Can Your Income Limit How Much IUL Life Insurance You Can Buy?

You make $150,000 a year.

You have plenty of cash flow.

You decide you want to put $20,000, $30,000 or even more into an IUL each year for retirement.

So you assume the only real question is:

“Can I afford the premium?”

Not necessarily.

There’s another question the insurance company may ask:

“Does the amount of life insurance being requested make financial sense for this person’s circumstances?”

That’s financial underwriting.

And if you’re considering the IUL JUMP Strategy, it matters for another reason.

The issue isn’t only how much insurance you can qualify for today.

Your income and financial circumstances can also matter when future JUMPs require approval for additional death benefit.

Being Able to Pay the Premium Is Not the Same as Qualifying for Any Amount of Death Benefit

This is the misconception I want to clear up first.

Imagine someone has enough money available to fund a large IUL premium.

They might think:

“It’s my money. If I can afford it, why wouldn’t the insurance company let me buy as much life insurance as I want?”

Because you’re not simply making a deposit into an investment account.

You’re applying for life insurance.

The insurance company is agreeing to take on a death-benefit obligation.

That means the amount of coverage being requested can be subject to financial underwriting.

What Is Financial Underwriting?

Most people understand medical underwriting.

You apply for life insurance.

The carrier looks at your health history and other medical information.

But underwriting can have a financial side too.

The carrier may evaluate whether the amount of life insurance requested is financially supportable based on the reason for the coverage and the applicant’s financial circumstances.

That can include factors such as:

• Income
• Employment
• Net worth
• Existing life insurance
• The purpose of the coverage
• The amount of additional coverage being requested
• Other financial information required under applicable underwriting guidelines

The actual standards are determined by the insurance company and the facts of the case.

There Is Not One Universal Income Formula for Every IUL

This matters.

I wouldn’t tell someone:

“If you make $100,000, you can always buy exactly X amount of IUL.”

That’s too simplistic.

Financial underwriting standards can vary by insurer, age, purpose of coverage, existing insurance, financial circumstances and other underwriting considerations.

So the goal isn’t to memorize some universal income multiplier.

The goal is to understand the principle:

The death benefit being requested needs to be financially justifiable under the applicable underwriting standards.

Why Does This Matter So Much With the IUL JUMP Strategy?

Because the JUMP Strategy doesn’t necessarily stop with the death benefit approved on day one.

The strategy contemplates planned future increases in death benefit.

Those increases are used to create additional funding capacity under the intended policy design while seeking to maintain the intended non-MEC structure.

Each planned future increase can require another underwriting decision.

That means your financial situation at the time of the future JUMP can matter.

Here’s the JUMP Progression in a Simple Example

Let’s use the $10,000 annual client-contribution example:

Notice something important.

The client isn’t increasing the planned out-of-pocket contribution from $10,000 to $60,000.

The client remains at:

$10,000 per year out of pocket in this example.

At the Year 11 level shown:

$10,000 comes from the client.

$50,000 comes from the Matching Indexed Participating Loan.

That creates $60,000 of total annual funding shown under the example.

But the $50,000 Is Not Free Money

It’s an actual policy loan.

The loan proceeds are redeployed into the same policy as additional funding under the strategy.

That creates additional policy funding, but it also creates policy indebtedness.

The matching-loan level increases as successful JUMPs are achieved.

And those future JUMPs can require additional death-benefit approval.

That’s Where Your Income Can Become Part of the JUMP Math

Imagine you start the strategy at age 45.

You’re earning $250,000.

Your career is going well.

The original policy is approved.

Your first JUMP is approved.

Your second JUMP is approved.

Then something changes.

At 51, you’re no longer earning $250,000.

Maybe you changed careers.

Maybe you sold a business.

Maybe you intentionally reduced your workload.

Maybe you’re earning $90,000 now.

Your health could still be excellent.

But the next JUMP is asking for additional life insurance.

Now financial underwriting may become part of that approval decision.

You Can Be Perfectly Healthy and Still Face a Financial Underwriting Issue

That’s why this deserves its own conversation.

Someone can pass the medical side beautifully and still have questions surrounding the financial justification for additional coverage.

