How to Stress-Test an IUL Before You Use It for Retirement
An IUL illustration can look fantastic.
That’s not the test.
The real test is what happens when you start making the illustration worse.
Lower the indexed-crediting assumption.
Raise the policy-loan cost.
Remove some future JUMPs.
Start retirement income earlier.
Live longer.
Take more money than originally planned.
Then combine several of those problems at the same time.
Does the strategy still hold together?
That’s what I mean when I talk about stress-testing an IUL for retirement.
Don’t Ask Only, “How Much Income Does It Show?”
That’s usually the number everyone’s staring at.
The illustration says the policy could potentially produce a certain amount of retirement income.
Great.
Now I want to know what had to go right for that number to appear.
Because a retirement strategy isn’t useful simply because it works under one set of assumptions.
You need to know what happens when reality doesn’t follow the original illustration.
A Pretty Illustration Is Not a Stress Test
If someone shows you one projection and says:
“Look how much retirement income this produces.”
You’re not finished.
You’re barely started.
Ask for another projection.
Then another.
Make the assumptions progressively less favorable.
You’re trying to find the point where the strategy becomes uncomfortable.
Why?
Because that’s where you learn what is actually carrying the result.
Is the retirement income being driven by a high crediting assumption?
Is it highly sensitive to the loan rate?
Does it require every planned JUMP to occur?
Does it work only if retirement begins at exactly the projected age?
Does the policy become fragile if you live to 95?
Those questions matter more than the prettiest number on the original page.
Stress Test #1: Lower the Indexed-Crediting Assumption
Start here.
If the policy is illustrated using a certain nonguaranteed indexed-crediting assumption, ask to see lower assumptions.
Don’t just reduce it a tiny amount.
Make the difference meaningful enough to see what happens.
Then compare:
- Projected cash value
- Projected policy value
- Projected loan balance
- Projected retirement distributions
- Projected net death benefit
- Projected policy durability
Why Lower Crediting Matters So Much
An IUL isn’t directly invested in the stock market.
Indexed interest is determined under the policy’s crediting rules.
Those rules can include things such as a cap, participation rate, spread, crediting method and other contractual provisions.
The actual indexed crediting can vary from year to year.
So if the retirement strategy only looks attractive at one favorable crediting assumption, you need to know that before relying on it.
Our Historical Example Uses 6.87%
One historical analysis used with the JUMP Strategy looked at annual S&P 500 price changes from 2006 through 2020.
Dividends were excluded because the policy is not directly invested in the S&P 500 and does not receive the index’s dividends.
For this analysis, annual negative index changes were treated as 0% for the indexed-crediting calculation.
Positive annual changes above 10% were capped at 10%.
Using those assumptions produced a:
6.87% historical average indexed-crediting result.
Don’t Turn 6.87% Into a Promise
That number is not:
- A guaranteed future crediting rate
- The historical total return of the S&P 500
- A guaranteed IUL return
- A guaranteed cash-value growth rate
- A promise that every future period will look similar
It’s a historical modeling result using a particular cap, floor, period and calculation method.
So stress-test below it.
Ask: “What If Future Crediting Is Lower?”
That’s the conversation I want.
Don’t argue about what future indexed crediting will be.
Neither one of us knows.
Run lower numbers and see what happens.
If the strategy remains durable, that’s useful information.
If the projected retirement income drops sharply, that’s useful information too.
Stress Test #2: Raise the Policy-Loan Rate
This is especially important when retirement income relies heavily on policy loans.
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 two numbers should not be treated as the same thing.
5% is the current applicable rate.
6% is the contractual maximum for the applicable loan feature.
So Run Both
Show me the strategy at 5%.
Then show me what happens at 6%.
If you’re going to rely on policy loans for decades, I want to know what happens when the loan cost isn’t sitting at the current rate.
And Don’t Look Only at the First Retirement Year
A one-percentage-point difference can look small when you stare at a single year.
But retirement may last 25 or 30 years.
Policy indebtedness can become substantial.
So I want to see the effect over the full projection.
