Why Do Future IUL JUMPs Require New Underwriting and Approval?

You’re looking at an IUL JUMP Strategy illustration.

Year 3 shows the first JUMP.

Year 5 shows another.

Then Year 7.

Year 9.

Year 11.

The projected funding keeps increasing while your planned out-of-pocket contribution remains the same.

Then you hear something that deserves your attention:

“Each future JUMP requires new underwriting and approval.”

Your immediate question should be:

“Why? Didn’t I already get approved when I bought the policy?”

Yes, you were approved for the original life insurance policy.

But that doesn’t mean every future increase in life insurance coverage shown in the JUMP Strategy is automatically approved on day one.

That’s one of the most important mechanics to understand before evaluating the projected retirement income.

The Future JUMPs Are Not Automatically Guaranteed at Initial Issue

Let’s start there.

When the original IUL is issued, you’re approved for the insurance coverage associated with that policy at that time.

The JUMP Strategy then contemplates future increases in the death benefit as the strategy progresses.

Those future increases require additional approval.

So if an illustration shows JUMPs in Years 3, 5, 7, 9 and 11, don’t look at that schedule and think:

“Great. All five are already locked in.”

They’re not.

Future approval is part of the strategy.

Why Does the Death Benefit Need to Increase?

This is where the JUMP mechanics start to make more sense.

The strategy is designed to increase policy funding over time.

But life insurance has tax rules governing how much premium can be placed into a policy relative to its design before Modified Endowment Contract rules 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 the death benefit simply doubles every few years.

It doesn’t.

The planned increase is specifically tied to creating additional funding capacity within the intended policy design.

More Death Benefit Means More Insurance Has to Be Approved

That’s the key.

You’re not merely changing a number on a spreadsheet.

You’re requesting additional life insurance coverage.

And when additional insurance is requested, the carrier has to decide whether it is willing to insure the additional risk.

That’s why underwriting comes back into the picture.

Here’s What the JUMP Schedule Can Look Like

Using our common example with a client contributing $10,000 per year:

Notice what happens.

The client’s planned out-of-pocket contribution remains:

$10,000 per year.

But after successful JUMPs, the Matching Indexed Participating Loan level can increase.

At the Year 11 level in this example:

$10,000 client contribution + $50,000 Matching Indexed Participating Loan = $60,000 total annual funding shown.

The Additional Funding Isn’t a Free Contribution

This point can’t get lost.

The $50,000 isn’t free money.

It isn’t an employer match.

It isn’t a tax credit.

It isn’t simply money being handed to the policy owner.

The Matching Indexed Participating Loan is an actual policy loan.

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

That creates additional policy funding and additional policy indebtedness.

So What Does Underwriting Have to Do With the Matching Loan?

The underwriting isn’t there because somebody is simply applying for another loan.

The important connection is the planned increase in life insurance coverage.

The JUMP design uses additional death benefit to create more funding capacity for the intended policy structure.

That additional insurance coverage has to be approved.

Once you understand that, the underwriting requirement makes much more sense.

What Can the Underwriting Process Look At?

Several things can potentially affect approval for additional life insurance.

Those can include:

• Health
• Income
• Employment
• Existing life insurance
• Driving history
• Occupation
• Hazardous job duties
• Risky hobbies or extracurricular activities
• Other medical and financial underwriting factors

The exact underwriting requirements and decision are controlled by the actual insurance company and the circumstances at the time of the application.

Health Is Only One Part of Underwriting

People often hear “underwriting” and immediately think:

“Medical exam.”

Health certainly matters.

But financial underwriting can matter too.

Life insurance isn’t simply:

“How much coverage would you like?”

The amount of insurance requested generally needs to be financially supportable under the carrier’s underwriting standards.

Your Income Can Matter

Imagine you’re earning $200,000 when the original policy is issued.

Several years later, the strategy calls for another death-benefit increase.

But now your employment situation has changed substantially.

The financial justification for additional insurance may be different.

That can matter when the additional coverage is reviewed.

It’s one reason future JUMP approval should not be treated like an automatic contractual event.

