1. Policy Lapse Risk – The Biggest Danger

If premium payments are insufficient, policy charges are high, or cash value growth underperforms illustrated projections, the cash value could eventually be depleted, causing the policy to lapse and potentially triggering income tax consequences. Unlike Participating Whole Life Insurance where coverage gradually becomes fully paid for, the cost of maintaining life insurance coverage with an IUL policy keeps increasing, often becoming too much for the policyholder to handle.

2. Rising Insurance Costs Devour Cash Value

The cost of renewable term insurance goes up over the years, meaning even more of the IUL policy’s cash value will be needed to cover these increasing costs, and eventually there might not be enough cash value left to handle these expenses. This is why proper funding strategies are essential.

3. Overly Optimistic Illustrations

Overly optimistic illustrations have been a point of concern, highlighted by regulators and publications like the Wall Street Journal. These are projections of the policy’s cash value growth based on predicted interest rates, fees, payments, caps, and participation rates – they’re estimates, not accurate forecasts.

4. Complex Fee Structures

IUL policies often come with various fees, including insurance charges, administrative fees, and policy fees that can significantly impact performance if not properly structured into the policy design.

5. Caps and Participation Rate Limitations

If the cap is set at 10% but the index fund gives really great returns at 18%, you’ll still only get 10% returns. Plus, they can move the cap whenever they want, including downward. Even if the index performs well, the policyholder may not fully benefit from the market’s gains due to caps and participation rates.

6. Modified Endowment Contract (MEC) Risk

The 7-pay rule is a federal tax qualification test applied to IUL policies to determine how much in policy premiums you can pay over its first seven years. Violating this rule turns the policy into a MEC, destroying the tax advantages.

7. Loan Interest Accumulation

While you can take out loans against the cash value, those loans often come with interest rates. If not managed carefully, the loan interest can accumulate and reduce your cash value and death benefit.

8. Regulatory Concerns and Industry Problems

Regulators find indexed universal life insurance products a persistent headache due to their complexity and inconsistent sales practices. Consumer advocates say IUL policies are confusing to almost all who buy them, a product rife with rampant fraud.

9. Agent Competency Issues

When you get into the weeds with these insurance agents, they really don’t understand how these products work. They’re simply relying on the illustration to sell the product. Anyone considering an IUL policy should find a life insurance agent with a Chartered Life Underwriter (CLU) designation.

10. Underfunding Consequences

Opting to pay less than the full IUL premium can lead to future financial challenges due to missed interest earnings and potential fees. The part of the premium that goes unpaid is meant to accumulate interest, which would help balance out the rising costs.

Why This Validates Eligry LLC’s Approach

These pitfalls explain exactly why our year of intensive training and consultation with top experts is so valuable. IUL requires expert guidance due to its complex “moving parts” and must be designed, funded, and managed properly.

The difference between a properly structured IUL and a disaster isn’t just academic – it’s the difference between:

• Success: Tax-free retirement income and wealth transfer
• Failure: Policy lapse, tax consequences, and total loss of premiums paid

Eligry’s expertise in avoiding these pitfalls through proper policy design, appropriate funding strategies, stress-testing illustrations, and ongoing monitoring is what separates Eligry LLC from agents who simply sell policies without understanding the intricate mechanics that make IULs work long-term.