What happens at 75?
At 85?
At 95?
Stress Test #3: Combine Higher Loan Costs With Lower Crediting
This is where the test gets more useful.
Don’t change only one assumption at a time.
Real life can give you more than one problem at once.
So lower the indexed-crediting assumption and use the contractual maximum 6% loan rate.
Then rerun the policy.
Now look at the projected retirement income and policy durability.
Why This Combination Matters
The JUMP Strategy uses a Matching Indexed Participating Loan structure.
Under the strategy, loan proceeds are redeployed into the same policy as additional funding.
That means the loan-funded portion can continue participating in the applicable indexed-crediting strategy while carrying the applicable loan cost.
If crediting exceeds the loan cost, the model can experience favorable loan economics.
If crediting falls below the loan cost, those economics move the other way.
Positive Arbitrage Is Not Guaranteed
Using the historical example:
6.87% historical indexed-crediting result – 5.00% current applicable loan rate = 1.87 percentage points.
That’s the modeled positive spread under those particular assumptions.
But what happens in a year when the applicable indexed crediting is 0%?
If the loan cost is 5%, you don’t have positive arbitrage for that period.
You have unfavorable loan economics.
That’s why the word arbitrage should never be interpreted as guaranteed profit.
Stress Test #4: Give the Policy Bad Crediting Years
Averages can hide the path.
That’s important.
Two scenarios can have similar long-term average crediting and still create different outcomes when loans and distributions are involved.
So I don’t only want to know the average.
I want to know what happens if weak crediting arrives at an inconvenient time.
Especially During Retirement
Imagine you’ve already stopped contributing.
You’re taking distributions.
The policy has outstanding loans.
Then indexed crediting comes in weak.
That’s a very different situation from getting a weak crediting year while you’re 42 and still accumulating.
Timing matters.
Stress Test #5: Remove Future JUMPs
This is mandatory for the JUMP Strategy.
If your original projection assumes future JUMPs, don’t show me only the version where every one of them gets approved.
Show me what happens when they don’t.
Here’s the Example Progression
| Policy Year | Client Contribution | Matching Indexed Participating Loan | Total Annual Funding Shown | Planned JUMP |
|---|---|---|---|---|
| Year 1 | $10,000 | $0 | $10,000 | No |
| Year 2 | $10,000 | $0 | $10,000 | No |
| Year 3 | $10,000 | $10,000 | $20,000 | Yes |
| Year 4 | $10,000 | $10,000 | $20,000 | No |
| Year 5 | $10,000 | $20,000 | $30,000 | Yes |
| Year 6 | $10,000 | $20,000 | $30,000 | No |
| Year 7 | $10,000 | $30,000 | $40,000 | Yes |
| Year 8 | $10,000 | $30,000 | $40,000 | No |
| Year 9 | $10,000 | $40,000 | $50,000 | Yes |
| Year 10 | $10,000 | $40,000 | $50,000 | No |
| Year 11 | $10,000 | $50,000 | $60,000 | Yes |
That’s the planned progression.
Now break it.
Run a Version Where JUMPs Stop After Year 3
Then one where they stop after Year 5.
Then after Year 7.
Then compare all of them with the full planned progression.
Now you can see how sensitive the retirement-income result is to future underwriting approvals.
Future JUMPs Are Not Guaranteed
Each planned increase can require additional underwriting and approval.
Factors can include:
- Health
- Income
- Employment
- Existing insurance
- Driving history
- Occupation
- Hazardous job duties
- Risky hobbies or activities
- Other applicable underwriting factors
Your original policy approval doesn’t guarantee every future JUMP.
Stress Test #6: Assume You Never Qualify for Another JUMP
This is more aggressive than missing one JUMP.
Pick the level already achieved.
Then assume it’s the final level forever.
If you reached the Year 7 example:
$10,000 client contribution + $30,000 Matching Indexed Participating Loan = $40,000 total annual funding shown.
Now assume Years 9 and 11 never happen.
Does the strategy still make sense?
