With the Life Industry and Annuity Industry facing pressures due to the interest rate environment and regulation, it’s important for insurance agents to think “outside the box” when considering tax-free and tax-deferred estate planning solutions to your clients or prospects with the various insurance companies that offer these solutions.
The specific solution I want to highlight is an indexed universal life (IUL) solve is doing just that, and beats fixed indexed annuity contracts. This is a great example of how you can continually learn to navigate your product portfolio and provide competitive options to your clients.
Indexed Universal Life vs. Fixed Indexed Annuity Highlights
- A beneficiary death benefit 3-4x your clients original deposit on day 1.
- Strong Accumulation due to higher cap rates.
- Living Benefits that cover Chronic and or Critical Illness. (You’re doing a disservice to your clients if you’re not educating them on living benefits!)
- Guarantee life insurance death benefit to age 121.
- Potentially No Medical Exam.
- Strong Compensation.
The key for this specific solve that allows an IUL policy to outperform a fixed indexed annuity is using a modified endowment contract to your advantage. Life insurance products can be flexible, take the time to learn them.
What is a Modified Endowment Contract (MEC)?
- A MEC is life insurance policy funded beyond the 7-pay or Guideline Premium limits.
- A MEC assumes annuity rules from a taxation standpoint. (you will withdraw gains before basis and pay tax on the gain)
- A MEC has a generally tax-free death benefit just like a non-MEC policy, which includes the use of accelerated death benefits for Chronic or Critical Illness.
- a Life Insurance Policy, MEC or non-MEC, can be exchanged into an annuity if the future desire turns towards withdrawal solutions such as lifetime income or other annuity opportunities.
Is a MEC a Bad Thing?
No.
A Modified Endowment Contract is not a bad thing when it is intentional.
In this IUL solve specifically we are comparing an Intentional MEC to an Fixed Indexed Annuity.
This intentional focus does not change the tax nature between the two products as it relates to accumulation, but it does improve the tax nature of the death benefit and other related benefits beyond the accumulation.
Modified Endowment Contract IUL vs. Fixed Indexed Annuity
For this comparison we’re going to be looking at the following scenario for both the IUL solve and the fixed indexed annuity.
IUL Scenario
- 50 year old male
- Resident State: Colorado
- Lump Sum Premium Payment: $37,000
- Ongoing Premiums: 10 Pay Monthly
- Underwriting: Standard Non-Tobacco
**Tip: scroll the chart left or right when viewing on mobile 🙂
| Guaranteed | Current Assumption | |||||
|---|---|---|---|---|---|---|
| End of Year | Age | Annual Outlay | Cash Value | Death Benefit | Cash Value | Death Benefit |
| 1 | 51 | $37,000.00 | $31,218.00 | $107,520.00 | $32,389.00 | $111,213.00 |
| 2 | 52 | $12,000.00 | $42,161.00 | $136,861.00 | $45,027.00 | $145,607.00 |
| 3 | 53 | $12,000.00 | $53,245.00 | $164,622.00 | $58,375.00 | $179,774.00 |
| 4 | 54 | $12,000.00 | $64,468.00 | $190,865.00 | $72,466.00 | $213,728.00 |
| 5 | 55 | $12,000.00 | $76,555.00 | $217,670.00 | $88,360.00 | $250,338.00 |
| 6 | 56 | $12,000.00 | $88,902.00 | $243,303.00 | $105,114.00 | $286,737.00 |
| 7 | 57 | $12,000.00 | $101,508.00 | $267,808.00 | $123,268.00 | $324,259.00 |
| 8 | 58 | $12,000.00 | $114,371.00 | $291,232.00 | $142,678.00 | $362,358.00 |
| 9 | 59 | $12,000.00 | $127,488.00 | $313,618.00 | $163,431.00 | $401,118.00 |
| 10 | 60 | $12,000.00 | $140,849.00 | $335,009.00 | $185,617.00 | $440,627.00 |
| 11 | 61 | $0.00 | $143,036.00 | $329,346.00 | $198,771.00 | $456,824.00 |
| 12 | 62 | $0.00 | $145,207.00 | $323,815.00 | $212,785.00 | $473,723.00 |
