Can IUL Policy Loan Arbitrage Turn Negative? What Happens When Loan Costs Beat Indexed Crediting

Positive arbitrage sounds great.

Your policy value receives an indexed-crediting result that’s higher than the applicable cost of your policy loan.

There’s a favorable spread.

But here’s the question that matters just as much:

What happens when the math goes the other direction?

What if the loan costs 5%, but the applicable indexed-crediting result is only 3%?

What if it’s 1%?

What if it’s 0%?

That’s negative arbitrage.

And if you’re going to use participating policy loans as part of a long-term retirement-income strategy, you need to understand the bad side of the math just as clearly as the good side.

What Is Negative Arbitrage in an IUL?

Negative arbitrage describes an unfavorable economic relationship where the applicable indexed-crediting result is lower than the applicable cost of the policy loan.

Here’s a simple example:

Indexed crediting: 3%

Applicable policy-loan cost: 5%

The simplified relationship is:

3% – 5% = an unfavorable 2-percentage-point difference.

That’s negative arbitrage.

It Doesn’t Mean the Policy Automatically Loses Exactly 2%

This distinction is critical.

The negative 2-percentage-point relationship is not automatically the policy’s total return.

It’s not necessarily a literal 2% deduction from the entire policy.

And it doesn’t account for every other policy mechanic.

It simply describes the relationship between the indexed-crediting result being compared and the applicable loan cost.

Why Can Negative Arbitrage Happen?

Because these are two separate moving parts.

Indexed crediting can vary.

The applicable policy-loan rate operates under the policy’s contractual provisions.

There’s no rule saying the indexed-crediting result must always exceed the loan cost.

That’s why positive arbitrage should never be presented as permanent.

Let’s Put Some Numbers on It

Suppose the applicable loan rate is currently:

5%.

Now look at several hypothetical indexed-crediting results:

That’s the concept in plain English.

Above the loan cost, the simplified relationship is favorable.

Below the loan cost, it’s unfavorable.

Does the 0% IUL Floor Prevent Negative Arbitrage?

No.

This is one of the easiest mistakes to make when looking at an IUL loan strategy.

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

It does not mean the policy loan costs 0% when indexed crediting is 0%.

Those are separate mechanics.

So You Can Have a 0% Floor and Still Have Negative Arbitrage

Suppose the applicable indexed-crediting result is:

0%.

The applicable loan rate is:

5%.

The simplified relationship is:

0% – 5% = an unfavorable 5-percentage-point difference.

The floor protected the applicable indexed-crediting calculation from going below 0% in this example.

It did not erase the economic cost of the loan.

And That’s Before Other Policy Charges

Cost of insurance can still apply.

Administrative expenses can still apply.

Other contractual policy charges can still apply.

If you’re already in retirement, distributions may also be occurring.

So a 0% indexed-crediting year can create more pressure than simply looking at the number zero suggests.

What If the Loan Rate Goes to 6%?

With the policy structure we currently use for the IUL JUMP Strategy, the applicable loan rate is currently:

5%.

The applicable loan feature has a contractual maximum loan rate of:

6%.

So let’s change the stress test.

If indexed crediting is 3% and the applicable loan rate is 6%, the simplified relationship becomes:

3% – 6% = an unfavorable 3-percentage-point difference.

At 0% crediting:

0% – 6% = an unfavorable 6-percentage-point difference.

That’s why the 6% loan-rate scenario belongs in the analysis.

Don’t Build a 30-Year Retirement Plan Around One Current Loan Rate

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

That doesn’t mean you should assume it remains 5% forever.

If the contract permits the applicable rate to rise as high as 6%, test 6%.

I’d rather find out now that the model gets uncomfortable at 6% than discover it after retirement.

How Does This Relate to a Participating Loan?

With a participating policy-loan structure, policy value associated with the applicable loan mechanics can continue participating in the indexed-crediting strategy according to the policy’s provisions.

That’s what creates the opportunity for favorable loan economics.

But the same structure creates the possibility of unfavorable economics.

If the credited result is greater than the loan cost, the relationship can be favorable.

If the credited result is lower, it can be unfavorable.

The Word “Participating” Does Not Mean “Guaranteed Positive Spread”

This is worth making very clear.

