How Do You Read an IUL Illustration and Know If the Numbers Are Realistic?

Someone puts an IUL illustration in front of you.

There are 30 or 40 pages.

Columns everywhere.

Cash value.

Death benefit.

Premiums.

Loans.

Guaranteed values.

Nonguaranteed values.

Then your eyes land on the number the person showing you the policy probably wanted you to see:

$150,000 a year of projected retirement income.

Or $200,000.

Or some other number that makes you think:

“Wait. I can put in that much and eventually take out THAT much?”

Maybe.

But that’s not where I would start.

I’d start asking:

“What assumptions had to be true to create that number?”

Because an IUL illustration isn’t a promise of what your policy will do.

It’s a model.

And a model is only useful when you understand what’s underneath it.

Don’t Start With the Retirement-Income Number

This is probably the biggest mistake people make when looking at an IUL.

They skip straight to age 65.

They see a projected distribution.

Then they compare that number with what they’re putting into the policy.

That’s backwards.

Before I care about the projected income, I want to understand:

• How much you’re contributing
• How long you’re contributing
• The death-benefit structure
• The policy charges
• The indexed-crediting assumptions
• The applicable cap, participation rate or other crediting terms
• The policy-loan assumptions
• When distributions begin
• How long distributions continue
• How much indebtedness accumulates
• Whether the policy remains in force
• What death benefit remains

Then we can talk about the income number.

First, Find the Premium

How much are you actually expected to put into the policy?

Don’t just look at Year 1.

Look at the entire planned funding schedule.

If it shows $10,000 per year, how many years?

Ten?

Fifteen?

Twenty?

Does the illustration assume you stop paying at retirement?

Does it assume contributions continue after retirement?

If you think you’re committing to $10,000 for ten years but the projection actually assumes $10,000 for twenty, that’s not a small misunderstanding.

It changes the entire comparison.

Then Ask What Happens If You Stop Early

Suppose the illustration assumes $10,000 per year for 15 years.

What happens if you stop after Year 10?

Year 7?

Year 5?

You shouldn’t have to pretend your life will unfold exactly according to the original illustration.

If changing the premium schedule destroys the strategy, I want to know that before you buy it.

Find the Guaranteed and Nonguaranteed Columns

An IUL illustration can contain both guaranteed and nonguaranteed values.

Don’t confuse them.

Nonguaranteed values can be based on assumptions about future policy performance and other elements that can change within contractual limits.

That doesn’t make those columns useless.

They’re necessary for understanding how a policy might perform under the illustrated assumptions.

But “illustrated” isn’t another word for “guaranteed.”

If someone walks you through an IUL and never makes that distinction clear, ask them to.

Find the Indexed-Crediting Assumption

Next question:

“What crediting assumption is this illustration using?”

An IUL isn’t directly invested in the stock market.

You’re not buying shares of the S&P 500 through the policy.

Instead, interest crediting can be linked to the performance of an external index according to the policy’s applicable crediting method.

That distinction matters.

The index itself might return one number.

The policy’s indexed-crediting result can be another.

Look at the Cap, Floor and Other Crediting Terms

Suppose the indexed strategy you’re evaluating uses a 10% cap and a 0% indexed-crediting floor in the example.

If the applicable index increases 18% over the measurement period, you shouldn’t automatically assume the policy gets 18%.

Under a simplified 10% cap example, the indexed-crediting result would be limited by that cap.

If the index result is negative, a 0% indexed-crediting floor can prevent a negative index-crediting rate for the applicable strategy, subject to the contract.

But don’t turn that into:

“I can’t lose money.”

That’s not what the floor means.

Policy charges and loan costs can still affect overall policy value.

The 0% Floor Is Not a 0% Loss Guarantee on Your Policy Value

This deserves its own section because it gets misunderstood constantly.

A 0% indexed-crediting floor applies to the applicable indexed-crediting calculation.

It doesn’t necessarily stop the policy’s total value from declining.