| 13 | 63 | $0.00 | $147,358.00 | $318,411.00 | $227,696.00 | $491,330.00 |
| 14 | 64 | $0.00 | $149,482.00 | $313,129.00 | $243,553.00 | $509,684.00 |
| 15 | 65 | $0.00 | $151,574.00 | $307,967.00 | $260,408.00 | $528,817.00 |
| 16 | 66 | $0.00 | $153,638.00 | $302,920.00 | $278,390.00 | $548,889.00 |
| 17 | 67 | $0.00 | $155,483.00 | $297,985.00 | $297,350.00 | $569,875.00 |
| 18 | 68 | $0.00 | $157,305.00 | $293,157.00 | $317,583.00 | $591,855.00 |
| 19 | 69 | $0.00 | $159,103.00 | $288,433.00 | $339,143.00 | $614,820.00 |
| 20 | 70 | $0.00 | $160,874.00 | $283,809.00 | $362,051.00 | $638,722.00 |
| 21 | 71 | $0.00 | $162,598.00 | $279,275.00 | $386,306.00 | $663,510.00 |
| 22 | 72 | $0.00 | $164,258.00 | $274,825.00 | $411,943.00 | $689,232.00 |
| 23 | 73 | $0.00 | $165,838.00 | $270,456.00 | $439,031.00 | $715,991.00 |
| 24 | 74 | $0.00 | $167,321.00 | $266,164.00 | $467,655.00 | $743,915.00 |
| 25 | 75 | $0.00 | $168,700.00 | $261,946.00 | $497,947.00 | $773,178.00 |
| 26 | 76 | $0.00 | $169,972.00 | $257,798.00 | $529,929.00 | $803,745.00 |
| 27 | 77 | $0.00 | $171,142.00 | $253,715.00 | $563,762.00 | $835,768.00 |
| 28 | 78 | $0.00 | $172,214.00 | $249,694.00 | $599,503.00 | $869,222.00 |
| 29 | 79 | $0.00 | $173,193.00 | $245,731.00 | $637,199.00 | $904,077.00 |
| 30 | 80 | $0.00 | $174,072.00 | $241,823.00 | $676,819.00 | $940,242.00 |
| 31 | 81 | $0.00 | $174,843.00 | $237,965.00 | $718,442.00 | $977,811.00 |
| 32 | 82 | $0.00 | $175,492.00 | $234,153.00 | $762,104.00 | $1,016,853.00 |
| 33 | 83 | $0.00 | $176,021.00 | $230,384.00 | $807,943.00 | $1,057,470.00 |
| 34 | 84 | $0.00 | $176,387.00 | $226,653.00 | $856,070.00 | $1,100,029.00 |
| 35 | 85 | $0.00 | $176,575.00 | $222,956.00 | $906,436.00 | $1,144,530.00 |
| 36 | 86 | $0.00 | $176,565.00 | $219,287.00 | $959,064.00 | $1,191,123.00 |
| 37 | 87 | $0.00 | $176,338.00 | $215,642.00 | $1,013,977.00 | $1,239,983.00 |
| 38 | 88 | $0.00 | $175,881.00 | $212,017.00 | $1,071,202.00 | $1,291,290.00 |
| 39 | 89 | $0.00 | $175,183.00 | $208,407.00 | $1,130,784.00 | $1,345,243.00 |
| 40 | 90 | $0.00 | $174,256.00 | $204,809.00 | $1,192,774.00 | $1,401,910.00 |
| 41 | 91 | $0.00 | $173,118.00 | $201,219.00 | $1,257,239.00 | $1,461,318.00 |
| 42 | 92 | $0.00 | $171,805.00 | $197,633.00 | $1,324,472.00 | $1,523,581.00 |
| 43 | 93 | $0.00 | $170,367.00 | $194,043.00 | $1,394,581.00 | $1,588,390.00 |
| 44 | 94 | $0.00 | $168,863.00 | $190,443.00 | $1,467,707.00 | $1,655,275.00 |
| 45 | 95 | $0.00 | $167,387.00 | $186,820.00 | $1,544,100.00 | $1,723,359.00 |
| 46 | 96 | $0.00 | $166,072.00 | $183,152.00 | $1,624,259.00 | $1,791,304.00 |
| 47 | 97 | $0.00 | $164,961.00 | $179,409.00 | $1,709,484.00 | $1,859,205.00 |
| 48 | 98 | $0.00 | $164,224.00 | $175,541.00 | $1,801,205.00 | $1,925,328.00 |
| 49 | 99 | $0.00 | $164,144.00 | $171,462.00 | $1,901,879.00 | $1,986,672.00 |
| 50 | 100 | $0.00 | $165,238.00 | $172,605.00 | $2,015,851.00 | $2,105,725.00 |
| 51 | 101 | $0.00 | $166,091.00 | $173,496.00 | $2,134,085.00 | $2,229,231.00 |
| 52 | 102 | $0.00 | $166,703.00 | $174,135.00 | $2,255,962.00 | $2,356,541.00 |
| 53 | 103 | $0.00 | $167,061.00 | $174,509.00 | $2,380,258.00 | $2,486,379.00 |
| 54 | 104 | $0.00 | $167,155.00 | $174,607.00 | $2,506,163.00 | $2,617,897.00 |
| 55 | 105 | $0.00 | $166,984.00 | $174,429.00 | $2,634,127.00 | $2,751,566.00 |
| 56 | 106 | $0.00 | $166,554.00 | $173,979.00 | $2,765,315.00 | $2,888,602.00 |
| 57 | 107 | $0.00 | $165,876.00 | $173,272.00 | $2,899,346.00 | $3,028,609.00 |
| 58 | 108 | $0.00 | $164,831.00 | $172,179.00 | $3,036,268.00 | $3,171,636.00 |
| 59 | 109 | $0.00 | $163,379.00 | $170,663.00 | $3,177,199.00 | $3,318,850.00 |
| 60 | 110 | $0.00 | $161,479.00 | $168,678.00 | $3,320,454.00 | $3,468,492.00 |
| 61 | 111 | $0.00 | $159,083.00 | $166,176.00 | $3,460,779.00 | $3,615,073.00 |