A participating loan can allow applicable policy value to continue participating in the policy’s crediting mechanics.

It does not guarantee what that crediting result will be.

It does not guarantee the credited result will exceed the loan rate.

And it does not guarantee positive arbitrage.

Now Bring in the Matching Indexed Participating Loan

The IUL JUMP Strategy uses a Matching Indexed Participating Loan.

Under the strategy mechanics we’re discussing, the matching amount is created as a policy loan.

The proceeds are then redeployed into the same policy as additional funding.

That loan-funded value can participate in the applicable indexed-crediting strategy while the policy carries the associated indebtedness and applicable loan cost.

The Match Is a Loan, Not Free Money

This matters even more when we’re talking about negative arbitrage.

If someone hears the word “match” and thinks:

“Someone is giving me extra money for free,”

they’re going to misunderstand the risk.

The Matching Indexed Participating Loan creates policy indebtedness.

That indebtedness has an economic cost.

Here’s the Example JUMP Progression

Suppose the client contributes:

$10,000 per year.

The example progression shows:

• Years 1 and 2: $10,000 client contribution and no matching loan
• Year 3: $10,000 client contribution + $10,000 Matching Indexed Participating Loan = $20,000 total annual funding shown
• Year 5: $10,000 client contribution + $20,000 matching loan = $30,000 total annual funding shown
• Year 7: $10,000 client contribution + $30,000 matching loan = $40,000 total annual funding shown
• Year 9: $10,000 client contribution + $40,000 matching loan = $50,000 total annual funding shown
• Year 11: $10,000 client contribution + $50,000 matching loan = $60,000 total annual funding shown

The client’s out-of-pocket contribution in this example remains $10,000.

The additional amount shown comes from Matching Indexed Participating Loan activity.

And Earlier Loans Don’t Simply Disappear

The policy loans accumulate under the strategy mechanics we’re discussing.

A later JUMP does not simply pay off the earlier loan activity.

So as the JUMP progression advances, the policy can have a larger amount of outstanding indebtedness participating in the overall economics.

That makes the relationship between indexed crediting and loan cost increasingly important.

Positive Arbitrage Looks Better as More Loan-Funded Value Participates

If the relationship remains favorable, additional participating loan-funded value can contribute to stronger modeled results.

That’s part of the attraction.

But now flip the assumption.

Negative Arbitrage Can Also Matter More as Loan Exposure Grows

If more loan-funded value exists and the applicable indexed-crediting result comes in below the loan cost, a larger amount of policy indebtedness can be exposed to unfavorable loan economics.

That’s why you can’t study only the upside.

The mechanism that can magnify a favorable modeled relationship can also create additional pressure when the relationship turns unfavorable.

Let’s Return to the Historical 6.87% Example

One historical analysis used in our JUMP modeling examined annual S&P 500 price changes from 2006 through 2020.

Dividends were excluded.

The analysis applied the example strategy’s:

10% cap

and:

0% indexed-crediting floor.

Negative annual index price changes were replaced by 0% for purposes of the historical indexed-crediting calculation.

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

The resulting annual capped-and-floored figures averaged approximately:

6.87%.

At a 5% Loan Rate, That Creates a Simplified 1.87-Point Favorable Spread

The calculation is:

6.87% – 5.00% = 1.87 percentage points.

That’s the positive-arbitrage example.

But an average can hide the individual years.

You Don’t Experience an Average Every Year

This is where retirement modeling gets more realistic.

You don’t wake up every January and receive exactly 6.87% because that’s what a historical average showed.

Actual indexed-crediting results can vary from period to period under the policy’s crediting mechanics.

Some periods can be favorable relative to the loan rate.

Some can be unfavorable.

A Favorable Long-Term Average Does Not Eliminate Negative-Arbitrage Years

That’s one of the biggest points of this article.

You could have a series of results where some years produce positive loan economics and other years produce negative loan economics.

The long-term result comes from the sequence and interaction of all of those periods, along with the policy’s other mechanics.

That’s Why “6.87% Minus 5% Equals 1.87% Every Year” Is Wrong

The 6.87% figure is a historical average from the specified analysis.

It is not a guaranteed annual crediting rate.

The 1.87-percentage-point figure is therefore not a guaranteed annual spread.

