Critical Elements for a Properly Structured IUL

Critical Elements for a Properly Structured IUL

When it comes to Indexed Universal Life insurance, the difference between building substantial wealth and losing your life savings often comes down to a few critical design decisions that 90% of agents get wrong. Most agents structure IULs to maximize their commissions rather than your cash accumulation, creating policies destined to implode within 10-15 years. The harsh reality is that a poorly designed IUL can leave you worse off than if you'd never bought insurance at all—but a properly structured IUL might be the most powerful wealth-building tool available to everyday Americans.

Understanding these critical elements isn't just important—it's the difference between financial security and financial disaster.

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1. Death Benefit Structure - THE MOST IMPORTANT

❌ Wrong Way (90% of agents do this):

  • Maximum death benefit to generate higher commissions
  • Example: $1M+ death benefit with $500/month premium
  • High insurance costs eat your cash value

✓ Right Way:

  • Minimum death benefit that satisfies MEC limits
  • Target death benefit should be 10-20x your annual premium
  • Example: $200K death benefit with $1,000/month premium ($12K annual)
2. Funding Strategy

MEC Limit is Your Guide:

  • Fund just below the MEC limit to maximize cash accumulation
  • MEC limit calculator should drive your design, not death benefit
  • Overfunding without crossing MEC = maximum wealth building

Premium Structure:

  • Target premium: As high as possible without hitting MEC
  • Minimum premium: Should be much lower for flexibility
  • Flexible premium: Allows you to adjust based on income changes
3. Illustration Assumptions - RED FLAGS

🚩 Avoid These Dangerous Projections:

  • Illustrations showing 7-8% returns consistently
  • No down years shown in projections
  • Unrealistic "best case scenarios"

✓ Demand Realistic Illustrations:

  • Use 4-5% average returns for planning
  • Ask for stress-test scenarios (3% average returns)
  • See illustrations with multiple down years included
  • Require break-even analysis
4. Carrier and Product Selection

Top-Tier Carriers Only:

  • A.M. Best rating of A+ or better
  • Strong capitalization
  • History of competitive cap rates
  • Examples: Allianz, Pacific Life, Lincoln Financial, Nationwide

Product Features to Demand:

  • Participation rates: 100%+ if possible
  • Cap rates: Currently 10-12%+ (varies by index)
  • Multiple index options: S&P 500, Nasdaq, international
  • Low volatility control options
5. Fee Structure Analysis

Monthly Charges to Scrutinize:

  • Cost of insurance (COI): Should be reasonable for your age
  • Administrative fees: Usually $10-15/month
  • Premium loads: Should be minimal or waived
  • Surrender charges: Understand the schedule (usually 10-15 years)

Get a Fee Breakdown:

  • Total fees in year 1, 5, 10, 20
  • How fees impact cash value growth
  • When policy becomes "self-sustaining"
6. Performance Monitoring Points

Key Benchmarks:

  • Year 7-10: Policy should have significant cash value
  • Year 15: Should be approaching self-sustaining status
  • Annual review: Performance vs. illustrations

⚠️ Warning Signs:

  • Cash value growing slower than illustrated
  • Increasing insurance costs outpacing projections
  • Carrier reducing cap rates or participation rates significantly
7. Questions to Ask Your Agent

Design Questions:

  1. "What's the minimum death benefit for my premium level?"
  2. "Show me the MEC limit calculation"
  3. "What happens if I miss a premium payment?"
  4. "When does this policy become self-sustaining?"

Stress-Test Questions:

  1. "Show me what happens with 3% average returns"
  2. "What if I need to reduce premiums in year 5?"
  3. "How much can I borrow without policy lapse?"
  4. "What if the carrier reduces caps by 2%?"
8. Documentation Requirements

Before You Sign:

  • Written explanation of MEC limits
  • Multiple illustration scenarios (conservative, moderate, stress-test)
  • Fee disclosure document
  • Annual review commitment from agent
Eligry

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9. The "Eligry Test" - Your Advantage

How does your existing IUL score on our scale A+ to F?

  • Would you give this design an A+ grade?
  • Is the death benefit minimized for cash accumulation?
  • Are the illustrations conservative and realistic?
  • Does the agent understand MEC limits?
10. First-Year Checkpoints

Month 6 Review:

  • Is cash value accumulating as projected?
  • Are fees matching the illustration?
  • Any carrier changes to cap rates?
Bottom Line: The difference between wealth-building and wealth-destroying IUL comes down to proper death benefit sizing and realistic funding. If your agent can't explain MEC limits or insists on high death benefits, walk away. You want an engineer's approach, not a salesperson's pitch.

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