What Is the IUL JUMP Strategy? How Matching Indexed Participating Loans Can Change Retirement Income

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In this video, I compare the IUL JUMP Strategy with a traditional 401(k) and explain why account balance alone doesn’t tell you how much retirement income a strategy may actually produce.  https://youtu.be/Wo8pIvX7MSA

If someone told you they could put $10,000 a year into a retirement strategy and eventually have $60,000 a year going into that strategy, your first question should probably be:

“Where is the other $50,000 coming from?”

That’s exactly the question you should ask.

Because it isn’t free money. It isn’t a 500% return. And it isn’t an insurance company handing you an extra $50,000 because you bought a policy.

The additional funding is created through policy loans.

That’s the basic idea behind what we call the IUL JUMP Strategy, which uses a Matching Indexed Participating Loan structure to potentially increase the amount of money working inside a properly designed indexed universal life insurance policy.

The strategy is more complicated than simply buying an IUL and hoping the index performs well.

There are policy loans. There are loan charges. There are increases in death benefit. There is additional underwriting. There are policy expenses. There are MEC limits. And there is no guarantee that every future JUMP will be approved.

So before you get excited about the numbers, you need to understand how the machine actually works.

First, What Is an IUL?

Indexed universal life insurance, commonly called IUL, is permanent life insurance that can build cash value.

Part of the policy’s interest-crediting potential can be linked to the performance of an external market index, such as the S&P 500. You aren’t directly investing your policy cash value in the S&P 500, and you don’t own the stocks inside the index.

Instead, the insurance company uses a crediting formula based on changes in the index.

For the indexed strategy we’re discussing in this article, the example uses a 10% cap and a 0% indexed-crediting floor.

That distinction matters.

A 0% indexed-crediting floor does not mean your overall policy value can never decline. Insurance costs, policy charges, loan costs and other expenses still exist.

It means a negative index result would not create a negative indexed-crediting rate under the applicable crediting formula.

So What Makes the IUL JUMP Strategy Different?

A traditional IUL might look something like this:

You contribute money. The policy builds cash value. Later, you may access policy values through withdrawals and policy loans, subject to the policy’s terms and tax rules.

JUMP adds another layer.

Instead of only relying on the money you’re contributing out of pocket, the strategy uses a Matching Indexed Participating Loan to create additional funding that is redeployed back into the policy.

That’s the part most people have never seen.

Let’s use a simplified example with a client contributing $10,000 per year.

How a $10,000 Annual Contribution Can Become More Annual Policy Funding

In our example, the first two years begin with the client’s normal $10,000 annual contribution.

Then the JUMPs begin.

A simplified progression can look like this:

Now look carefully at that last line.

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

In this simplified example, the client is still contributing $10,000 out of pocket. The additional $50,000 comes from the Matching Indexed Participating Loan mechanism.

But again, that $50,000 isn’t free.

It’s borrowed money.

What Happens to the Matching Loan?

This is where the strategy starts making more sense.

The Matching Indexed Participating Loan isn’t taken out so the client can go spend it.

It’s redeployed back into the policy.

That means the loan-funded dollars have the potential to receive the same indexed crediting as the client’s own funded dollars under the applicable indexed-crediting strategy.

Using our current structure as an example, both sets of dollars have the potential for indexed crediting subject to the applicable 10% cap and 0% indexed-crediting floor.

There is one major difference.

The loan-funded dollars have a 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 should not be confused with a guarantee that the loan will always cost 5%.

Think About It as Two Buckets

One of the easiest ways to understand the JUMP Strategy is to picture two buckets.

Bucket One is your money.

Those are the dollars you’ve contributed to the policy.

Bucket Two is the matching-loan money.

Those are dollars created through the Matching Indexed Participating Loans and redeployed back into the policy.

Both buckets can participate in the applicable indexed-crediting strategy.

But Bucket Two carries the cost of the policy loan.

That’s where the idea of positive arbitrage comes into the picture.

Where Does the Positive Arbitrage Come From?

Let’s use a historical example.

For the analysis behind this example, annual S&P 500 price changes from 2006 through 2020 were evaluated without dividends.

Why without dividends?

Because the policy isn’t directly invested in the S&P 500. It doesn’t own the stocks in the index or receive their dividends.

The index is being used to determine interest crediting according to the policy’s crediting formula.

For this historical analysis, negative annual index changes were floored at 0% and positive annual changes above 10% were capped at 10%.