Don’t Keep the Original Retirement-Income Projection
If future JUMPs disappear from the assumptions, the retirement-income projection needs to change too.
Rerun it.
Maybe the policy still looks strong.
Maybe it doesn’t.
That’s what you’re trying to discover.
Stress Test #7: Examine the Policy Charges
The 0% indexed-crediting floor does not mean the policy has no costs.
An IUL can have charges associated with the insurance contract.
Those costs matter.
Especially over decades.
And especially as the insured gets older.
Ask to See the Charges, Not Just the Ending Cash Value
If you’re committing significant money to a policy, you should understand what is being charged.
Don’t settle for:
“The policy handles all that.”
Show me.
What charges are illustrated?
How do they change?
How do they interact with policy value and outstanding loans?
Stress Test #8: Start Retirement Earlier
Suppose the original projection assumes retirement income begins at 65.
Run 62.
Maybe 60.
Why?
Because retirement doesn’t always happen when you planned.
Layoffs happen.
Health changes.
Family responsibilities change.
Sometimes people simply reach a point where they’re done working.
Earlier Retirement Creates Two Pressures
You may have fewer years of accumulation.
And you may have more years of distributions.
That’s a very different mathematical problem.
If the strategy is being positioned as retirement income, I want to know what that does to the policy.
Stress Test #9: Start Retirement Later
This matters too.
Maybe you planned on retiring at 65 but work until 70.
What does that do?
Does the extra accumulation materially improve the projected income?
Does the shorter distribution period change the strategy?
Again, run it.
Stress Test #10: Take More Retirement Income Than Planned
This one is uncomfortable because almost everyone thinks they’ll stick to the plan.
Then life happens.
A roof needs replacing.
A child needs help.
A spouse gets sick.
You decide to travel more during the first five years of retirement.
Expenses don’t ask permission from your illustration.
Our Modeling May Evaluate Approximately 12% of Policy Value
In certain retirement analyses for the JUMP Strategy, approximately 12% per year of policy value may be evaluated as a modeled distribution level under the assumptions being tested.
That is not a universal safe withdrawal rate.
It is not a promise that every policy can support 12% indefinitely.
It has to be tested against the actual policy.
So Stress-Test the Distribution
If the modeled retirement distribution is a certain dollar amount, increase it.
What happens if you need 10% more?
What happens if you need 20% more for several years?
What happens if you take a large one-time amount?
Look at the effect on policy values, indebtedness, net death benefit and durability.
Stress Test #11: Take Less Income After a Weak Year
This test goes the other direction.
What happens if you’re willing to reduce distributions temporarily after an unfavorable crediting period?
Does that materially improve durability?
That tells you something important about how flexible the strategy may need to be.
Stress Test #12: Live to 95
Please don’t stop a retirement illustration at 80 because the numbers look good there.
If you’re using a policy to support retirement income, longevity is one of the biggest risks you need to test.
Run age 90.
Run age 95.
Use the longest meaningful projection available for the policy.
Why Age 95 Can Expose Problems Age 75 Hides
Policy loans can accumulate over a long retirement.
Policy charges continue.
Retirement distributions continue.
Crediting varies.
The interaction between those forces may not become obvious during the first decade.
A policy that looks comfortable at 75 can look very different later.
Stress Test #13: Look at the Net Death Benefit
If policy loans are being used for retirement, don’t stare only at cash value.
Look at the projected net death benefit too.
Outstanding policy indebtedness generally reduces the net death benefit payable under the contract.
If legacy matters to you, that should be part of the retirement-income decision.
Ask a Simple Question
“If I take the retirement income shown here and die at 80, what is projected to go to my beneficiaries?”
Then ask the same question at 90.
Now you’re seeing both sides of the policy.
Stress Test #14: Test a Larger Loan Balance
Policy-loan strategies can look very different when indebtedness becomes substantial.
So don’t evaluate only the early loan years.
Look at the later years.
What percentage of policy value is represented by outstanding indebtedness?
How much room remains if crediting disappoints?
What happens to lapse risk?