You can’t simply add 1.87% every year forever and call that guaranteed policy performance.

Then What Do the 8.74%, 11.61%, 14.48%, and 17.35% Numbers Mean?

Under assumptions used in one JUMP model, the base 6.87% historical indexed-crediting assumption and the modeled 1.87-percentage-point positive-arbitrage effect were used to express modeled effective results associated with successive JUMPs:

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

Those are modeled effective results under the assumptions used in that analysis.

They are not guaranteed returns.

They are not indexed-crediting rates.

They are not S&P 500 returns.

They are not net policy returns after every charge.

Negative Arbitrage Is Exactly Why Those Numbers Need a Stress Test

If the model assumes a favorable 1.87-percentage-point relationship, ask:

“What happens if that relationship is zero?”

Then ask:

“What happens if it’s negative?”

That’s how you find out how much of the projected result relies on favorable loan economics.

Stress Test #1: No Arbitrage

Suppose the applicable indexed-crediting result equals the applicable loan cost.

For example:

5% crediting versus 5% loan cost.

The simplified relationship is:

0 percentage points.

What does the retirement projection look like without a favorable spread?

Stress Test #2: Mild Negative Arbitrage

Now test:

3% crediting versus 5% loan cost.

That’s an unfavorable 2-percentage-point relationship.

What happens to projected policy values?

What happens to retirement income?

What happens to policy durability?

Stress Test #3: Severe Negative Arbitrage

Now test several weak periods where applicable indexed crediting is 0% while the loan rate remains 5%.

Don’t assume that happens forever.

Test what happens if it happens at a bad time.

Especially during retirement.

Why Is Retirement Timing So Important?

Because the policy may already be distributing money.

During accumulation, you’re generally putting money into the policy under the planned funding design.

During retirement, contributions may stop and distributions begin.

Now combine:

• Negative arbitrage
• Retirement distributions
• Policy charges
• Outstanding indebtedness
• Increasing age

That’s a much harder environment for the policy.

Negative Arbitrage During Accumulation and Retirement Are Not the Same Problem

A weak period while you’re still funding the policy can affect the projection.

A weak period after you’ve stopped contributing and started accessing money can be more consequential to long-term durability.

That’s why the timing of unfavorable periods matters.

What If Negative Arbitrage Lasts Several Years?

Now the pressure can compound.

The policy still carries outstanding indebtedness.

Applicable loan costs continue.

Applicable policy charges continue.

Retirement distributions may continue.

If indexed crediting remains below the applicable loan cost across multiple periods, the favorable relationship the original model relied upon may be reduced or reversed for those periods.

This Does Not Mean One Bad Year Destroys the Strategy

That’s the other extreme I don’t want to fall into.

One period of negative arbitrage does not automatically mean:

“The IUL failed.”

The effect is determined by the entire policy position.

How much value exists?

How much indebtedness exists?

How much is being distributed?

What charges apply?

What happens in subsequent years?

How long does the policy need to last?

The Real Risk Is a Strategy With No Margin for Error

Suppose a retirement projection only works if:

• Crediting remains consistently favorable
• The loan rate remains at 5%
• Positive arbitrage continues
• Every future JUMP is approved
• Retirement begins exactly on schedule
• Distributions never exceed the original projection
• The insured doesn’t live longer than expected

That’s not the kind of model I want to rely on.

I want room for the future to be imperfect.

What If Future JUMPs Don’t Happen?

That’s another stress test.

The example JUMP schedule includes planned increases in Years:

3, 5, 7, 9, and 11.

Those future JUMPs require future underwriting and approval.

They are not guaranteed at initial issue.

Health, income, employment, existing insurance, occupation, driving history, risky hobbies, and other applicable underwriting factors can affect approval.

A Missed JUMP Can Pause the Progression

Under the mechanics we’re discussing, a client who does not qualify for the next planned JUMP does not necessarily lose the matching-loan level already achieved.

The progression can pause at that level.

The client may potentially reapply later if circumstances improve, subject to applicable underwriting and policy rules.

But the retirement projection needs to be updated.

Now Combine No Future JUMPs With Negative Arbitrage

This is the kind of test that tells you something.

Don’t just change one assumption.

Change two.

What if the JUMP progression stops at Year 7?