Applying that 10% cap and 0% floor to the annual index changes during the period analyzed produced a 6.87% historical average indexed-crediting result.

That does not mean the S&P 500 itself averaged 6.87%.

It also does not mean the policy is guaranteed to earn 6.87% in the future.

It is simply the historical indexed-crediting result produced by applying those assumptions to that particular historical period.

Now compare that historical 6.87% crediting result with the current 5% loan rate used in our example.

6.87% – 5.00% = 1.87%

That difference represents a modeled 1.87 percentage-point positive spread on the applicable borrowed-and-redeployed dollars under those assumptions.

That’s the basic idea behind the positive arbitrage.

But Positive Arbitrage Is Not Guaranteed

This part can’t be skipped.

If the applicable indexed-crediting result exceeds the cost of the loan, positive arbitrage can occur.

If it doesn’t, the economics move the other direction.

Imagine the indexed-crediting calculation produces 0% during a particular period while the policy loan still carries a 5% charge.

You don’t have positive arbitrage in that situation.

The loan still has a cost.

That’s why I don’t want someone looking at one favorable number and deciding that JUMP is automatically a good strategy.

You need to see what happens when the numbers aren’t favorable too.

Why Do the JUMPs Potentially Increase the Modeled Result?

The loans don’t disappear when another JUMP occurs.

They accumulate.

A later Matching Indexed Participating Loan doesn’t simply pay off the previous loan and start over.

As additional JUMPs are successfully completed, additional borrowed-and-redeployed capital is added to the strategy.

Under the historical assumptions we’ve been discussing, the modeled illustration demonstrates the positive-arbitrage effect increasing through successive JUMPs.

The example shows:

• Year 3: 8.74% modeled effective result
• Year 5: 11.61% modeled effective result
• Year 7: 14.48% modeled effective result
• Year 9: 17.35% modeled effective result

Here’s where I want to be extremely clear.

Those numbers do not mean the S&P 500 is earning 17.35%.

They do not mean the IUL’s index account has a 17.35% crediting rate.

And they do not mean you’re guaranteed a 17.35% return.

They represent the modeled effective result of the JUMP structure under the historical assumptions used in the analysis, including the effect attributed to successive layers of borrowed-and-redeployed capital and modeled positive arbitrage.

Actual policy charges, cost of insurance, loan costs, crediting results and other policy mechanics still matter.

That’s why the headline number isn’t enough.

Why Does the Death Benefit Have to JUMP?

There’s another piece of this strategy that can’t be ignored.

You generally can’t just keep pouring increasing amounts of money into a life insurance policy without considering the tax rules governing the policy.

One major issue is the Modified Endowment Contract, or MEC, rules.

A policy that becomes a MEC can receive very different tax treatment when money is accessed during the insured’s lifetime.

The JUMP design therefore incorporates increases in death benefit intended to create additional funding capacity while keeping the policy within the intended non-MEC structure.

In our example, those death-benefit increases correspond with the planned JUMPs.

But there is a catch.

You have to qualify for the additional death benefit.

Future JUMPs Are Not Automatically Guaranteed

This may be one of the most important things to understand before considering the strategy.

Each planned JUMP that requires additional death benefit also requires a new application and carrier approval for that increase.

The carrier can evaluate factors such as:

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

Someone could qualify for the original policy and several JUMPs, then have circumstances change before the next one.

Maybe they suffer a serious health event.

Maybe their employment changes.

Maybe their income falls enough that the additional requested death benefit can no longer be financially justified under the carrier’s underwriting guidelines.

That can prevent the next JUMP from being approved.

This is why it would be misleading to show someone the entire JUMP staircase on day one and tell them they’re guaranteed to reach the top.

They’re not.

What Happens If You Don’t Qualify for the Next JUMP?

This is another feature of the strategy that deserves explanation.

Based on the JUMP structure we’re discussing, failing to qualify for the next planned increase does not mean you automatically fall all the way back to the beginning.

For example, suppose you’re contributing $10,000 annually and you’ve successfully reached a $30,000 Matching Indexed Participating Loan level.

That’s $10,000 from you plus a $30,000 matching policy loan, producing $40,000 of annual funding under the strategy in this simplified example.

Now suppose you apply for the next JUMP and don’t qualify for the additional death benefit.

Under the structure we’re describing, you can remain at the previously established $30,000 matching-loan level rather than automatically falling back to zero matching-loan funding.

You may then have the opportunity to reapply for the next JUMP at a future policy anniversary if your circumstances allow.