Your Existing Insurance Can Matter Too

Suppose you already own substantial life insurance when the next JUMP is requested.

The carrier may consider existing coverage as part of the overall financial underwriting picture.

The question isn’t simply:

“Can this person afford the premium?”

The carrier is also evaluating the amount of life insurance being requested relative to the financial circumstances supporting it.

Your Job Can Matter Even If Your Health Is Great

You could be in excellent health and still have underwriting considerations tied to your occupation.

Some jobs involve more risk than others.

Hazardous duties can matter.

Occupational changes can matter.

That’s why I wouldn’t tell someone:

“As long as you stay healthy, every future JUMP will be approved.”

That’s too broad.

Risky Hobbies Can Matter Too

Maybe you took up private aviation.

Maybe you started participating in a high-risk recreational activity.

Maybe something about your lifestyle is materially different from when the original policy was issued.

Those changes can potentially enter the underwriting conversation.

Again, the actual decision rests with the carrier.

Even Driving History Can Enter the Picture

Life insurance underwriting can look beyond your doctor’s office.

Driving history and other risk factors may be reviewed under applicable underwriting guidelines.

This is why the correct question isn’t:

“Will I definitely qualify again?”

It’s:

“What has to remain true for the future JUMP assumptions in this projection to stay realistic?”

That’s a Much Better Question

Because now you’re treating the illustration like a model.

Not a promise.

If the retirement-income projection assumes successful JUMPs in Years 3, 5, 7, 9 and 11, then future underwriting approval is one of the assumptions supporting that projection.

Make it visible.

What Happens to the Death Benefit at Each JUMP?

The death benefit is increased enough under the intended design to create additional policy funding capacity while seeking to avoid causing a MEC.

The exact amount isn’t something I would reduce to a generic formula.

It needs to be based on the actual policy design and applicable tax rules.

So don’t think:

“The death benefit doubles every time I JUMP.”

That’s not the mechanic.

Why Does MEC Status Matter So Much?

Because one of the reasons people consider an IUL for retirement is the potential tax treatment of accessing policy values.

A properly structured and maintained non-MEC policy may potentially allow access through withdrawals to basis and policy loans without current income taxation under current federal rules, subject to applicable requirements.

A Modified Endowment Contract has different tax treatment for distributions.

So if you’re designing a policy around future retirement access, MEC testing matters.

But increasing the death benefit isn’t a magical guarantee that a policy can never become a MEC.

Actual premium timing, policy structure, death benefit, applicable tax rules and other factors have to be monitored.

Now You Can See Why the JUMP Isn’t Just a Button Someone Pushes

A JUMP involves several connected pieces.

Additional death benefit.

Additional funding capacity.

New underwriting.

Carrier approval.

Then progression to the next planned Matching Indexed Participating Loan level under the strategy.

That’s very different from:

“Every two years, the policy automatically gives me another match.”

That’s not how I would describe it.

Why the Underwriting Matters to the Retirement-Income Projection

Because the future JUMPs can materially change the amount of funding shown in the strategy.

Look again at the example.

The client is putting in $10,000.

At the first JUMP level, total annual funding shown becomes $20,000.

Later it can become $30,000.

Then $40,000.

Then $50,000.

Then $60,000.

Those higher matching-loan levels are part of what can materially change the long-term modeled retirement-income result.

So future underwriting isn’t a footnote.

It’s part of the math.

The Loan Mechanics Are Another Part of the Math

The Matching Indexed Participating Loan dollars are redeployed into the same policy.

Under the indexed strategy used in our example, client-funded dollars and 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.

The current rate should not be confused with the maximum.

And 5% should not be assumed to remain unchanged forever.

Where Does the Positive-Arbitrage Idea Come From?

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

Dividends were excluded because the policy isn’t directly invested in the S&P 500.

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

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

Positive annual price changes above 10% were limited to 10%.

Under those assumptions, the period produced a:

6.87% historical average indexed-crediting result.

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

It’s not a guaranteed future crediting rate.

It’s not a guaranteed policy return.