And what if several later periods produce indexed crediting below the loan cost?

Does the retirement-income strategy still work?

How much income survives?

That’s more useful than staring at the best-case illustration.

What Happens to Outstanding Loans When Arbitrage Is Negative?

The outstanding policy indebtedness does not vanish because the crediting relationship becomes unfavorable.

The applicable loan cost remains part of the policy economics.

Under the JUMP accumulation design we’re discussing, the applicable loan charges are modeled as being carried forward rather than requiring the client to pay those charges out of pocket each year.

That does not make the loan cost disappear.

“I Don’t Write a Check for the Loan Cost” Is Not the Same as “The Loan Costs Nothing”

Those are completely different statements.

A cost can be economically real even if you’re not writing a separate check for it that year.

That’s why the loan belongs in the retirement model.

Can Negative Arbitrage Increase Lapse Risk?

Unfavorable loan economics can contribute to policy pressure, especially when combined with other factors.

Those can include:

• Large outstanding policy indebtedness
• Weak indexed crediting
• Ongoing policy charges
• Large retirement distributions
• Insufficient policy values
• Longer-than-modeled retirement

No single one of those automatically proves a policy will lapse.

But the combination needs to be monitored.

Why Is Lapse With a Large Loan Such a Serious Issue?

Because a policy that lapses or is surrendered with gain and outstanding indebtedness can potentially create taxable income under applicable tax rules.

That’s why policy loans should never be treated as:

“Take the money and forget about the policy.”

If you’re using loans for retirement income, monitor the policy.

Does Negative Arbitrage Mean You Should Pay the Loan Interest Out of Pocket?

Not automatically.

That’s a separate planning decision that should be evaluated using the actual policy and the purpose of the loan.

Under the JUMP accumulation design we’re discussing, applicable loan charges are modeled as being carried forward rather than requiring an annual out-of-pocket payment.

That structure is part of the model.

But it still needs to be stress-tested.

A JUMP Loan Is Also Different From Borrowing Money to Spend

Suppose you borrow from the policy and spend the proceeds on a boat.

Those borrowed dollars are now outside the policy being consumed.

That’s economically different from the JUMP structure, where the Matching Indexed Participating Loan proceeds are redeployed into the same policy as additional funding.

The purpose of the borrowing matters.

Can Positive Years Make Up for Negative-Arbitrage Years?

Potentially, stronger future policy results can improve the long-term projection.

But don’t assume a future favorable year automatically erases every consequence of an earlier unfavorable period.

Timing matters.

Loan balances matter.

Policy values matter.

Distributions matter.

That’s why the complete projection matters more than one annual spread.

Now Let’s Put the Up-to-300% Retirement-Income Result Under This Test

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.

If favorable loan economics are part of what contributes to that result, then negative arbitrage has to be part of the stress test.

Otherwise you’re only testing half the strategy.

Don’t Say “300% More” and Hide the Bad Years

If the model produces a large retirement-income advantage, ask:

What happens when the loan spread is unfavorable?

Does the advantage shrink?

By how much?

Does it disappear under a severe stress test?

Does the policy remain in force?

How much retirement income can still be supported?

Those are the questions worth answering.

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

Show me the assumptions that produced it.

Then make them worse.

Lower the indexed-crediting assumption.

Raise the loan rate from 5% to 6%.

Include several unfavorable spread periods.

Remove future JUMPs.

Keep the policy charges in the projection.

Extend longevity.

Then compare the retirement income again.

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

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.

Loan mechanics can be one reason two IUL strategies produce different modeled retirement-income results.

But the same rule applies.

Stress-test both.

Don’t give the JUMP Strategy favorable crediting and give the comparison policy bad crediting.

Don’t use different longevity assumptions.

Don’t hide charges on one side.

Don’t use a different tax assumption without explaining it.

Make the comparison fair.

What Should You Ask Before Relying on Policy-Loan Arbitrage?

