Dear Mr. Client, We Need to Talk About Your Insurance

An open letter to an indexed universal life policy owner.

Hello Mr. Client:

Thanks again for the recent phone call.  I’m glad your business associate suggested you speak with me.  I’ve received the information from your insurance company that I ordered as they have efficient workers for this chats that they manage with software like pay stub online, and I’m reviewing it now.  Based on our conversation, the bottom line is that I’m pretty confident this policy isn’t what you think it is.  It’s not that it can’t work but it’s likely not working and not doing for you what you understand it to be doing.

My recollection is that you have this policy for two basic purposes. First, you want a significant death benefit for your wife, and second, you’d like that premium to be accumulating cash value so you have access to it in the future.

One issue is that the way your policy has been built and is projected to perform is much more aggressive than you probably realize. The roughly 6% projected crediting rate in this contract is assuming a significantly higher S&P 500 return, maybe 10% year in and year out.  First of all, it’s important to understand that none of your premium dollars are going into the S&P 500 Index or into any equities whatsoever.  The net premium after expenses is going into the insurance carrier’s general fund, and a small part of that is being used to buy derivatives to support the upside crediting subject to the cap rate of your policy.

You also need to understand that the S&P 500 Index that underlies your policy crediting isn’t directly invested in equities and doesn’t include dividends, so you have to take a few hundred basis points off the S&P 500 return as you know it.  That’s huge.

It’s also important to realize that the illustrated crediting rate on your policy per the AG49 regulations that govern your contract is the regulatory maximum allowable projected rate based on hypothetical 25-year rolling averages going back 65 years.  It’s not a rate that’s as conservative as it may appear to be.  Furthermore, it’s based off a geometric mean of those thousands of data points, which fundamentally means it’s a 50/50 proposition.  To review, the projected crediting rate is the highest legislatively allowable rate that historically would result in a lower return 50% of the time.  Not at all conservative.

In the middle of writing this, I stopped and did some calculations based on the S&P 500 returns from April 1990 through April 2021.  This isn’t as encompassing as the AG49 calcs that incorporate over 10,000 data points but it looks at 30 years of annual numbers.  I see that the compounded return on the full S&P 500 with dividends is 10.70%.  Removing the dividends reduces this to 8.37%, and putting a 0% floor and 10% cap on this brings it down to 6.48%.  Do you see what’s happening here?  To realize a 6.48% gross crediting rate in a hypothetical transaction with this assumed floor and cap, you’d have to gross 10.70% in the real S&P 500.
The actual index your cash value is in has a current cap rate of 9%.  This lowers the projected gross crediting rate to 5.93%, which is practically the same as the 5.96% assumed on your policy projection from just a month ago.   At an 8% cap rate, it would be reduced to 5.35%.  As an aside, it’s important to remember that cap rates have been falling, sometimes precipitously, across the market regardless of carrier or product, including your product.  Furthermore, many believe the affordable caps rates based on market forces are lower, so they’ll keep coming down which will further reduce the crediting rate of your policy.  In addition, the AG49 regulations that govern your policy aren’t even allowed for new policies today.  While insurance regulations enhancements are often born from poor experiences suffered by customers, such as AG49, the new rules that govern policy illustrations offer little comfort to those customers who already own policies based on old projections.  That’s like the National Highway Safety Administration finding a deadly problem with a car and only making the automakers fix the problem for newly made cars, while not recalling the ones that are currently on the road.

You mentioned on the phone that you couldn’t lose, or at least that’s what the agent told you.  I’ve heard these lines over and over, but they’re simply not true.  It’s very important to understand that a minimum 0% crediting doesn’t mean the policy can’t lose money.  In fact, in a 0% year it definitively will lose money.  Expenses are still coming out of premiums and the cash value.  I’ve seen many policies with annual positive returns crash and burn and fall off the books with no value.  Let me ask you this; if you found a truly guaranteed investment with an 8% return but it had a 10% expense rate, how excited would you be?