A simple way to think about it is:

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

The actual policy contract, carrier rules and approvals govern what is available in any individual situation.

What Happens to the Loan Interest?

The Matching Indexed Participating Loans aren’t interest-free.

Under the strategy we’re discussing, the design generally does not plan on having the client pay the applicable JUMP loan charges out of pocket every year.

Instead, the strategy is modeled with the applicable loan charges carried forward while the borrowed funds remain redeployed into the policy.

That’s very different from taking a policy loan and spending the proceeds.

And that distinction matters.

A JUMP Loan Is Not the Same as Borrowing $30,000 to Buy a Boat

Suppose you borrow $30,000 from a policy and use it to buy a boat.

You now have a policy loan and its associated cost, but the $30,000 you borrowed isn’t sitting inside the policy participating in the strategy anymore.

You spent it.

Compare that with the JUMP structure.

The Matching Indexed Participating Loan proceeds are redeployed back into the policy. Those dollars therefore remain part of the strategy and have the applicable indexed-crediting potential, while the corresponding loan and its costs remain outstanding.

That doesn’t eliminate the loan risk.

It changes what you’re doing with the borrowed money.

That’s a huge distinction.

Can the Loans Keep Growing?

Yes.

The loans accumulate under the strategy we’ve described.

That means the loan balance can become substantial over time.

This is one reason an IUL retirement-income strategy needs to be monitored carefully.

Outstanding policy indebtedness can affect cash value, policy performance, available retirement distributions and the death benefit ultimately paid to beneficiaries.

Excessive borrowing can also increase the risk that a policy becomes unsustainable.

If a policy with outstanding loans lapses or is surrendered while there is taxable gain in the contract, there can be significant tax consequences.

That’s not something you want to discover at age 82 after taking retirement income for 15 years.

So How Can JUMP Potentially Produce More Retirement Income?

This is where people often hear the big 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.

Read that sentence carefully.

It says projected retirement income in certain modeled comparisons.

It does not say 300% more investment return.

It does not say every IUL will produce 300% more income.

It does not say you’re guaranteed to receive 300% more money.

The number isn’t the reason to buy it.

The assumptions behind the number are what you need to understand.

The projected difference can be influenced by several moving pieces:

• The client’s actual contributions
• The amount and timing of successful JUMPs
• The amount of borrowed-and-redeployed capital
• Indexed-crediting results
• Loan costs
• Positive or negative arbitrage
• Policy charges and cost of insurance
• Tax treatment of the strategies being compared
• Market and sequence-of-returns exposure
• The timing and amount of retirement distributions
• Policy longevity
• Death-benefit requirements
• Underwriting approval for future JUMPs

Change those assumptions and the result can change dramatically.

That’s why my response to the 300% number is:

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

What About Traditional IUL?

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

Again, that isn’t because every JUMP policy automatically beats every other IUL by 40%.

Two IUL designs can have completely different costs, crediting assumptions, loan mechanics, death benefits and distribution strategies.

That’s exactly why I don’t like comparing products by looking at one illustrated number.

You need to know how that number was created.

What Happens When You Retire?

The accumulation phase is only half the equation.

Eventually, the purpose of building retirement assets is to use them.

A properly structured non-MEC life insurance policy may allow policy values to be accessed through withdrawals to basis and policy loans without current income taxation under current federal tax rules, when structured and maintained properly.

But saying, “IUL gives you tax-free retirement income” without explaining the conditions is too simplistic.

Policy loans aren’t distributions from a Roth IRA.

They’re loans.

They accrue interest. They reduce available policy values and can reduce the net death benefit. Excessive loans can increase lapse risk.

If a policy lapses or is surrendered with gain and outstanding indebtedness, taxable income can potentially result.

And if the policy becomes a MEC, the tax treatment of distributions and loans changes.

The retirement distribution strategy therefore needs to be modeled along with the accumulation strategy.

What Happens to the Loans When You Die?

Policy loans generally aren’t written off as though they never existed.

Outstanding policy indebtedness reduces the amount ultimately available under the policy according to its contractual terms.

In favorable modeled scenarios, remaining policy values and death-benefit protection may leave substantial value for beneficiaries even after outstanding indebtedness is accounted for.

But the net amount ultimately paid is affected by the actual loan balance and policy performance.

Life insurance death benefits are generally received income-tax-free by beneficiaries under current federal law, subject to applicable exceptions and individual circumstances.

Who Should Even Consider the IUL JUMP Strategy?