The policy can still have:

• Cost-of-insurance charges
• Administrative expenses
• Other contractual policy charges
• Policy-loan costs

So if someone says:

“The market can crash and you can’t lose anything,”

ask them to show you the actual policy values during a zero-crediting period after applicable charges and loan costs.

Now Find the Policy Charges

This isn’t the fun page.

It’s still one of the pages I care about.

Life insurance has costs.

If the policy is being used primarily as a retirement-income strategy, those costs need to earn their place in the plan.

I want to know what the illustration assumes for policy charges.

I also want to understand how those charges can change as the insured gets older under the contract.

Don’t compare an IUL with a 401(k), IRA or brokerage account while pretending the insurance policy is free.

Include the costs.

Now Find the Cash Value

This is where people often look next.

How much projected value exists at 50?

60?

65?

75?

85?

95?

I don’t just want the biggest cash-value number before retirement.

I want to see what happens after retirement distributions begin.

Does the policy value continue to grow?

Flatten?

Decline?

Approach zero?

That’s where the retirement story gets interesting.

Then Look at the Death Benefit

If you’re buying life insurance, the death benefit isn’t an irrelevant side column.

It can affect policy costs.

It can affect funding capacity.

And if you’re planning to borrow against the policy for decades, I want to know what net death benefit is projected to remain after outstanding indebtedness is accounted for.

If the illustration shows a $1 million headline death benefit but substantial outstanding policy loans later in life, your beneficiaries may not receive that entire headline amount.

Look at the net result.

Now We Get to the Policy Loans

If the IUL is being presented as a retirement-income strategy, this is one of the most important sections.

Ask:

When do the loans start?

How much is borrowed each year?

What loan rate is assumed?

Can that rate change?

How much outstanding indebtedness exists at age 75, 85 and 95?

Does the policy remain in force under weaker assumptions?

The retirement-income number is meaningless without the loan assumptions that created it.

Why Loan Assumptions Matter So Much With the IUL JUMP Strategy

The IUL JUMP Strategy introduces policy loans during the accumulation phase, not just during retirement.

It uses what we call a Matching Indexed Participating Loan.

This is an actual policy loan.

The loan proceeds are redeployed into the same policy as additional funding rather than being taken outside the policy and spent.

That’s an important distinction.

The borrowed dollars remain inside the strategy, but the loan itself still has a cost.

The Two-Bucket Way to Understand JUMP

I like to explain it as two conceptual buckets.

Bucket One: the client’s own contributed money.

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

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 carries the applicable policy-loan cost.

That’s why the loan rate matters so much.

Here’s the $10,000 JUMP Illustration Example

Suppose the client contributes $10,000 per year.

By Year 11 in this simplified example, the client is still contributing $10,000 out of pocket.

The additional $50,000 comes from a Matching Indexed Participating Loan.

So the total annual funding shown is:

$60,000.

If an illustration showed me that, my first response wouldn’t be:

“Wow. That’s amazing.”

It would be:

“Show me where the other $50,000 came from.”

Then:

“Show me what it costs.”

The Additional $50,000 Is Not Free Money

This point cannot get buried.

The Matching Indexed Participating Loan is borrowed money.

The loans accumulate.

When a later JUMP occurs, the new loan activity doesn’t simply erase the previous outstanding loans.

So when you’re reading a JUMP illustration, look at both sides.

How much additional funding is entering the policy?

And:

How much policy indebtedness is accumulating?

What Loan Rate Should You Look For?

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.

Those are two different numbers.

Five percent is the current applicable rate we’re discussing.

Six percent is the contractual maximum for the applicable loan feature we’re evaluating.

I don’t want an illustration tested only at 5%.

I want to know what happens if the loan rate reaches 6%.

Why Stress-Test the Loan Rate?

Because your retirement could last 30 years.

If a strategy only works because the current loan rate never changes, that’s something you need to know.

Show me 5%.

Then show me 6%.

Now combine 6% with weaker indexed-crediting results.

Then extend the retirement period.

That’s how you find out whether the policy has breathing room.

What Is Positive Arbitrage?