The thought is usually:

“But I already have the money to fund the policy.”

That isn’t necessarily the entire underwriting question.

The carrier is evaluating life insurance coverage, not merely whether you can write the premium check.

What If You’re Retired When a Future JUMP Comes Up?

This is another scenario worth thinking about before you start.

Suppose your original JUMP schedule extends toward a time when you’re planning to leave the workforce.

Your employment income may look very different at that point.

That doesn’t automatically tell you what the underwriting outcome will be.

Other financial circumstances can matter.

But it does mean you should not assume:

“I qualified for the original policy, so every future death-benefit increase is already guaranteed.”

It isn’t.

What If You Own a Business?

Business owners can have financial lives that look very different from a W-2 employee.

Income can fluctuate.

Compensation can change.

A business can grow quickly.

It can also have a bad year.

You might sell the company.

You might reduce your involvement.

Those changes can alter the financial picture used when additional life insurance is requested.

That’s why the next JUMP should be treated as a future underwriting event, not something that was permanently locked in years earlier.

Existing Life Insurance Can Matter Too

Suppose you already have several life insurance policies.

Then you apply for another large death benefit.

The carrier may look at the total amount of existing and requested coverage as part of the financial underwriting process.

Again, the question is broader than:

“Can I afford another premium?”

The amount of insurance itself needs to fit within applicable underwriting standards.

Why Does the Death Benefit Need to Increase During a JUMP?

This is where the mechanics connect.

Life insurance has tax rules that affect how much premium can be placed into a policy relative to its design before Modified Endowment Contract treatment can become an issue.

The planned JUMPs increase the death benefit enough to create additional funding capacity while seeking to maintain the intended non-MEC structure.

That does not mean:

“Every JUMP doubles the death benefit.”

It doesn’t.

The planned death-benefit increase is tied to the additional funding capacity needed under the intended policy design.

More Death Benefit Means More Insurance Has to Be Approved

That’s the simple connection.

The strategy wants additional funding capacity.

The design calls for additional death benefit.

The additional death benefit means additional life insurance coverage.

The additional coverage can require underwriting.

Financial underwriting can include income and other financial circumstances.

Now you can see why income matters to the JUMP Strategy even though the client contribution in our example stays at $10,000.

What If Your Income Goes Up?

That can change your financial circumstances too.

Maybe you started the strategy early in your career.

Several years later, your income is substantially higher.

Your financial profile may support a different amount of coverage than it did earlier, subject to the applicable underwriting standards and other factors.

But don’t turn that into:

“Higher income guarantees my next JUMP.”

Medical underwriting and other underwriting factors can still matter.

What If Your Income Goes Down?

Then don’t panic.

But don’t ignore it either.

If another JUMP is coming up, find out what financial information may be needed.

Don’t wait until the original projection has assumed another large step in funding and then act surprised when the additional death benefit has to be justified.

And If the Next JUMP Isn’t Approved?

This is where the structure we’ve discussed in the prior JUMP articles matters.

Under the strategy mechanics we’re discussing, failing to qualify for the next planned JUMP does not automatically mean the successful progression already achieved disappears.

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

If you previously reached a $30,000 Matching Indexed Participating Loan level, for example, not receiving approval to move to the next level does not automatically mean you fall all the way back to zero under the mechanics described here.

The actual policy contract and applicable carrier procedures control the individual case.

You May Be Able to Apply Again Later

If your financial circumstances improve, a future application may be considered at a later policy anniversary under the strategy mechanics we’re discussing.

Maybe your income recovers.

Maybe your employment changes.

Maybe the financial circumstances supporting the requested coverage become stronger.

But a future application still requires underwriting and approval.

Reapplying does not guarantee approval.

Don’t Build the Retirement Plan Around Future Income You Haven’t Earned Yet

This is a mistake I wouldn’t want to make.

Imagine the strategy’s best-looking retirement projection assumes successful JUMPs through Year 11.

But those JUMPs assume future death-benefit increases.

And those increases assume future underwriting approval.

If part of that approval is financial, then future financial circumstances matter to the projection.

Don’t treat those future approvals as though they’re already sitting inside the original contract.