Compare 6.87% With the Current 5% Applicable Loan Rate

Under those 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 Successful Future JUMPs Can Make Such a Big Difference in 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 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 Underwriting

If successive JUMPs are part of what creates the modeled retirement-income difference, then successful future underwriting matters to the projection.

That’s why I don’t want somebody showing you a Year 30 retirement-income number while barely mentioning that several future insurance approvals are built into the path used to get there.

Show the assumption.

Then test it.

What Happens to the Up-to-300% Retirement-Income Comparison?

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

That can be a dramatic difference.

But if the projection producing that result assumes several successful future JUMPs, you need to know that.

The 300% number doesn’t erase the underwriting requirement.

It makes understanding it even more important.

Ask One Question About Every Big Projection

“What had to happen for us to get this result?”

If the answer includes:

Year 3 JUMP approved.

Year 5 JUMP approved.

Year 7 JUMP approved.

Year 9 JUMP approved.

Then those approvals are part of the assumptions behind the number.

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

Show me exactly where the difference comes from.

Don’t Just Run the Perfect JUMP Scenario

Run the projected strategy as designed.

Then make the assumptions worse.

Lower the indexed-crediting assumption.

Raise the applicable loan rate from the current 5% to the contractual 6% maximum.

Run both changes together.

Then model the effect of future JUMP progression changing from the original illustration.

See what happens to projected retirement income.

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

What About the Approximately 40% Difference Versus 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, that projected advantage comes from differences in strategy design and assumptions.

If the JUMP version assumes successful future progression, underwriting is part of that story.

You can’t show the projected benefit while hiding the approval requirement.

Underwriting Risk Doesn’t Automatically Make the Strategy Bad

It makes it something you need to understand.

Every retirement strategy has assumptions.

A market portfolio has return assumptions.

A retirement withdrawal plan has longevity assumptions.

A tax projection has future tax assumptions.

The JUMP Strategy has those types of assumptions plus policy-specific assumptions, including future underwriting when additional coverage is requested.

The mistake is pretending the assumption isn’t there.

Would I Treat a Future JUMP Like Guaranteed Income?

No.

If the future JUMP has not yet been approved, I would not describe it as guaranteed.

I’d describe it as part of the planned strategy, subject to future underwriting and carrier approval.

That’s a much more accurate way to look at the illustration.

This Matters Even More When You’re Planning 10 or 20 Years Ahead

Think about how much can change in a decade.

Your health can change.

Your income can change.

Your career can change.

Your existing insurance can change.

Your hobbies can change.

Your financial situation can change.

That’s why a Year 9 JUMP can’t simply be treated as though it has already happened when you’re still in Year 1.

What Should You Ask Before Starting the Strategy?

I would ask:

• Which policy years currently assume future JUMPs?
• Why is the death benefit expected to increase?
• Does each planned increase require new underwriting?
• What medical factors can affect future approval?
• What financial factors can affect future approval?
• How can employment or income affect the requested death benefit?
• Can existing insurance affect future approval?
• Can occupation or risky activities affect underwriting?
• How much of the projected retirement income assumes successful future JUMPs?
• What does the projection look like if future progression changes?

Those are much better questions than:

“What’s the projected income at 65?”

The Biggest Mistake Is Looking Only at the Final Number

Imagine someone shows you:

$180,000 per year of projected retirement income.

That number means very little until you understand how the strategy got there.

What was the premium?

What crediting assumption was used?

What policy charges were included?

What loan rate was used?

How much indebtedness accumulated?

How many future JUMPs were assumed?

How many of those JUMPs still require underwriting?

Now the number has context.

This Is Also Why the Strategy Needs to Be Reviewed Over Time

You shouldn’t buy the policy, put the illustration in a drawer, and assume the original projection will unfold perfectly for the next 30 years.

Actual policy performance should be reviewed.

Crediting should be reviewed.

Policy charges should be reviewed.

Loan balances should be reviewed.

Upcoming JUMPs should be reviewed.

Retirement-income projections should be updated as the facts change.

There Is a Psychological Side to This Too

Most people don’t like hearing that part of a retirement projection still requires future approval.

They want certainty.

Especially when they’re 55 or 60.