This isn’t something I would show someone simply because they heard that IULs can produce tax-advantaged retirement income.

The strategy requires enough time, sufficient cash flow, appropriate insurance need and insurability, and the ability to withstand the risks associated with a long-term life insurance strategy.

Future JUMPs require additional underwriting.

Policy charges continue.

Loan costs continue.

Crediting results won’t be identical every year.

And retirement distributions have to be managed so the policy remains sustainable.

For the right person, those mechanics may create a compelling modeled result.

For the wrong person, they may not.

The Question I Want You to Ask Isn’t “Can I Get 300% More?”

I understand why that number gets attention.

If you’ve spent decades putting money into a 401(k) or IRA and someone shows you a strategy projecting substantially more retirement income from comparable out-of-pocket contributions, of course you’re going to look at it.

But here’s the question I’d rather have you ask:

“Show me exactly where the difference comes from.”

Show me my contribution.

Show me the Matching Indexed Participating Loans.

Show me how those loans accumulate.

Show me the loan rate.

Show me what happens at 5%.

Show me what happens if that rate reaches the contractual maximum we’re modeling.

Show me the indexed-crediting assumptions.

Show me a 0% crediting year.

Show me the policy charges.

Show me what happens if I don’t qualify for a future JUMP.

Show me the retirement distributions.

Show me the outstanding loans at life expectancy.

Show me what my beneficiaries could receive.

Then compare all of that against the retirement strategy I’m already using.

That’s a completely different conversation from:

“Trust me. This is better.”

What If You’re Afraid of Making the Wrong Decision?

For many people considering a strategy like this, the biggest fear isn’t missing another percentage point of return.

It’s making a retirement decision they can’t easily undo.

You may be thinking:

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

Or:

“We should be able to handle this ourselves.”

And underneath that may be something even more personal:

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

Those are legitimate reasons to slow down and understand what you’re doing.

You spent decades accumulating your retirement assets. You shouldn’t move money into a complicated insurance strategy because somebody showed you a beautiful illustration and a giant retirement-income number.

You should understand what has to go right, what could go wrong, and what the strategy looks like under less favorable assumptions.

That’s Why We Use the Retirement Math Method™

At FPP Financial, I don’t want the decision to come down to whether I can give you a better sales pitch than somebody else.

We use our Retirement Math Method™ to compare the numbers.

That means looking beyond the headline illustration.

We want to examine the assumptions, loan mechanics, policy costs, crediting scenarios, retirement distributions, taxes, longevity and the strategy you’re comparing JUMP against.

If we’re comparing it with your 401(k), show the 401(k).

If we’re comparing it with your IRA, show the IRA.

If we’re comparing it with a traditional IUL, show both policy structures.

Then stress-test the JUMP strategy too.

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

Want to See What the JUMP Strategy Looks Like With Your Numbers?

You don’t need to decide whether you like the IUL JUMP Strategy based on an article.

And you definitely shouldn’t make the decision based on the words “up to 300% more projected retirement income.”

Bring your numbers.

We’ll look at what you’re contributing now, what you’ve accumulated, your retirement timeline, the strategy you’re currently using, and the assumptions behind the alternatives.

Then we’ll run the comparison.

Let the math do the talking.

Schedule Your Tax-Free Retirement Strategy Meeting

Explore More

• What Is a Matching Indexed Participating Loan in an IUL?
• IUL JUMP Strategy vs. 401(k): Which Can Produce More Retirement Income?
• What Happens If IUL Loan Rates Go Up in Retirement?

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. Policy loans and withdrawals reduce available cash value and death benefits and may increase the risk of policy lapse. A lapse or surrender of a policy with outstanding loans may create taxable income. Modified Endowment Contracts are subject to different tax rules.

References to indexed crediting, historical results, positive arbitrage, modeled effective results, projected retirement income, the 6.87% historical example, the current 5% loan rate, the contractual maximum 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 performance or results. Historical indexed-crediting calculations do not predict future crediting. Actual results are affected by policy terms, caps, participation rates, spreads, loan rates, policy charges, cost of insurance, underwriting, timing, distributions and other factors. Future JUMPs and death-benefit increases are subject to carrier approval and applicable underwriting requirements.

The S&P 500 is an external market index. 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-specific values, loan provisions, guarantees, nonguaranteed elements and current charges should be verified against the current carrier-approved illustration and actual insurance contract. Tax treatment varies with individual circumstances and policy status. Consult qualified tax and legal professionals regarding your individual situation.