The fine print in indexed universal life plans

CARLTON Crabbe, chief executive of Capital for Life, says high net worth clients should examine four main elements in their choice of insurers for indexed universal life (IUL) policies:

• The life insurer’s financial strength and long-term track record, which indicates reliability and stability in fulfilling policy commitments.

• Comparison of cash value accumulation in IULs. An insurer, he said, may have a cap rate of 12.5 per cent and another, 11.2 per cent. A higher cap rate doesn’t make it better. “You can only tell by comparing the cash value accumulation within the policy.”

• Free withdrawals, which allow a client to take out some of the IUL’s cash value without affecting the death benefit. “One of the key features our clients like is the ability to tap into the IUL’s cash value to provide a retirement income. The earlier that free withdrawals are allowed, and the higher the withdrawal amount, the more flexible the policy is for a client.

• Downside protection. Many IUL policies feature a guaranteed floor rate of zero per cent, which means the account is protected from market loss. Crabbe says some newer policies offer limited downside protection, “which we do not like”. “The way those work is that the insurer may protect the first 20 per cent of the client’s downside risk, but thereafter it’s on a one-for-one loss basis until an annual reset. We see no place for these types of policies among our clients. Clients and financial advisers need to look very carefully at the underlying IUL policy risk and decide if they are comfortable taking that market risk in a client’s life policy.”