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.

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 (Modified Endowment Contract) 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