How Does the Matching Indexed Participating Loan Create the Potential Retirement-Income Difference?

Under the indexed strategy used in our example, the client-funded dollars and the loan-funded dollars have the same potential 10% cap and 0% indexed-crediting floor.

The loan-funded dollars also carry the applicable 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.

That current 5% rate should not be confused with the contractual maximum.

And neither number guarantees favorable loan economics.

The Historical 6.87% Indexed-Crediting Example

One historical analysis used with the strategy examined annual S&P 500 price changes from 2006 through 2020.

Dividends were excluded because the policy is not directly invested in the index.

The analysis applied a 10% cap and 0% indexed-crediting floor to the annual price changes.

Negative annual index years were treated as 0% for purposes of the indexed-crediting calculation.

Positive annual changes above 10% were capped at 10%.

Under those assumptions, the period produced a:

6.87% historical average indexed-crediting result.

That is not the historical return of the S&P 500.

It isn’t a guaranteed future crediting rate.

It isn’t a guaranteed policy return.

Where the 1.87-Percentage-Point Modeled Spread Comes From

Under those particular assumptions:

6.87% – 5.00% = 1.87 percentage points.

That’s the modeled positive spread.

If applicable indexed crediting exceeds the applicable loan cost, the loan-funded portion can experience favorable economics under the model.

If indexed crediting is 0% while the applicable loan rate is 5%, the economics are unfavorable for that period.

Positive arbitrage isn’t guaranteed.

Why Future JUMP Approval Can Have Such a Big Effect on the Model

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 aren’t S&P 500 returns.

They aren’t IUL indexed-crediting rates.

They aren’t guaranteed policy returns.

They’re modeled effective results under the assumptions used in that particular analysis, before accounting for applicable policy charges and other factors.

Now Connect That Back to Your Income

If the projected retirement-income result assumes successive JUMPs, and successive JUMPs require additional death-benefit approval, then financial underwriting can become part of the path to that result.

That’s why I don’t want someone looking only at the final retirement-income number.

I want to know what had to happen to get there.

What About Up to Approximately 300% More Projected Retirement Income?

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.

It should lead to more questions, not fewer.

Ask:

“How many future JUMPs does this projection assume?”

Then ask:

“What financial underwriting assumptions are built into those future approvals?”

If your income or financial situation changes and the planned progression changes, rerun the retirement-income comparison.

Don’t keep quoting the original number.

The 300% Number Is Not a Promise

It isn’t:

“Put $10,000 into this strategy and you’re guaranteed 300% more retirement income.”

That’s not how I would present it.

It’s a result produced in certain modeled comparisons under specific assumptions.

Those assumptions can include:

• Client contributions
• Successful future JUMPs
• Additional death-benefit approval
• Indexed-crediting assumptions
• Loan costs
• Policy charges
• Distribution timing
• Tax assumptions in the strategy being compared
• Policy durability
• Longevity

The 300% isn’t the sales pitch. It’s the question.

Show me exactly where the difference comes from.

What About Approximately 40% More Than a Traditional IUL?

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, the reason isn’t simply that one policy has “IUL” written on it.

The design and loan mechanics can materially change the projection.

But if future JUMPs are part of the JUMP illustration, future approval is part of the math too.

Here’s a Better Way to Stress-Test the Financial Underwriting Risk

Suppose the original illustration assumes JUMPs in Years 3, 5, 7, 9 and 11.

Run it that way first.

Then create another scenario where your income changes and the progression stops after Year 5.

Now run another where the progression stops after Year 7.

Then run one where the next JUMP is delayed.

Now compare the retirement income.

Then Stress-Test the Loan Rate

Run the current applicable 5% loan rate.

Then run the contractual maximum of 6%.

Now combine the 6% loan rate with fewer successful future JUMPs.

What happens?

That’s much more useful than looking at one perfect illustration.

Then Lower the Crediting Assumption

Don’t assume the historical 6.87% indexed-crediting example repeats forever.

Run lower crediting.

Combine it with the 6% maximum loan rate.

Combine both with fewer future JUMPs.

Then look at the retirement-income result again.