You’ve spent decades building retirement assets.

You don’t want a strategy filled with surprises.

Your brain immediately goes to:

“What if something changes?”

That’s the right question to ask.

Because the Fear Isn’t Really About Underwriting

It’s about making a decision now that you can’t easily undo later.

You’re thinking:

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

You don’t want to discover at 65 that the retirement projection you relied on at 55 required assumptions you never understood.

You Want to Know You Can Handle Retirement Yourself

That’s the deeper issue.

You want enough retirement income.

You want flexibility.

You want the plan to survive things not going perfectly.

You want to stay independent.

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

“We should be able to handle this ourselves.”

So don’t hide the underwriting risk.

Put it on the table and model it.

So, Why Do Future IUL JUMPs Require New Underwriting?

Because each planned JUMP involves a request for additional life insurance coverage through an increase in the death benefit.

That increased death benefit is part of creating additional funding capacity under the intended JUMP design.

Additional life insurance coverage requires carrier approval.

That means medical, financial, occupational and other underwriting considerations can affect future JUMP approval.

The original policy approval does not automatically guarantee every future JUMP shown in the projection.

That’s Not a Detail. It’s Part of the Retirement Math.

If successful future JUMPs help create the projected funding progression, and that funding progression helps create the projected retirement income, then future underwriting belongs in the analysis.

Show me the projection with the planned JUMPs.

Show me the assumptions behind them.

Show me what factors could affect approval.

Then stress-test the retirement-income result.

How We Look at It at FPP Financial

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

I don’t want to show you only the best-looking final retirement-income number.

I want to show you what has to happen to get there.

If the projection assumes future JUMPs, we’ll identify them.

We’ll explain why the death benefit is increasing.

We’ll explain the Matching Indexed Participating Loan mechanics.

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

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

We’ll lower the indexed-crediting assumptions.

We’ll look at policy costs and indebtedness.

And we’ll make sure you understand that future JUMPs require future approval.

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 the Underwriting Assumptions Made Visible?

If you’ve seen an IUL illustration showing large projected retirement income, bring the numbers.

We’ll look at what you’re actually contributing.

We’ll look at the planned JUMP schedule.

We’ll look at the death-benefit progression.

We’ll identify which future increases still require approval.

We’ll look at the Matching Indexed Participating Loans.

We’ll account for policy indebtedness.

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

We’ll lower the indexed-crediting assumptions.

Then we’ll compare the projected retirement income.

If the strategy remains compelling after the assumptions are visible, that’s useful information.

If the projection changes materially when those assumptions change, you should know that before making the decision.

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

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

• What Is the IUL JUMP Strategy and How Does It Work?
• How Much Death Benefit Should an IUL Have for Retirement?
• How Can $10,000 a Year Turn Into $60,000 of Annual IUL Funding?

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.

Future JUMPs and associated death-benefit increases described in this article are subject to future carrier approval and applicable underwriting requirements. Future approval is not guaranteed by the initial policy approval. Medical, financial, occupational, avocational and other underwriting factors may affect eligibility for additional coverage.

Income, employment, existing insurance, health, driving history, occupation, hazardous duties, hobbies and other factors may be considered under applicable underwriting guidelines. Actual underwriting requirements and decisions are controlled by the insurance company and may vary based on the circumstances and guidelines in effect when additional coverage is requested.

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.

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.

Policy loans are actual policy indebtedness and generally accrue applicable loan charges. Loans and withdrawals can reduce policy values and death benefits and may increase lapse risk. Outstanding policy indebtedness generally reduces the net death benefit payable under the insurance contract.

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, planned JUMPs in Years 3, 5, 7, 9 and 11, 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 a modeled comparison assumes successful future JUMPs, those future underwriting approvals are assumptions within the projection and should not be treated as guaranteed.

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. Actual results can vary materially from illustrated results.

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.

Failure to obtain approval for a planned future JUMP can materially change projected funding, policy values, indebtedness, death benefits and retirement-income results. Actual treatment of an existing policy following a missed JUMP is governed by the insurance contract, carrier procedures and the circumstances of the individual policy.

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.