Download the 2022 DALBAR Study
Missed last week’s newsletter? If so, you can still download the 2022 DALBAR Study for FREE. The study quantifies what the “average investor” has earned over the last 1, 3, 5, 10, and 20 years in equities, a 60/40 mix, and AGG. To download the 18-page study, click on the following:
Why Advisors are Running IUL Illustrations Wrong!
When selling IUL, it’s vitally important to make sure you are running your IUL illustrations correctly. This week we were asked to run two IUL illustrations that were NOT correct. By correct, I mean the illustrations were NOT ones we think are “in the client’s best interest.”
IUL for Death Benefit (DB) vs. MEC Minimum Illustrations
Advisors routinely run IUL illustrations for a specific DB vs. the MEC minimum DB. This is wrong because increasing the DB to meet a specific need will cost the client tens of thousands of dollars in the borrowing phase during retirement.
95% of the time the life insurance “needs” of the client are to cover short-term needs (take care of a spouse if you die early, pay for a kid’s college, pay off a mortgage, etc.). That is the assumption for this newsletter.
The following assumes the client wants to fund an IUL as a tax-free retirement tool.
Example—a 40-year old male paying premiums to age 65 with loans from ages 66-90.
Case 1: using a 6% ROR to solve for a DB of $1 million.
Why the $1 million DB? Because the client “needs” $1 million in coverage.
Premium = $16,258 (ages 40-65)
Borrowing = $100,807 (ages 66-90) ($2,520,175 total)
Sound great right? Well, it wasn’t correct (it won’t get the client the best outcome).
Case 2: same as Case 1 except we will solve for the MEC minimum DB, and we’ll layer in term-life to cover the insurance shortfall.
MEC minimum DB for the same $16,258 premium = $300,000.
$700,000 25-year term cost = $672 a year.
Subtract $672 from $16,258 and the actual premium going into the IUL every year is $15,586.
Borrowing from the IUL that starts with a $300,000 DB?
$108,614! ($2,715,350 total)
Difference in IUL designs?
$7,807 more every year for 25 years in retirement (total difference = $195,175)
Which outcome will clients like better?
The one where they buy two policies. 1) the IUL run at the MEC minimum and 2) a term policy to fill in the DB shortage for a period of 25 years.
#1 Reason why advisors insist on using only the IUL policy to offer the “needed” DB:
It’s too much work. Agents don’t want to fill out two applications and go through underwriting at two companies.
I don’t care how much work it is; our goal is ALWAYS to get the best outcome for the client. And as you can see with this very simple example, by being lazy, the advisor cost the client potentially $7,807 in tax-free borrowing EVERY year for 25 years in retirement.
Conclusion—if you are selling IUL for clients as a tax-free retirement tool and IF there is a short-term need (less than 30 years) for DB, DON’T add the DB to the IUL policy. Buy a separate term-life policy to cover the short-term need and sell the IUL at the true MEC minimum DB.
What is your IMO recommending?
The reason we created an IMO is because we knew that advisors were getting bad product recommendations (not the best products) and illustration designs that were NOT in their client’s best interest (“level DB” illustrations instead of “increasing” DB illustrations at the MEC minimum).
For information on an IMO you can trust to run illustrations that are ALWAYS in your client’s best interest, click on the following link: