Pac Life’s IUL Used in Abusive Sales Scheme

I recently did a newsletter titled Pac Life Sued in Class Action Lawsuit Over Deceptive IUL Sales. If you didn’t download the 53-Page Class Action Complaint, you can do so clicking on the following link:

This past week, I found out that a marketing firm is using Pac Life’s IUL (Indexed Universal Life) in what is one of the most abusive IUL sales schemes in the marketplace today. I wanted to warn advisors of this scheme which is also taking place with a separate firm using Mutual of Omaha’s IUL.

Hyper-Funding is Back!

Hyper-funding has been around since the late 1990s. In order to avoid lawsuits, most insurance companies FORBID agents from illustrating hyper-funding.

What is Hyper-Funding? It’s when you borrow from the policy and take the borrowed funds and put them back into the policy as new premium.

Why illustrate Hyper-Funding? Even though AG49 reduced the loan arbitrage on borrowed funds from an IUL, policies can still illustrate a 0.5% positive loan arbitrage. That means you are actually making money on the borrowed funds in the typical IUL illustration.

So, the more you borrow from the policy and put it back in as new premium, the better the illustration is going to look.

Hyper-Funding is dangerous

Consumers have no idea that the illustration is intentionally creating HUGE loans in the policy. Loans that must be kept until death or the client will get imputed income in the amount of the loans.

It’s all good when you illustrate a static and consistent rate of return every year for 30+ years. But what if there is a zero year in year 3, 5, 7, or what happens if we have another lost decade like 2000-2009? The policy could blow up (or at the very least much less borrowing, if any, will be available).

Real Pac Life IUL Illustration (this came across my desk last week)

Male, 48 years old, $15,000 in premium for five years, borrows tax-free from the IUL from ages 67-100. Let’s look at the total tax-free cash flow of the hyper-funded illustration and a traditional IUL with one of my favorite IULs:

Hyper-Funding illustration =        $1,086,414
Traditional Illustration =                $575,314

The hyper-funding illustration generated almost twice as much tax-free borrowing.

Which is easier to sell? The hyper-funding illustration of course.

Which one pays a bigger commission? Hyper-funding by a long shot.

Total premium? Guess what the total premium into the hyper-funded illustration vs. the traditional illustration was?

$447,600 in total premium for the hyper-funded illustration
$75,000 in total premium for the traditional illustration

That’s $372,600 more in premium with the hyper-funded illustration or nearly five times more premium. With five times more premium, you’d think the amount you could borrow from the IUL would be five times higher?  But it’s not.

As abusive as it gets! Can you think of a more abusive way to illustrate an IUL than to concoct a scenario where you show a client nearly 2X’s the amount of tax-free borrowing than an AG49-compliant illustration?

Does Pac Life condone these sales? Good question. I have an email from a wholesaler who asked Pac Life about this and the response is classic:

I emailed PacLife and the response I got back was, basically, that they’re aware that some people are using these designs and they’re not promoting it, but they’re not stopping it, either. Usual corporate crap.”

Want to see the illustration? Don’t believe that any insurance agent would peddle this crap to clients?

Click on the following link to download the actual illustration:

Bottom Line

There are a lot of scum bags in the insurance industry who care about nothing but themselves and making commissions at all costs. I’d submit to you that those who promote hyper-funding fall into this category. Hopefully lawsuits will eventually be filed against agents who sell this concept as well as the insurance companies who are aware of it and condone it.

Roccy DeFrancesco, JD, CAPP, CMP
Founder, The Wealth Preservation Institute
Co-Founder, The Asset Protection Society