To put this further into perspective, do you realize that from April of 2000 through April of 2021, the S&P 500 return without dividends was 5.01%?  From April 2000 through April 2011, it was negative 0.84%.  These are the returns fed into the calcs for indexed universal life policies before the caps are applied.  This represents significant periods of time in the near past with returns that would likely cause your policy to fail.

During periods of negative returns, the 0% minimum crediting will help.  When I look at the beginning of 2000 through the end of 2011, the total S&P 500 return is less than 1%, and without dividends, it falls below 0% but the bracketed rate is 4.77% with my data set.  That’s meaningful but your policy will fail at that crediting rate.  Conversely, from 1990 through 2001, the total return is 14.68% and 12.12% without dividends with a bracketed rate of 6.67%.  That’s a 190-basis point increase in policy crediting rate for a 1,370-basis point increase in market return.  I have to reiterate this; the market return during one period was 0.98% and the other it was 14.68% but the increase in policy crediting was less than 2%, just a 40% increase in crediting for a 15-fold increase in return.


The final thing to note in these numbers is that it takes an S&P 500 market return in the double digits to credit your policy as illustrated.  Various periods of gross market returns of 10.70%, 13.95% and 14.68% result in a gross credit to the policy in the 6-point something range at the current cap rate.

The average of the spread between the total S&P 500 return and the bracketed crediting rate of these six periods over the past 30 years is 3.55%.  Yes, in the worst period the bracketed return with a floor gave back 3.79% but in the highest return periods, it took away 7.58% and 8.01%.  You simply can’t average high policy crediting rates by giving away those high-end returns, and this is only getting worse as caps fall.

Non-mortality expenses in life insurance policies are always higher in the early years but inception to date the return on your premium to cash value is roughly negative 6%.  That’s a disturbing number for your $1.2 million of premium over the past eight years. Even 12 years from now, when the ledger assumes you cease premium payments, assuming that 6% crediting rate year in and year out has actually materialized, which requires an S&P 500 return significantly greater, at Year 20 of the policy, the internal rate of return of premium to cash value is less than 2%.  This means that over time, your policy crediting represents about 20% of the actual S&P 500 return.

You’re correct that you’ve gotten the $10 million of death benefit protection in the meantime but you could have gotten that with a 20-year term policy for under $12,000/year rather than the $150,000 you’ve been paying.   I also assume you probably thought you’d be getting a bit more on your money for the extra $138,000.  You’re also correct that the $3 million you’re planning to put in will almost certainly be available to you after 20 years of paying premium, and maybe more, but at what cost?  After taking out the term premium, $138,000/year at 6% would have grown to $5.38 million, a couple million more than the cash value would have reasonably grown to.  That couple million is your true cost.

The ledgers you provided projected a $350,000 annual withdrawal/loan from the policy for a dozen years starting at age 65.  Any reasonable assumption of policy performance over time almost certainly wouldn’t support this.  Even a very modest change in assumptions projects the contract would collapse prior to life expectancy.  All this and we haven’t even discussed the impact that sequencing of returns can have on policy performance or other eye-popping assumptions built into the AG49/AG49A regulations that allow projected results to appear more favorable than what’s reasonable.

If you decide to stay the course with the policy, we need to run new projections based on reasonable assumptions.  We can fund and manage the policy to end up with a high probability of success but we have to define what success is.  What it simply won’t do is allow the death benefit and income that’s been shown to you.

In closing, what I want to make sure you realize is that you’re assuming risk associated with a growth rate of return while getting a projected credited return associated with a much lower risk investment and an actual projected realized return over the long run associated with a safety of principal investment.  It doesn’t make any sense.  If you’re going to take on meaningful risk, then you should endeavor to get a commensurate rate of return.  There’s an objectively, provably much better way to attain your goals with less risk and more reward.

I look forward to talking again soon.



The source data for this article was produced from the S&P 500 calculator at The S&P 500 Index isn’t available for direct investment. Insurance investments derived from the S&P 500 Index often experience tracking error and, as such, the percentages, while intended to be representative of the index movement, are not likely to track the exact moves of the S&P 500. 

Bill Boersma is a CLU, AEP and LIC. More information can be found at,,,, or email at

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