That’s how you make the strategy prove itself.

Should You Inflate Your Income to Get More Coverage?

No.

Your application and underwriting information should be accurate.

The goal isn’t to figure out how to get the biggest death benefit approved at any cost.

The goal is to design a policy that fits your actual circumstances and can be managed over time.

A retirement strategy built on inaccurate information is not a retirement strategy I would want to rely on.

Should You Buy More Insurance Than You Need Just to Put More Money Into an IUL?

That’s the wrong way to frame the decision.

An IUL is life insurance.

The death benefit, premium, cash value, charges, MEC limits, loan provisions and retirement-income objectives need to work together.

More isn’t automatically better.

The policy needs to be appropriately designed for the client’s goals and financial circumstances.

What If You Have a High Net Worth but Low Current Income?

This is exactly why financial underwriting shouldn’t be reduced to a single income number.

Someone may have substantial assets but relatively little earned income.

Another person may have high income but limited assets.

Another may have recently sold a business.

Another may be retired.

Those are different financial profiles.

The carrier evaluates the financial justification under its applicable underwriting guidelines.

That’s why I would never promise an exact approval amount from income alone.

What If Your Spouse Has Most of the Household Income?

Again, the financial circumstances surrounding the application matter.

Household finances can be more complicated than looking at one W-2.

The purpose of the insurance, ownership structure, existing coverage and other facts may matter to the underwriting analysis.

The correct answer comes from the actual case and applicable underwriting requirements, not a generic internet formula.

Why This Matters Before You Retire

Imagine you’re 55 and plan to retire at 62.

Your original JUMP projection assumes another future death-benefit increase after you’ve substantially reduced your earned income.

That’s something I want to identify now.

Not at 62.

The issue may never become a problem.

But if future financial underwriting is part of the strategy, it belongs in the planning conversation.

You Don’t Want to Discover a Hidden Assumption Late

That’s the real fear.

It’s not:

“I hope my insurance paperwork is easy.”

It’s:

“What if the retirement number I’m relying on assumes something that isn’t actually guaranteed?”

That’s a much more serious question.

Because by 55 or 60, You Don’t Feel Like You Have Unlimited Do-Overs

You have money saved.

You have a retirement date in your head.

You know roughly what lifestyle you want.

And you don’t want to make some clever-looking financial move that becomes a problem ten years later.

The thought is:

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

That’s why future underwriting assumptions need to be visible from the beginning.

The Real Goal Is Independence

You want enough income to live the way you planned.

You want flexibility when taxes change.

You want money available when life doesn’t cooperate.

You don’t want a strategy that requires your kids to rescue you if one assumption goes wrong.

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

“We should be able to handle this ourselves.”

So don’t hide financial underwriting behind a giant projected retirement-income number.

Put it into the math.

So, Can Your Income Limit How Much IUL Life Insurance You Can Buy?

Yes, income can be one of the factors considered in financial underwriting and can affect the amount of life insurance that may be approved.

But income isn’t the only factor.

Financial underwriting can also consider the purpose of the insurance, existing coverage, net worth, employment, financial circumstances and other information required under applicable underwriting guidelines.

There isn’t one universal IUL income formula that tells every person exactly how much coverage will be approved.

And With the IUL JUMP Strategy, the Question Doesn’t End at Initial Approval

Future planned JUMPs can involve additional death-benefit increases.

Those increases can require new underwriting.

So your future financial circumstances can matter too.

If your income changes and a future JUMP isn’t approved, that does not automatically mean the successful JUMP progression already achieved disappears under the mechanics described here.

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

But the retirement-income projection needs to be updated.

How We Look at This at FPP Financial

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

I don’t want to show you only:

“Here’s how much retirement income this could produce.”

I want to show you what assumptions have to happen before that income appears.

If future JUMPs are part of the projection, we’ll identify them.

We’ll look at the additional death benefit required.

We’ll discuss the fact that future underwriting can include financial considerations.

We’ll model what happens if the planned progression stops early.

We’ll model the current 5% applicable loan rate.

We’ll stress-test the contractual 6% maximum.

We’ll lower the indexed-crediting assumption.