The JUMP concept attempts to create economic spread between what the borrowed-and-redeployed dollars receive through the applicable indexed-crediting strategy and what the corresponding loan costs.

For example, we’ve used a historical indexed-crediting analysis based on annual S&P 500 price changes from 2006 through 2020.

Dividends are excluded because an IUL isn’t directly invested in the index and doesn’t receive index dividends.

The example applies a 10% cap and 0% indexed-crediting floor to those annual price changes.

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

Again, that’s not the historical S&P 500 return.

It’s not a guaranteed IUL return.

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

6.87% Minus 5% Gives Us the Modeled 1.87% Spread

Using the historical example and current applicable loan rate:

6.87% – 5.00% = 1.87 percentage points.

That’s the modeled positive spread.

But now run the opposite scenario.

Suppose the indexed-crediting result is 0%.

The applicable loan still costs 5%.

Now the economics are unfavorable for that period.

That’s why an illustration should never make positive arbitrage look guaranteed.

What Are the 8.74%, 11.61%, 14.48% and 17.35% Numbers?

If you see these numbers in a JUMP model, understand what they represent.

Under the assumptions used in the model, the successive JUMPs layer the modeled positive-arbitrage effect onto the base indexed-crediting assumption.

The conceptual progression has been illustrated as:

• Year 3 JUMP: 8.74%
• Year 5 JUMP: 11.61%
• Year 7 JUMP: 14.48%
• Year 9 JUMP: 17.35%

Don’t misread those numbers.

They aren’t S&P 500 returns.

They aren’t IUL index-crediting rates.

They aren’t guaranteed policy returns.

They are modeled effective results under the assumptions used in the JUMP analysis, reflecting the base indexed-crediting assumption and the modeled positive-arbitrage effect attributed to successive Matching Indexed Participating Loans.

Policy charges and other factors still have to be accounted for.

Ask Whether Every Future JUMP Is Already Guaranteed

The answer should not be yes.

Future planned JUMPs can require new carrier approval for additional death benefit.

That approval can be affected by:

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

So if an illustration shows JUMPs in Years 3, 5, 7, 9 and 11, don’t assume every one has already been approved when the original policy is issued.

Future approvals are part of the risk.

Ask to See the Illustration With a Missed JUMP

This is one of the tests I’d specifically request.

Suppose the client successfully reaches:

$10,000 client contribution + $30,000 Matching Indexed Participating Loan = $40,000 of annual funding shown.

Then the next planned JUMP isn’t approved.

Under the mechanics we’re discussing, a missed future JUMP can pause the progression rather than automatically resetting the client to the original funding level, subject to the actual contract and carrier rules.

The client may also be able to reapply later.

But the original illustration should be rerun.

If the retirement-income number falls dramatically after one missed JUMP, you need to know that.

Ask Where the MEC Line Is

If the policy is being funded aggressively for cash-value accumulation, find the applicable MEC information.

A Modified Endowment Contract has different federal tax treatment for distributions and policy loans than a non-MEC policy.

With JUMP, planned death-benefit increases are designed to create additional funding capacity while seeking to maintain the intended policy structure relative to applicable MEC limits.

But don’t interpret that as:

“The death benefit goes up, so MEC status is impossible.”

Actual MEC testing, policy design, carrier administration and federal tax rules govern.

Now Find the Retirement Distributions

This is the number everyone wants to see.

Fine.

Now we’re ready for it.

When do distributions begin?

How much is projected each year?

Do they increase?

Stay level?

Stop at a certain age?

What percentage of policy value is being accessed?

How much indebtedness exists after 10 years of distributions?

Twenty years?

Thirty?

The income number needs a timeline.

What About a 12% Retirement-Distribution Model?

In some JUMP modeling, approximately 12% per year of policy value may be used as a modeled retirement-distribution level under the specific assumptions being evaluated.

Do not read that as:

“Every IUL can safely pay 12% forever.”

That’s not what it means.

A modeled distribution level has to be evaluated alongside actual policy values, policy charges, loan costs, crediting results, outstanding indebtedness and longevity.

