Questions – Index Universal Life

What is the cap rate and what is the guaranteed cap rate?

The cap rate is the maximum performance you will get from the index you selected. The guaranteed cap rate is the minimum rate the insurer can pay to the policyholder. It is usually around 3%.

Are historical cap rates important?

Yes, it is important to see the variability of the annual cap rates — for example, over the past 10 years. This helps you assess the likelihood that the cap rate will remain high enough to allow the policy to perform well.

What is the participation rate and the guaranteed participation rate?

Most index universal life policies use a 100% participation rate. The guaranteed participation rate is the minimum participation rate the insurance company can offer. The participation rate is the percentage of index change that translates to the policyholder. If an index rises 8%, and the participation rate is 70%, the cash account in the policy will rise by 8% x 70% or 5.6%.

How can I determine how the policy performs based on various different assumptions?

Run each index option at 4%, 5%, 6% and 6.5% with current and guaranteed mortality rates. In addition, run an illustration using a different return each year based on past financial results. Using the same rate of return for all years does not give you an accurate analysis of how a policy will perform when you are paying premiums or taking annual loans.

Q: If I’m looking at an illustration of the income from the product, does it matter if the illustration uses a fixed or variable rate loan?

When taking loans from the policy to provide retirement income, make sure illustrations are run as a fixed loan rate in addition to a variable loan rate. If you take out a fixed rate loan you minimize the risk in the policy.

Can I put a term blend in to reduce commissions and improve policy performance?

A few insurance companies offer lower commission products like a term blend to reduce the premium. You need to determine how this impacts the policy.

Is there a benefit to using a high early cash value product?

A. There may be. This amortizes upfront costs over a longer period of time.

Do products sold outside of New York differ from those sold in New York?

There are index universal life products available outside of New York that is not available in New York. Sometimes, these products have lower premiums or better features and/or performance.

What is the target commissionable premium?

This is the portion of the premium upon which the agent is paid. The commission rate is typically between 80% and 115% of the target commissionable premium.

Are there lower commission products, such as a term blend, that can reduce the commissionable premium? If so, how does that affect the policy?

A few insurance companies offer lower commission products or allow you to lower the commission to reduce the premium. Ask questions to determine how this impacts the policy.

Do some products offer a return of premium feature?

There are a few index universal life products that offer the ability to get a refund of premiums in year 15, 20 or 25. This is beneficial if you decide to cancel the insurance. Even if the premium is slightly higher, it may be worth it.