We’ll account for policy charges and policy indebtedness.

Then we’ll compare the projected retirement income.

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

Want to See How Financial Underwriting Fits Into Your JUMP Projection?

If you’re considering a large IUL or the IUL JUMP Strategy, don’t start with:

“What’s the biggest policy I can buy?”

Start with:

“What am I trying to accomplish, and what does the math actually support?”

We’ll look at the planned contribution.

We’ll look at the death-benefit design.

We’ll identify the future JUMPs.

We’ll look at which future increases still require approval.

We’ll show the Matching Indexed Participating Loan progression.

We’ll stress-test fewer future JUMPs.

We’ll test the current 5% applicable loan rate and contractual 6% maximum.

We’ll lower the indexed-crediting assumptions.

Then we’ll compare the projected retirement income against the alternatives you’re actually considering.

If the JUMP Strategy produces a major projected advantage, you’ll see where it comes from.

If that advantage relies heavily on assumptions you aren’t comfortable with, you’ll see that too.

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

The number isn’t the reason to buy it. The assumptions behind the number are what you need to understand.

Let the math do the talking.

Schedule Your Tax-Free Retirement Strategy Meeting

Explore More

• Why Do Future IUL JUMPs Require New Underwriting?
• What Happens If You Don’t Qualify for Your Next IUL JUMP?
• 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.

Life insurance coverage is subject to underwriting and carrier approval. Financial underwriting may include income, employment, net worth, existing insurance, the purpose and amount of coverage requested, and other financial information required under applicable underwriting guidelines. There is no universal income-to-death-benefit formula applicable to every insurer, applicant or case. Actual underwriting standards and decisions are controlled by the insurance company.

Future JUMPs and associated death-benefit increases are subject to future carrier approval and applicable underwriting requirements. Future approval is not guaranteed by initial policy approval. Changes in income, employment, financial circumstances, health, occupation, existing insurance and other underwriting factors may affect eligibility for additional coverage.

Under the strategy mechanics described in this article, failure to obtain approval for the next planned JUMP may pause future progression rather than automatically eliminating prior successful JUMPs or returning the strategy to its original matching-loan level. Actual treatment of an individual policy is governed by the insurance contract, applicable carrier procedures, underwriting decisions and the circumstances of the policy at that time.

A policy owner may potentially be able to apply for additional coverage at a later policy anniversary if financial or other circumstances change. A later application remains subject to applicable underwriting requirements and approval. An increase in income, net worth or other financial resources does not guarantee approval.

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. Increasing a death benefit does not by itself guarantee that a policy will avoid Modified Endowment Contract status. Actual premium timing, policy structure, death benefit, applicable tax rules, policy changes and other factors must be considered.

Matching Indexed Participating Loans are policy loans. They are not free carrier contributions, employer contributions, bonuses, tax credits, guaranteed gains or direct investments in a market index. Under the JUMP 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.

Existing policy indebtedness associated with prior loan activity does not automatically disappear because a future JUMP is delayed or not approved. 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.

Indexed universal life insurance does not directly invest in a 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 does not guarantee that overall policy value cannot decline. Policy charges, cost of insurance, loan costs, withdrawals and other policy mechanics continue to apply. Caps, participation rates, spreads, loan rates and other nonguaranteed elements may change when permitted by the insurance contract.

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, Modified Endowment Contract status, policy lapse, surrender and other circumstances. 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, 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. When the modeled comparison assumes successful future JUMPs, financial underwriting and approval for future death-benefit increases are assumptions within the projection. Changes to future approval can materially change the projected result.

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. Changes to future JUMP progression can materially alter the modeled 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.

A change in income or financial circumstances, missed JUMP or delayed JUMP can materially change projected funding, policy values, indebtedness, death benefits and retirement-income results. Illustrations should be updated as actual policy performance, underwriting results and other assumptions change.

Policy-specific guarantees, nonguaranteed elements, underwriting requirements, loan provisions, loan rates, caps, participation rates, spreads, crediting methods, expenses, surrender provisions, MEC testing, lapse provisions and death-benefit provisions should be verified against current carrier-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 life insurance or implementing any retirement-income strategy discussed here.