If the policy can’t sustain the distributions under reasonable stress tests, the distribution assumption needs to change.

Don’t Stop the Illustration at Age 80

This is another test I like.

If you’re 55 today, you could easily live another 35 or 40 years.

Show me the policy at 85.

90.

95.

Maybe 100.

I want to know:

Does the policy remain in force?

How much policy value remains?

How much indebtedness exists?

What is the projected net death benefit?

A retirement strategy that looks incredible at 70 and breaks at 88 isn’t incredible.

What Happens If the Policy Lapses?

If policy loans are part of the retirement strategy, this question is essential.

A life insurance policy that lapses or is surrendered with gain and outstanding indebtedness can potentially create taxable income.

That means policy durability isn’t merely an insurance issue.

It can become a tax issue.

If someone is showing you decades of projected policy loans, ask them to show you what keeps the policy in force.

What Happens to the Loans When You Die?

Outstanding policy indebtedness generally reduces the net death benefit paid under the terms of the contract.

So don’t look only at the gross death benefit.

Ask for:

Gross death benefit.

Outstanding indebtedness.

Net death benefit.

That’s the number your family cares about.

Now Let’s Talk About the Up-to-300% Number

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 big number.

Which means it deserves more scrutiny, not less.

If someone showed me 300% more projected retirement income, I’d ask:

“Show me exactly where the difference comes from.”

How much did the client contribute to each strategy?

How long did contributions continue?

How many JUMPs were assumed?

How much Matching Indexed Participating Loan funding occurred?

What loan rate was used?

What indexed-crediting assumption was used?

What taxes were assumed for the 401(k) or IRA?

What policy charges were included?

When did retirement distributions begin?

How long did they continue?

What happened to the IUL if the client lived to 95?

What happened if indexed crediting was lower?

What happened if a future JUMP wasn’t approved?

If the 300% difference survives that examination, now you’ve learned something.

If it disappears as soon as reasonable assumptions change, you’ve learned something too.

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.

That number should receive the same treatment.

Don’t compare one IUL using conservative assumptions with another using aggressive assumptions.

Don’t compare different funding amounts and call it a strategy advantage.

Don’t ignore loan costs in one policy.

Don’t ignore policy charges.

Make it apples to apples.

The 300% Isn’t the Sales Pitch. It’s the Question.

That’s how I want you to think about big financial projections.

A huge number shouldn’t make you stop asking questions.

It should make you ask better ones.

What created it?

What could reduce it?

What assumptions have to go right?

What happens when some of them go wrong?

That’s how you turn an illustration into an analysis.

Ask for a Stress Test, Not Just Another Illustration

If I were evaluating an IUL for retirement, I would want multiple scenarios.

Scenario 1: The illustrated assumptions.

Fine. Show me the intended design.

Scenario 2: Lower indexed crediting.

What happens?

Scenario 3: Higher loan costs.

If we’re evaluating the JUMP structure described here, show me the current 5% applicable loan rate and then the contractual 6% maximum for the applicable feature.

Scenario 4: A missed JUMP.

How much does that change projected income?

Scenario 5: Early retirement.

What happens if distributions start five years sooner?

Scenario 6: Longer life.

Show me age 95 or 100.

Scenario 7: Reduced funding.

What happens if I can’t keep contributing exactly as planned?

Now we’re having a useful conversation.

What I Don’t Want to Hear

I don’t want:

“Historically, this should be fine.”

I don’t want:

“The floor means you can’t lose.”

I don’t want:

“The loans pay for themselves.”

I don’t want:

“You’ll get tax-free income for life.”

I want the numbers.

Show me the assumptions.

Show me the contractual limits.

Show me the downside scenario.

Then let me decide.

This Matters More When You’re Close to Retirement

If you’re 55 or 60, you don’t have another 30 working years to recover from a major planning mistake.

That’s why the real thought underneath the illustration is often:

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

You don’t want to discover at 75 that the policy worked differently than you thought.

You want to remain independent.

“We should be able to handle this ourselves.”