A Lapse With a Large Loan Can Be a Serious Problem
If a life insurance policy lapses or is surrendered with gain and outstanding indebtedness, taxable income may result.
That’s one reason monitoring policy durability is so important.
You don’t want to discover a deteriorating policy after the margin for fixing it has become small.
Stress Test #15: Look at Guaranteed Values
Don’t confuse guaranteed and nonguaranteed columns.
An IUL illustration can contain both.
The projected retirement-income strategy will generally rely on nonguaranteed elements.
You should understand that clearly.
We’ll go much deeper into guaranteed versus nonguaranteed values in Post #52.
Stress Test #16: Test the Policy Without Positive Arbitrage
This is a big one for the JUMP Strategy.
Don’t assume the loan-funded portion always earns more than its loan cost.
Run scenarios where the spread is smaller.
Run periods where the spread is zero.
Run periods where it’s negative.
Then look at what happens to the long-term retirement projection.
The Loan Cost Isn’t Simply Subtracted From the Index Credit
Keep the mechanics straight.
The loan-funded dollars can participate in the applicable indexed-crediting strategy.
The policy loan has its applicable cost.
Those are separate components of the policy economics.
When we talk about a positive spread, we’re comparing the economic result of those components.
We’re not saying the carrier simply takes 5% out of the indexed credit.
Stress Test #17: Test the Full JUMP Progression Against a Partial Progression
Now put the scenarios side by side.
Scenario A: all planned JUMPs occur.
Scenario B: progression stops after Year 7.
Scenario C: progression stops after Year 5.
Scenario D: only the first JUMP occurs.
Now compare projected retirement income.
That tells you how much of the final result is being created by the later JUMPs.
This Is Especially Important When You See the Modeled Effective JUMP Results
Under assumptions used in one JUMP analysis, the combination of the base indexed-crediting assumption and the positive-arbitrage effect attributed to successive Matching Indexed Participating Loans produced modeled effective results of approximately:
- 8.74% at the Year 3 JUMP
- 11.61% at the Year 5 JUMP
- 14.48% at the Year 7 JUMP
- 17.35% at the Year 9 JUMP
Those figures are not S&P 500 returns.
They’re not IUL indexed-crediting rates.
They’re not guaranteed policy returns.
They’re modeled effective results under the assumptions used in that particular JUMP analysis, before accounting for applicable policy charges and other factors.
Stress-Test the Assumptions Behind Those Numbers
What happens at lower crediting?
What happens at the 6% maximum loan rate?
What happens with fewer JUMPs?
What happens when several of those things occur together?
That’s far more useful than repeating 17.35% without understanding what it represents.
Stress Test #18: Challenge the Up-to-300% Retirement-Income Result
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 exactly the kind of number that should trigger more questions.
Not fewer.
Start With: “Why?”
Where is the projected difference coming from?
How much is connected to taxes?
How much is connected to distribution mechanics?
How much is connected to the Matching Indexed Participating Loan?
How many future JUMPs are assumed?
What loan rate is being used?
What indexed-crediting assumption is being used?
What retirement distribution is being modeled?
How long does the projection run?
Then Try to Break the 300% Result
Remove future JUMPs.
Raise the loan rate.
Lower the crediting assumption.
Start retirement earlier.
Extend longevity.
Then compare the strategies again.
Does the JUMP Strategy still show more projected retirement income?
How much more?
That’s the number I care about.
Don’t Compare a Conservative 401(k) Scenario With an Aggressive IUL Scenario
An apples-to-apples comparison matters.
If one side gets favorable assumptions and the other gets unfavorable assumptions, the comparison isn’t telling you much.
Use clearly stated assumptions for both.
Account for applicable taxes.
Account for fees and policy charges.
Account for loan costs.
Account for contribution differences.
Account for distribution timing.
Then compare the projected spendable retirement income.
Do the Same With the Approximately 40% Traditional-IUL Comparison
In certain modeled comparisons we’ve evaluated, the JUMP Strategy has produced approximately 40% more projected retirement income than the traditional IUL structure being compared.
Again, try to break it.
