How is This Allowed?

The pernicious nature of premium financing and IUL

I didn’t dig for this example. It’s simply the one I was working on yesterday. Below is a 2024 statement for an IUL policy put in force in 2014. Boldly on the first page it states the Average Interest Rate over the life of the policy has been 5.13%. I see this all the time. Rightly or wrongly, this is the number the policy owner often focuses on. After all, the S&P 500 this index is based on has been on fire so that even seems a bit low.

Actually, the S&P 500 over this time frame was 11.47% and the S&P 500 without dividends was 9.37%[1]. But look closer. The accumulated cash value is $7,474,757. Note the cumulative premiums are $8,023,963.

5.13%?

What does that mean to a consumer? To most it certainly doesn’t mean I put million of dollars into this contract and now have less than I put in.

Of course, I know how insurance works. Obviously, there are expenses. That’s not the point. The point is the misrepresentation. The “interest rate” is the number that’s focused on, whether or not it means there’s anything actually growing in the policy. In a recent litigation case, I was reviewing the premium finance annual reports. The program was deeply under water. The rate of return on premium to cash value was meaningfully negative. The annual report shows glowing numbers that the agent presented as proof everything was going according to plan when it had a small chance of working.

Shouldn’t there at least be two numbers there; the gross number and the return net of expenses? I suggest that’ll get the questions flowing that shouldn’t be glossed over.

For this case, the cash value is never projected to be greater than the cumulative premium, yet it’s the backbone of a premium financing program. There is no rollout planned. Debt and collateral will always be growing. Yet they will continue to get reports showing a positive return and wonder why they’re slowly losing all of their money [NS1] .

Bill Boersma is a CLU, AEP and LIC and the founder and owner of OC Consulting Group. More information can be found at www.OC-LIC.com, www.BillBoersmaOnLifeInsurance.info or email at bill@oc-lic.com or call at 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.

This example is for illustrative purposes only and is not meant to represent the experience of all clients. Guarantees are based on the claims-paying ability of the issuing company. Indices are unmanaged and do not incur fees. One cannot directly invest in an index.

[NS1]For DQYDJ calculator please link it to the specific calculator being used on the website.