| 62 | 112 | $0.00 | $156,220.00 | $163,185.00 | $3,604,816.00 | $3,765,532.00 |
| 63 | 113 | $0.00 | $153,388.00 | $160,227.00 | $3,750,483.00 | $3,917,693.00 |
| 64 | 114 | $0.00 | $150,587.00 | $157,301.00 | $3,893,017.00 | $4,066,582.00 |
| 65 | 115 | $0.00 | $147,816.00 | $154,407.00 | $4,032,791.00 | $4,212,587.00 |
| 66 | 116 | $0.00 | $145,076.00 | $151,544.00 | $4,162,381.00 | $4,347,955.00 |
| 67 | 117 | $0.00 | $142,365.00 | $148,712.00 | $4,293,783.00 | $4,485,216.00 |
| 68 | 118 | $0.00 | $139,684.00 | $145,912.00 | $4,415,968.00 | $4,612,848.00 |
| 69 | 119 | $0.00 | $137,032.00 | $143,141.00 | $4,533,160.00 | $4,735,264.00 |
| 70 | 120 | $0.00 | $134,409.00 | $140,401.00 | $4,647,244.00 | $4,854,435.00 |
| 71 | 121 | $0.00 | $131,814.00 | $137,691.00 | $4,733,985.00 | $4,945,044.00 |
Fixed Indexed Annuity Scenario
- 50 year old male
- Resident State: Colorado
- Lump Sum Payment: $37,000
- Ongoing Premiums: $1,000 per month for 10 years
**Tip: scroll the chart left or right when viewing on mobile 🙂
| Guaranteed | Most Recent 10 Years | ||||
|---|---|---|---|---|---|
| EOY Age | Premium | Surrender Value | Death Benefit | Surrender Value | Death Benefit |
| 51 | $37,000.00 | $32,699 | $37,000 | $33,572 | $38,084 |
| 52 | $12,000.00 | $43,631 | $49,000 | $44,448 | $50,580 |
| 53 | $12,000.00 | $54,672 | $61,000 | $55,195 | $64,501 |
| 54 | $12,000.00 | $65,824 | $73,000 | $68,634 | $83,700 |
| 55 | $12,000.00 | $77,087 | $85,000 | $84,134 | $100,399 |
| 56 | $12,000.00 | $88,463 | $97,000 | $96,213 | $112,399 |
| 57 | $12,000.00 | $99,953 | $109,000 | $115,863 | $127,322 |
| 58 | $12,000.00 | $121,000 | $121,000 | $155,818 | $155,818 |
| 59 | $12,000.00 | $133,000 | $133,000 | $167,818 | $167,818 |
| 60 | $12,000.00 | $145,000 | $145,000 | $198,339 | $198,339 |
| 61 | $145,000 | $145,000 | $207,264 | $207,264 | |
| 62 | $145,000 | $145,000 | $216,591 | $216,591 | |
| 63 | $145,000 | $145,000 | $226,338 | $226,338 | |
| 64 | $145,000 | $145,000 | $236,523 | $236,523 | |
| 65 | $145,000 | $145,000 | $247,167 | $247,167 | |
| 66 | $145,000 | $145,000 | $258,289 | $258,289 | |
| 67 | $145,000 | $145,000 | $269,912 | $269,912 | |
| 68 | $146,311 | $145,000 | $282,058 | $282,058 | |
| 69 | $147,774 | $145,000 | $294,751 | $294,751 | |
| 70 | $149,251 | $145,000 | $308,015 | $308,015 |
Conclusion
Using a MEC IUL with your clients can be an excellent use of life insurance when you’re intentionally using it within your strategy to diversify returns from other vehicles such as the stock market. As stated above, you can accomplish strong performance when you’re educated on how to properly use life insurance as a retirement income or retirement planning tool with your clients.
If you look at the two illustrations above showing indexed universal live vs. fixed indexed annuity, you’ll notice a few compelling areas financial advisors and insurance agents should consider educating their clients on this strategy.
- By age 67 in both financial products, total cash outlay is $145,000.
- At age 67 IUL solve shows $297k vs FIA showing $269k of retirement savings.
- At age 70, IUL solve shows $638k death benefits for loved ones vs. FIA showing $308k.
- IUL provides living benefits that cover chronic and or critical illness.
- The difference maker in this solve is using a modified endowment contract when illustrating your IUL.
Insurance products are never created equal, but this solve really highlights why it’s important for you to take the time to learn how to properly illustrate a solution for your prospective policyholders. In this scenario, IUL makes a strong argument over a fixed indexed annuity.
For financial professionals interested in this solve for your clients, please reach out and our broker back office team can get prepare you a quote. Request an IUL or FIA quote.