Define what “traditional IUL” means in that comparison.
Compare the loan mechanics.
Compare policy charges.
Compare funding.
Compare crediting assumptions.
Compare retirement distributions.
Then look at the difference.
The Number Isn’t the Reason to Buy It
The assumptions behind the number are what you need to understand.
If the modeled advantage survives tougher assumptions, that’s meaningful.
If the advantage disappears as soon as one assumption changes, that’s meaningful too.
Stress Test #19: Create a “Bad but Plausible” Scenario
This is one of my favorite tests.
Don’t create an impossible disaster scenario.
Create a scenario that could realistically happen.
For example:
- Future JUMPs stop earlier than planned
- The applicable loan rate reaches 6%
- Indexed crediting is lower than the original assumption
- Retirement starts three years early
- The client lives to 95
Now run them together.
That Scenario Tells You More Than Five Separate Stress Tests
Why?
Because risks don’t always arrive one at a time.
You could retire early and experience lower crediting.
You could miss a future JUMP and later face a higher loan cost.
You could live longer while taking more retirement income than originally planned.
That’s real life.
Stress Test #20: Ask What Would Make the Policy Fail
This question makes people uncomfortable.
Ask it anyway.
“Show me what has to happen for this policy to become unsustainable under the modeled retirement-income plan.”
That’s an incredibly useful question.
You’re trying to find the edge.
Then Ask What You Could Do Before Reaching That Edge
Could distributions be reduced?
Could the retirement-income start date change?
Could policy funding be adjusted while still permitted and appropriate?
Could loan activity be managed differently under available contract provisions?
What other policy-management options might exist?
The actual contract and circumstances control the available choices.
But you should understand that a policy needs monitoring.
An IUL Isn’t a “Set It and Forget It” Retirement Strategy
Especially when substantial policy loans are involved.
Review it.
Look at actual performance.
Look at the loan balance.
Look at the applicable loan rate.
Look at policy charges.
Look at the projected retirement income.
Look at policy durability.
Then make adjustments when appropriate.
The Real Goal of Stress-Testing Isn’t to Make the IUL Look Bad
It’s to make the decision better.
If an IUL still looks attractive after you make the assumptions tougher, you understand the strategy much better.
If it falls apart, you found that out before retirement.
Either way, the stress test did its job.
There Is a Psychological Reason People Avoid This
Once you see a big projected retirement-income number, you start emotionally spending it.
You picture the trips.
The house paid off.
Helping the grandkids.
Not worrying about every bill.
Then someone says:
“Let’s reduce the projection and see what happens.”
You don’t want to.
Because it feels like they’re taking something away from you.
But the Money Was Never Yours Yet
It’s a projection.
That’s exactly why you test it.
You don’t want to discover at 72 that the retirement-income number you built your life around required every nonguaranteed assumption to cooperate.
The Fear Isn’t Really That the Illustration Changes
The deeper fear is:
“What if we mess this up and regret it?”
Because by the time you’re 55 or 60, you don’t feel like you have unlimited chances to rebuild.
You want to know the strategy has room for things to go wrong.
You’re Protecting More Than Money
You’re protecting independence.
“I don’t want to ask my kids for help.”
“We should be able to handle this ourselves.”
That’s why a stress test matters.
It’s not pessimism.
It’s asking whether the strategy can keep doing its job when retirement doesn’t go exactly according to the original illustration.
Here’s the Stress-Test Checklist I Would Use
- Lower the indexed-crediting assumption.
- Test the current applicable 5% loan rate.
- Test the contractual maximum 6% loan rate.
- Combine lower crediting with the 6% loan rate.
- Model weak crediting during retirement.
- Remove some future JUMPs.
- Assume no future JUMPs.
- Review policy charges.
- Start retirement earlier.
- Start retirement later.
- Increase retirement distributions.
- Test temporary distribution reductions.
- Run the policy to age 95 or beyond when illustrated.
- Review projected net death benefit.
- Review large outstanding loan balances.
- Review guaranteed and nonguaranteed values separately.
