance advice. Indexed universal life insurance is a long-term life insurance product with policy charges, cost of insurance, surrender considerations, underwriting requirements and other contractual provisions. Death-benefit amounts, premium funding levels and policy design should be evaluated based on individual circumstances and the actual insurance contract.

Modified Endowment Contract status is determined under applicable federal tax rules and policy-specific testing. Increasing a policy’s death benefit does not by itself guarantee that a policy will avoid MEC status. Policy design, premium timing and amounts, benefit changes, carrier administration, applicable tax rules and other factors can affect MEC testing. Modified Endowment Contracts are subject to different tax treatment for distributions and policy loans.

Matching Indexed Participating Loans are policy loans, not free contributions, bonuses, guaranteed gains or direct investments in a market index. Policy loans and withdrawals reduce available policy values and death benefits and may increase lapse risk. Outstanding policy indebtedness generally reduces the net death benefit payable under the contract. A policy that lapses or is surrendered with gain and outstanding indebtedness may create taxable income.

References to the $10,000 annual contribution example, JUMP progression, 6.87% historical indexed-crediting example, 1.87 percentage-point modeled positive spread, current 5% loan rate, contractual maximum 6% loan rate, approximately 40% more projected retirement income, or up to approximately 300% more projected retirement income are illustrative and are not guarantees of future policy performance, positive arbitrage, policy durability, funding capacity, non-MEC status, death-benefit approval, net death benefit or retirement income.

The historical 6.87% indexed-crediting example discussed in this article is based on an analysis of annual S&P 500 price changes from 2006 through 2020, excluding dividends, using the stated 10% cap and 0% indexed-crediting floor. Historical results do not predict future policy performance. An indexed universal life policy does not directly invest in the S&P 500, does not own the underlying stocks and does not receive index dividends.

A 0% indexed-crediting floor does not guarantee that overall policy value cannot decline. Policy charges, cost of insurance, loan costs and other policy mechanics continue to apply. Positive arbitrage is not guaranteed. Periods in which indexed crediting is below the applicable loan cost can produce unfavorable loan economics.

Future JUMPs and death-benefit increases are subject to carrier approval and applicable medical, financial and other underwriting requirements. Future approval is not guaranteed. A client’s health, income, employment, financial circumstances, existing insurance, occupation, activities and other underwriting factors can affect eligibility for additional coverage. Failure to complete a planned future JUMP can materially change projected funding, policy values, indebtedness, death benefits and retirement-income results.

Policy-specific premium requirements, death-benefit options, insurance charges, loan provisions, loan rates, guarantees, nonguaranteed elements, caps, participation rates, spreads, crediting methods, MEC testing, lapse provisions and other contractual terms should be verified against the current carrier-approved illustration and actual insurance contract. FPP Financial does not provide tax or legal advice. Consult qualified tax and legal professionals regarding your individual circumstances.