And you don’t want your children cleaning up a financial decision you made because you trusted the biggest number on a sales illustration.

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

That’s why I don’t think skepticism is a problem.

It’s useful.

A strategy involving decades of your retirement deserves to be questioned.

Our Retirement Math Method™ Starts Where the Sales Illustration Usually Ends

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

I don’t want to hand you an illustration and point at the biggest number.

I want to make that number defend itself.

Show me the contributions.

Show me the death benefit.

Show me the policy charges.

Show me the indexed-crediting assumptions.

Show me the cap and floor.

Show me the Matching Indexed Participating Loans.

Show me the current applicable loan rate.

Then show me the contractual maximum.

Show me the accumulated indebtedness.

Show me what happens if a JUMP isn’t approved.

Show me what happens if crediting is lower.

Show me the retirement distributions.

Then show me the policy at 85, 95 and 100.

Finally, compare the projected spendable retirement income against what you’re already doing.

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

So, How Do You Read an IUL Illustration?

Don’t start at the biggest retirement-income number.

Start at the beginning.

What are you putting in?

How long are you putting it in?

What insurance are you buying?

What does the policy cost?

What isn’t guaranteed?

What crediting assumptions are being used?

What happens during a bad crediting period?

How do the loans work?

What do they cost?

How much indebtedness accumulates?

What happens if you live longer?

What happens if you stop funding?

What happens if a future JUMP isn’t approved?

Does the policy remain in force?

What does your family receive when you die?

Once you can answer those questions, the illustration stops looking like a wall of numbers.

It starts becoming a retirement model you can actually evaluate.

Want Us to Run the Math on Your IUL Illustration?

If you’ve been shown an IUL and the future numbers look almost too good to be true, don’t automatically reject it.

But don’t automatically believe it either.

We can look at the assumptions, policy funding, crediting strategy, charges, policy loans, retirement distributions, JUMP mechanics and long-term policy durability.

Then we can compare the projected result with the retirement strategy you’re already using.

Don’t just believe the 300% number.

Make the strategy prove where the difference comes from with the math.

Let the math do the talking.

Schedule Your Tax-Free Retirement Strategy Meeting

Explore More

• What Is the IUL JUMP Strategy?
• What Happens If IUL Loan Rates Go Up?
• 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. Life insurance illustrations contain both guaranteed and nonguaranteed elements and should be reviewed in their entirety. Illustrated values and benefits are not guarantees of future policy performance. Actual results can differ materially from illustrated results.

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. Indexed universal life policies do not directly invest in a market index. Index-linked interest crediting is determined according to the applicable policy terms, including the selected crediting strategy and any applicable caps, participation rates, spreads, floors or other contractual provisions.

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. A policy that lapses or is surrendered with gain and outstanding indebtedness may create taxable income. Modified Endowment Contracts are subject to different tax rules.

References to the $10,000 annual contribution example, JUMP progression, 6.87% historical indexed-crediting example, 1.87 percentage-point modeled positive spread, 8.74%, 11.61%, 14.48% and 17.35% modeled effective results, current 5% loan rate, contractual maximum 6% loan rate, approximately 12% modeled retirement-distribution level, 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, net death benefit or retirement income.

The historical 6.87% indexed-crediting example described in this article is based on the historical analysis discussed for 2006 through 2020 using annual S&P 500 price changes, excluding dividends, and applying 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.

The 8.74%, 11.61%, 14.48% and 17.35% figures are modeled effective results under the assumptions used in the JUMP analysis. They are not S&P 500 returns, IUL index-crediting rates or guaranteed policy returns. Actual policy results are affected by policy charges, cost of insurance, loan costs, actual indexed-crediting results and other contractual factors.

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, and 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. Failure to complete a planned JUMP may materially change projected policy values, indebtedness, death benefits and retirement-income results.

Policy-specific premium requirements, loan provisions, loan rates, guarantees, nonguaranteed elements, caps, participation rates, spreads, crediting methods, policy expenses, MEC testing, lapse provisions, death-benefit 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.