Let’s dive into an Indexed Universal Life (IUL) illustration and break down some of the important assumptions behind the policy.

When looking at an IUL illustration, it can be easy to focus on the values shown in the later years of the policy, especially when the illustration shows significant accumulation or future distributions. Those numbers can look very attractive.

But before focusing on the ending values, I think it is important to understand what assumptions are being used to get there.

An illustration is based on both guaranteed and non-guaranteed elements, and the non-guaranteed values shown are not a promise of future policy performance. Actual results can be higher or lower than what is illustrated.

One of the assumptions to look at is the illustrated crediting rate. Changing that assumption can have a significant impact on the illustrated policy values and potential future distributions. This is why I believe it is helpful to look at more than one hypothetical scenario rather than focusing only on the values shown in the original illustration.

It is also important to understand what a 0% floor means. If the credited interest rate for a given period is 0%, that does not necessarily mean the policy value had a 0% return. Policy charges, including cost of insurance charges, can still be deducted from the policy. As a result, the policy value can decrease even during a period when the credited interest rate is 0%.

The sequence of credited interest can also affect policy performance, particularly when distributions are being taken from the policy. Index performance will vary from year to year, and the interest credited to the policy will be determined according to the terms of the contract.

Running an illustration using different hypothetical crediting assumptions can help show how sensitive the policy values and future distributions may be to changes in performance.

Here are a few other things I believe advisors should look at when reviewing an IUL illustration:

• Surrender charges: IUL policies may have surrender charges during the early years of the policy. The duration and amount vary by product.

• Caps and participation rates: Depending on the policy, caps, participation rates and other crediting factors may change over time, subject to the terms and contractual guarantees of the policy. Changes to these factors can affect the interest credited to the policy.

• Index history: Some indices or index strategies used within IUL policies may have limited actual performance history. When reviewing historical information, it is important to understand whether the results represent actual historical performance or hypothetical back-tested performance.

• Policy charges: Policy charges, including cost of insurance charges, can affect policy values. Current charges may change subject to the guarantees contained in the policy, and cost of insurance charges are generally affected by factors including the insured’s attained age.

• Bonuses and multipliers: Some IUL products include bonuses, multipliers or other features that can increase illustrated values. It is important to understand how those features work, whether there are associated charges, and how they affect the overall policy.

• Policy loans: If future distributions are illustrated using policy loans, it is important to understand the loan provisions. Loan rates, how borrowed amounts are treated, and the relationship between credited interest and loan interest can affect future policy values and distributions.

• Guaranteed vs. non-guaranteed values: One of the most important things when reviewing an illustration is understanding which values are guaranteed and which are based on assumptions that can change.

IUL can be a useful tool when it fits the client’s needs, but the illustration needs to be understood beyond the numbers shown at the end.

Instead of simply looking at the illustrated value at age 65, 75 or 85, look at what assumptions were used to get there. What happens if credited interest is different? What happens in a year when the credited interest is 0%, but policy charges are still being deducted? What elements can change? What are the policy charges? How do the loan provisions work? And how does the policy look under different hypothetical scenarios?

The goal isn’t to determine whether IUL is good or bad. The goal is to understand what you are looking at.

An illustration is a tool based on a set of assumptions. The more advisors and clients understand those assumptions, the better equipped they are to evaluate whether the policy fits their goals.

An Indexed Universal Life (IUL) is not considered a security. Premium and death benefit

types are flexible. It’s crediting rate is based on the performance of a stock index with a

cap rate (i.e.10%), a floor (i.e.0%) and a participation rate (i.e., 100%). This type of

universal life policy may lapse due to low or negative performance of the stock index,

inadequate funding, and increasing cost of insurance rates. Tracking Number Tracking Number 9179120.1