- Test periods without positive loan arbitrage.
- Compare full JUMP progression with partial progression.
- Create a combined bad-but-plausible scenario.
- Identify what conditions could threaten policy sustainability.
Then Compare the IUL With the Alternative
A stress test shouldn’t happen in isolation.
You also need to know what you’re comparing the IUL against.
A 401(k)?
A Traditional IRA?
A Roth IRA?
A taxable account?
A traditional IUL?
Another retirement-income strategy?
Run the alternatives using clearly stated assumptions too.
Don’t Ask the IUL to Be Perfect
Ask it to earn its place.
If the policy provides a compelling projected retirement outcome after realistic stress tests, that’s useful.
If another strategy produces a stronger result for your situation, that’s useful too.
The goal isn’t to force the IUL to win.
The goal is to find the strategy that survives the math.
How We Stress-Test the IUL JUMP Strategy at FPP Financial
At FPP Financial, we use our Retirement Math Method™.
I’m not interested in showing you one perfect projection and asking you to trust it.
I want to make the assumptions move.
We’ll look at the client-funded dollars.
We’ll look at the Matching Indexed Participating Loan dollars.
We’ll look at outstanding policy indebtedness.
We’ll look at planned future JUMPs.
We’ll remove future JUMPs.
We’ll lower the indexed-crediting assumption.
We’ll model the current applicable 5% loan rate.
We’ll stress-test the contractual 6% maximum.
We’ll change retirement timing.
We’ll test distributions.
We’ll extend longevity.
Then we’ll compare the projected retirement income against the alternatives you’re actually considering.
I don’t try to sell you on the strategy. I make the strategy prove itself with the math.
Want to See If an IUL Can Survive the Retirement Math?
Don’t just ask to see the best-case illustration.
Ask to see the uncomfortable one.
We’ll model the strategy under the assumptions being considered.
Then we’ll start making those assumptions tougher.
In certain modeled comparisons, 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 reason to investigate the math.
It isn’t a reason to skip it.
Don’t just believe the 300% number. Make the strategy prove where the difference comes from with the math.
The 300% isn’t the sales pitch. It’s the question.
Show me exactly where the difference comes from.
Let the math do the talking.
Schedule Your Tax-Free Retirement Strategy Meeting
Explore More
- How to Read an IUL Illustration Before You Buy a Policy
- What Happens If You Can’t Qualify for Any More IUL JUMPs?
- What Is the IUL JUMP Strategy and How Does It Work?
Disclosure
This material is for educational purposes only and is not intended as individualized investment, securities, tax, legal, underwriting or insurance advice. Indexed universal life insurance is permanent life insurance and is not a qualified retirement plan, IRA, brokerage account or direct investment in a market index.
Stress-test scenarios are hypothetical and are intended to illustrate how changes in assumptions may affect projected policy results. They are not predictions of future performance and do not represent every possible policy outcome. Actual results are affected by the insurance contract, policy design, premium activity, indexed-crediting results, policy charges, loan activity, loan rates, withdrawals, death-benefit changes, underwriting decisions and other factors.
Future JUMPs and associated death-benefit increases are subject to future underwriting and approval. Initial policy approval and prior successful JUMPs do not guarantee future increases. Health, income, employment, existing insurance, driving history, occupation, hazardous job duties, risky hobbies and other applicable underwriting factors may affect eligibility for additional coverage.
Planned death-benefit increases under the JUMP Strategy are intended to create additional policy funding capacity while seeking to maintain the intended non-MEC structure. A death-benefit increase does not by itself guarantee that a policy will avoid Modified Endowment Contract status. MEC testing is affected by actual policy design, premium activity, benefit changes, applicable tax rules and other factors.
Matching Indexed Participating Loans are policy loans. They are not free contributions, employer matches, bonuses, tax credits, guaranteed gains or direct investments in a market index. Under the strategy described here, Matching Indexed Participating Loan proceeds are modeled as being redeployed into the same policy as additional funding. Associated policy indebtedness and applicable loan costs remain part of the policy economics.