1. What is the current applicable policy-loan rate?
2. What is the contractual maximum loan rate?
3. Can the loan rate change?
4. What indexed-crediting assumption is being used?
5. What cap is assumed?
6. What participation rate applies?
7. Does a spread apply to the indexed-crediting strategy?
8. What happens when indexed crediting equals the loan cost?
9. What happens when indexed crediting is below the loan cost?
10. What happens during several unfavorable periods?
11. What happens at a 0% indexed-crediting result?
12. How much policy indebtedness develops?
13. What policy charges continue while loans are outstanding?
14. What happens if future JUMPs stop?
15. What happens after retirement distributions begin?
16. What happens if retirement begins earlier?
17. What happens if I live to 95 or longer?
18. At what point does the modeled retirement income need to be reduced?

Then Ask the Question That Makes the Model Prove Itself

“Show me what happens if positive arbitrage disappears for several years.”

That’s a much better test than asking for another favorable illustration.

You Should Know the Breaking Point Before Retirement

How many weak years can the policy handle?

What happens at the 6% loan rate?

How much can retirement income be reduced if necessary?

What if the final JUMP never happens?

What if you live ten years longer than expected?

You may not like every answer.

That’s okay.

The purpose of the analysis isn’t to make you comfortable.

It’s to make you informed.

This Is Especially Important When You’re 55 to 65

At this stage of life, the fear isn’t really:

“What if I have one year of negative arbitrage?”

That’s technical language.

The real thought is:

“What if this looks great on paper and I find out too late that it couldn’t handle a bad stretch?”

That’s the fear.

You Don’t Want to Make an Irreversible Retirement Mistake

You’ve spent decades accumulating money.

Now you’re trying to turn that money into income.

You don’t have the same amount of time to recover from a major mistake that you had at 35.

So you think:

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

That’s not irrational.

That’s why we test the downside.

And This Is About Independence Too

You don’t want a retirement strategy that needs your children to rescue it later.

You don’t want to be 82 trying to understand a policy-loan problem for the first time.

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

“We should be able to handle this ourselves.”

Then understand what happens when the math goes against you before you commit to the strategy.

The Bottom Line

Yes, IUL policy-loan arbitrage can turn negative.

If the applicable indexed-crediting result is lower than the applicable loan cost, the simplified economic relationship is unfavorable.

At 3% indexed crediting and a 5% loan cost, that’s an unfavorable 2-percentage-point relationship.

At 0% indexed crediting and a 5% loan cost, that’s an unfavorable 5-percentage-point relationship.

And if the applicable loan rate reaches the contractual maximum 6%, the unfavorable relationship can be larger.

That does not automatically tell you the policy’s total return or mean one weak year destroys the strategy.

It means the loan economics need to be modeled honestly.

How We Test Negative Arbitrage at FPP Financial

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

I don’t want to show you only what happens when the spread is positive.

We’ll test when it’s negative too.

We’ll look at the Matching Indexed Participating Loan mechanics.

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

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

We’ll lower the indexed-crediting assumption.

We’ll test 0% indexed-crediting periods.

We’ll keep the policy charges in the model.

We’ll test no future JUMPs.

We’ll test retirement distributions.

We’ll test longevity to age 95 or longer.

Then we’ll compare the projected retirement income with 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 What Happens When the Loan Math Goes Against the Strategy?

That’s the version I want you to see before you make a decision.

Not just the positive spread.

Show me the negative spread.

Show me several weak years.

Show me 6% loan cost.

Show me the outstanding loans.

Show me the policy charges.

Show me what happens if future JUMPs stop.

Then show me how much projected retirement income survives.

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.

But don’t accept that number until you’ve seen what happens when the favorable loan assumptions get worse.

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

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 Does Positive Arbitrage Work With an IUL Policy Loan?
• What Happens If IUL Loan Rates Go Up in Retirement?
• What Is a Matching Indexed Participating Loan in an IUL?

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, mutual fund, index fund, savings account, or direct investment in a market index.

The terms “positive arbitrage” and “negative arbitrage” in this article describe simplified modeled economic relationships between an applicable indexed-crediting result and an applicable policy-loan cost. They should not be interpreted as guaranteed profit or loss, a guaranteed policy return, or the policy’s complete net performance.

Simplified examples such as 3% indexed crediting compared with a 5% loan cost are provided to illustrate the economic relationship between the two rates. Actual dollar results are affected by policy-specific loan provisions, crediting mechanics, timing, outstanding indebtedness, policy values, cost of insurance, administrative expenses, other policy charges, withdrawals, distributions, and other contractual factors.

