Sure! That Should Work.

My response to a client’s question on Indexed Universal Life  

I recently wrapped up a consulting engagement with a client who was presented a proposal for a new life insurance policy. This guy did what I think almost everyone should do, and that’s to hire an independent third party to vet recommendations. Until you experience it firsthand, it’s difficult to understand how things are often postured to clients and how much pressure they can be under.

This gentleman is a retired business owner with a significant life insurance portfolio. He originally came to me before the pandemic, and then the process took on a life of its own and continued in fits and starts for the last few years. The bottom line was my analysis and recommendation regarding a 1035 exchange into an indexed universal life policy (IUL).

A Few Highlights

There’s no way I’ll be able to do justice to all the details of the conversations and analysis, but I’ll share the highlights. First, this is a reasonably high net-worth individual subject to estate taxes. Most of the insurance is owned in his estate. This recommendation would involve a 1035 exchange of almost $4 million from two different policies, including a variable universal life (VUL) policy and a traditional mutual whole life policy. Both policies have loans, with the whole life policy having a seven-figure loan.

The same agent had sold the existing policies, with the VUL policy placed less than ten years prior. My analysis concluded both existing policies were solid, with the whole life policy projecting very modest increases in cash value and death benefit but needing no additional premium. The VUL policy was structured reasonably well and was doing fine. Still, now that it was on the cusp of having dramatically lower internal expenses, it was being recommended for a rollover. In any given situation, there may be a legitimate rationale for doing so, but I couldn’t find it here.

Another statement from the agent to the client was that the higher his loan on the new policy, the better because a greater loan balance would result in better policy performance. He encouraged the policy owner to take additional loans to improve the financial dynamics of the transaction. This paragraph won’t mean much to most people, but to those who understand how the regulatory allowable product illustration system works, they may cry themselves to sleep tonight.

A Controversial Practice

Make what you will of this fact pattern so far; none of it is the point of this article. In some corners of the industry, there’s been much discussion regarding engineered indices offered in IUL policies. There are a couple of reasons these options are being offered, but it’s beyond the scope of this piece. A part of the conversation revolves around how reverse engineering an index over past years may be manipulated to show unrealistically optimistic results. That struck me when I heard what the agent told this client.

The recommended product has a couple of options regarding bonuses and performance factors, as is common in the market today. Underlying these features are expenses because we know you can’t get something for nothing, right? One feature the agent was recommending was the 80 basis point annual expense for the high cap option. Another was the performance factor, which had a 7.5% annual cost. The agent boasted his personal strategy of managing the policy, which included activating the performance factor in some years, deactivating it in others, and then reactivating it when certain things happened in the market.

No matter what I had to say about this, the agent’s single-minded response was, “I don’t care about illustrations. All I care about is exactly duplicating how this policy would have performed over time, and I’m showing that.” Putting aside the fact that I don’t think his compliance officer would look kindly at the homegrown spreadsheet he developed and provided to the client, I took it to analyze myself.

I just recalled another agent comment. “There’s no way the existing variable life policy can outperform the indexed policy moving forward.” Hmmm.

Important to Understand

Here are a few things to keep in mind. IUL policies are based on the S&P 500 Index, not the actual S&P 500 return. It’s shocking how few people understand this. This means dividends of the S&P 500 are not incorporated into the index’s return. There are entire decades where dividends were a majority of the S&P total return. Generally, a couple of hundred basis points of the return in any given year can be attributed to dividends; they’re off the table. It’s also important to remember that none of the premiums and cash value go into the market. IUL is a fixed product. The cash value is in the same general account of the insurance company as fixed universal life and whole life.

From 2001 through 2022, the period modeled by the agent, the S&P return, exclusive of dividends, was 5.026% per The 80 basis point high cap expense is applicable every year, and in the years the performance factor is in effect, per the agent’s strategy, there’s an 8.3% cumulative charge. (That’s $6,833,614 of expenses, which, to the agent’s credit, he enumerated on his spreadsheet.) During this period, the hypothetical back-tested policy had 11 years of an embedded 8.3% expense. Also, this does not include premium taxes, additional policy expenses or mortality charges. Additionally, there was a front end load just shy of a quarter million dollars.

The Result

Again, roughly 5% growth crediting, 8.3% performance charge for more years than not, additional policy costs, mortality expenses, and a couple hundred thousand of front-end expenses. What is the net return of the transaction for the initial 1035 exchange relative to the cash value 20 years later? 7.28%.

The agent did provide two additional spreadsheets, one showing only the 80 basis point feature every year and the other showing both features in effect with the 8.30% charged every year, but this resulted in $3 million to $4.3 million less in ending cash value. This fixed-interest product, with no cash value in equities, is modeled to have a 24% earned interest for 10 or 13 of the years, depending on the model, and 10% for another two of the years, with zero years of negative interest return. This was incredibly persuasive to the client.

And people wonder why I’m cynical.

Bill Boersma is a CLU, AEP and licensed insurance counselor. More information can be found at,, or email at or call 616-456-1000.  

Securities offered through Valmark Securities, Inc. Member FINRA, SIPC. Investment Advisory Services offered through Valmark Advisers, Inc. a SEC Registered Investment Advisor. OC Consulting Group and its affiliates are separate entities from Valmark Securities, Inc. and Valmark Advisers, Inc. 

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