Policy loans generally accrue applicable loan charges and can reduce policy values and death benefits and increase lapse risk. Outstanding policy indebtedness generally reduces the net death benefit payable under the insurance contract.
The JUMP Strategy is modeled with applicable loan charges carried forward during the accumulation design rather than requiring the client to pay those charges out of pocket each year. This does not eliminate the economic cost of borrowing, guarantee positive arbitrage or guarantee that policy values will remain sufficient to support outstanding indebtedness.
With the policy structure discussed in this article, the applicable loan rate is currently 5%, with a contractual maximum loan rate of 6% for the applicable loan feature. The current applicable rate can change subject to the governing policy provisions and should be verified against current approved policy information. The 6% contractual maximum does not guarantee positive arbitrage or favorable policy performance.
Indexed universal life insurance does not directly invest in the S&P 500 or another market index, does not own the underlying index securities and does not receive index dividends. Indexed interest is determined according to applicable policy crediting terms, which may include caps, participation rates, spreads and other provisions.
A 0% indexed-crediting floor applies to the applicable indexed-crediting calculation under the example discussed and does not guarantee that overall policy value cannot decline. Policy charges, cost of insurance, loan costs, withdrawals and other policy mechanics continue to apply.
Policy values from a properly structured and maintained non-MEC life insurance policy may potentially be accessed through withdrawals to basis and policy loans without current income taxation under current federal rules, subject to applicable requirements. Tax treatment can be affected by basis, MEC status, policy lapse, surrender and other circumstances. A policy that lapses or is surrendered with gain and outstanding indebtedness may create taxable income.
The approximately 12% annual retirement-distribution level referenced in this article is a modeling assumption used in certain strategy analyses. It is not a universal safe withdrawal rate, guaranteed distribution rate or promise that any policy can support distributions at that level for life. Sustainable distributions are affected by actual policy values, policy indebtedness, policy charges, loan costs, crediting, distribution timing and longevity.
References to the $10,000 annual contribution example, JUMP progression, 6.87% historical indexed-crediting example, 1.87 percentage-point modeled positive spread, modeled effective results of 8.74%, 11.61%, 14.48% and 17.35%, 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, future JUMP approval, death benefit or retirement income.
The up-to-approximately-300% projected retirement-income result cited in this article refers to certain modeled comparisons involving the IUL JUMP Strategy and a 401(k), Traditional IRA or comparable tax-deferred retirement strategy. It is not a universal result or guarantee. The comparison can materially change when assumptions involving future JUMPs, loan costs, indexed crediting, policy charges, taxes, distributions, timing, longevity or other factors change.
The approximately-40% projected retirement-income result refers to certain modeled comparisons involving the JUMP Strategy and the traditional IUL structure being evaluated. It is not a universal result or guarantee. Loan mechanics, policy charges, funding, crediting assumptions, future JUMP progression and retirement distributions can materially alter the comparison.
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, and applying the stated 10% cap and 0% indexed-crediting floor. Historical results do not predict future policy performance. The modeled effective JUMP results discussed above are not S&P 500 returns, indexed-crediting rates or guaranteed policy returns.
Positive arbitrage is not guaranteed. Periods in which indexed crediting is below the applicable loan cost can produce unfavorable loan economics. Policy charges and other expenses must also be considered when evaluating overall policy performance.
Illustrations contain assumptions and may include both guaranteed and nonguaranteed elements. Nonguaranteed illustrated values and retirement-income projections are not promises of future results. Stress-testing does not eliminate policy risk or guarantee that a policy will remain in force.
Policy-specific guarantees, nonguaranteed elements, underwriting requirements, death-benefit options, MEC limits, loan provisions, loan rates, caps, participation rates, spreads, crediting methods, policy charges, surrender provisions, lapse provisions and distribution mechanics should be verified against current approved illustrations and the actual insurance contract.
FPP Financial does not provide tax or legal advice. Consult qualified tax, legal and financial professionals regarding your individual circumstances before purchasing or modifying life insurance or implementing any retirement-income strategy discussed here.