Indexed universal life insurance does not directly invest policy cash value in the S&P 500 or another market index and does not provide ownership of underlying index securities through the indexed account. Indexed-crediting results should not be confused with market-index returns or direct investment performance.

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. Cost of insurance, administrative expenses, loan costs, withdrawals, retirement distributions, and other policy mechanics can continue to affect policy values during a 0% indexed-crediting period.

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. Negative annual price changes were replaced by 0% and positive annual price changes above 10% were capped at 10% for purposes of that historical analysis. The resulting annual capped-and-floored figures averaged approximately 6.87%. Historical results do not predict future policy performance and should not be interpreted as a guaranteed future indexed-crediting rate, compound annual growth rate, net policy return, or historical total return of the S&P 500.

The simplified 1.87-percentage-point modeled positive spread discussed in this article represents the mathematical difference between the 6.87% historical indexed-crediting result used in the referenced model and the current 5% applicable policy-loan rate. It is not a representation of net policy return after cost of insurance, administrative expenses, other policy charges, withdrawals, distributions, or other factors and is not guaranteed to occur in any future period.

The modeled effective JUMP results of approximately 8.74%, 11.61%, 14.48%, and 17.35% are not S&P 500 returns, indexed-crediting rates, compound annual growth rates, net returns after policy charges, participation rates, cap rates, or guaranteed policy returns. They are modeled effective results under assumptions used in the referenced JUMP analysis, before accounting for applicable policy charges 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.

References to loan-funded policy value continuing to participate in an applicable indexed-crediting strategy describe the strategy mechanics being modeled and should be verified against the applicable current approved illustration and insurance contract. Policy-specific loan and crediting provisions govern actual results.

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, prevent negative 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 should not be interpreted as a guarantee that the rate will remain at 5%. Current and guaranteed loan provisions should be verified against current approved policy information and the actual insurance contract.

Periods in which indexed crediting is below the applicable loan cost can produce unfavorable loan economics. Repeated unfavorable periods can increase pressure on a policy when combined with outstanding indebtedness, policy charges, withdrawals, retirement distributions, insufficient policy values, and longevity. No simplified spread calculation by itself determines whether a policy will remain in force.

Life insurance illustrations contain assumptions and may include both guaranteed and nonguaranteed elements. Nonguaranteed values, indexed-crediting assumptions, policy values, death benefits, positive-arbitrage assumptions, and retirement-income projections are not promises of future results. Actual policy performance can differ materially from illustrated results.

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 in the JUMP Strategy are intended to create additional policy funding capacity under the intended design and are not a guarantee that the policy will avoid MEC status. Actual MEC testing, applicable tax law, policy design, funding, death-benefit changes, underwriting, carrier procedures, and other factors govern.

Under the strategy mechanics described, failure to qualify for a future JUMP does not necessarily mean prior successful JUMPs or the previously achieved matching-loan level automatically disappear. Actual policy rules govern each case, and retirement-income projections should be updated when future JUMP assumptions change.

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, outstanding indebtedness, and other circumstances. A policy that lapses or is surrendered with gain and outstanding indebtedness may create taxable 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 and should not be interpreted as 300% more investment return, indexed interest, positive arbitrage, net policy return, or S&P 500 performance. Unfavorable loan economics can materially alter projected results. Comparisons should include contributions, employer contributions where applicable, market-return assumptions, taxes, investment expenses, indexed-crediting assumptions, policy charges, insurance costs, loan costs, future JUMPs, retirement distributions, and longevity.

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. Differences in funding, indexed-crediting assumptions, policy charges, loan mechanics, loan costs, future JUMPs, death-benefit structure, retirement distributions, and unfavorable loan-arbitrage periods can materially alter the comparison.

Comparisons between an IUL and a 401(k), IRA, traditional IUL, or another retirement strategy should use clearly stated assumptions appropriate to each strategy. Different strategies have different costs, tax characteristics, contribution rules, market exposure, insurance features, risks, and distribution mechanics.

Policy-specific guarantees, nonguaranteed elements, underwriting requirements, death-benefit options, MEC limits, cost-of-insurance provisions, policy charges, surrender provisions, loan provisions, loan rates, caps, participation rates, spreads, crediting methods, 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.