What is Your IUL Loan Strategy?

A Guest Article by Sheryl J. Moore

Today, indexed life insurance offers partial withdrawal options as well as three different types of policy loan options. Here, we will discuss each of these loan options, their pros and cons, and explain why withdrawals have fallen out-of-favor in the IUL market.

Since the creation of cash value life insurance, insurance agents have been advising their clients how to tap into that value. Accessing your life insurance policy’s cash value for retirement income, education funding, and other income scenarios while you are living not only provides living benefits to you, but also leaves the net death benefit as a tax-free benefit to your life insurance beneficiaries.

So, how does one gain access to their life insurance policy’s cash values?

Historically, insurance agents have advised their clients to take partial withdrawals of the policy’s cash value, until the contract’s cost basis is reached. Once the cost basis threshold has been reached, loans are initiated against the policy’s cash value as a method of accessing funds.

It is important to understand that partial withdrawals permanently reduce a policy’s death benefit and cash value. Therefore, the benefit payable to heirs is forever reduced when withdrawals are initiated and interest earned is thereafter credited on a lesser cash value balance.

By contrast, loans reduce the policy’s cash value and death benefit until repaid and also have loan interest that is payable annually on the total loan balance. So, the benefit payable to heirs can be fully restored if a loan is repaid, but until such time, a lesser death benefit is payable and interest is earned only on the net cash value.

It goes without saying that this method has its drawbacks, but the “withdrawals to basis, then loans” strategy ensures that taxable consequences are avoided, while protecting the policy owner’s rights to access their cash values. But this strategy is now a thing of the past. It has been falling out-of-favor since the introduction of indexed universal life insurance in the late 20th century.

With the introduction of indexed life came the opportunity to continue earning indexed gains on policy cash values that were loaned against, a feature never before available on universal life. While such benefits had long been offered on participating whole life contracts with dividends not of the direct-recognition variety, customers purchasing unbundled, interest-sensitive products were never allowed the opportunity to earn interest on monies that were loaned against.

Today, indexed life insurance offers partial withdrawal options as well as three different types of policy loan options. Here, we will discuss each of these loan options, their pros and cons, and explain why withdrawals have fallen out-of-favor in the IUL market.

Fixed rate loans

Fixed rate loans have traditionally been the vehicle of choice when accessing cash values on life insurance, once the cost basis has been hit via withdrawals. Fixed rate loans are, quite simply, loans that are charged a fixed rate of interest, which is declared by the insurance company.

Often, life insurance contracts with fixed rate loans also offer a “preferred loan” provision, which charges a loan rate that is equal to the credited rate on the policy once a specified time period has elapsed (typically 10 years). In the past, some insurance agents referred to such loans as wash loans, as the interest charged and the interest credited appeared to be a wash. This is technically not an accurate way to describe the favorable loan provision, but gives one an idea of how marketable this policy feature can be.

Fixed rate loans have pluses and minuses: With fixed rate loans, you always know the amount of interest you’ll be charged. However, neither fixed loans, nor their preferred loan benefits, credit interest on the monies that are loaned against.

Variable rate loans

Variable rate loans aren’t really new; they have been utilized on whole life policies for eons. Yet indexed life insurance has reinvigorated this once-forgotten loan option. Variable rate loan provisions charge a loan rate that varies, based on the Moody’s Corporate Bond Yield Average. Considering the historical Moody’s rate has been around 8 percent, one can see why fixed rate loans (typically averaging around 6 percent) have prevailed in popularity in past decades.

Over the past few years, however, Moody’s has remained in the 4 percent to 5 percent range, meaning that variable rate loans have taken favor over fixed rate loans, which have been charging a higher rate of interest.

Variable rate loans have their pros and cons too. The ultimate pro of variable rate loans is that the policy values that are loaned against continue to earn indexed interest on IUL products. Variable rate loans can also offer more competitive loan rates when you consider that fixed rate loans are typically charging a rate of 6 percent, but some companies today have variable loan interest (VLI) rates as low as 4.39 percent.

On the other hand, variable rate loans charge interest that will likely change in the future. This makes it difficult to predict what rate will be charged on monies taken out of the policy when the agent is illustrating life insurance policy distributions at point of sale.

The insurance agent may illustrate a rate of 5.50 percent being credited to the policy, and a loan rate of 4.5 percent being charged against the loan balance; this would effectively be a 1 percent net gain (5.5 percent – 4.5 percent = 1 percent). In reality, however, the loan rate could exceed the policy’s credited interest rate, meaning that the policy holder is upside down on their life insurance.

This phenomenon is further complicated when considering indexed life, where the illustrated rate may be as high as 10 percent, but the credited rate could be as low as 0 percent.

For this reason, many companies have scorned the VLI provision on some IULs, citing that the propensity for both the policy’s credited rate and the loan’s variable rate charged can deviate significantly from what is illustrated at point-of-sale. As a result, some companies with VLI provisions guarantee that the variable loan rate will never exceed a stated rate of interest (typically 10 percent).


Also as a result of the negative stigma that has surrounded VLI on indexed life, some companies in the IUL market have begun offering an entirely new type of loan option: the participating fixed rate loan. Participating fixed rate loans (sometimes called indexed loans) are like fixed rate loans in that the interest rate charged on the policy loan is fixed (usually at 5 percent or 6 percent), and declared by the insurance company.

Conversely, participating fixed rate loans continue to credit indexed interest on the monies that are loaned against. This new type of loan options effectively offers the best of both worlds when it comes to fixed rate and variable rate loans.

That being said, we clearly see the argument for participating fixed rate loans; but what about the case against this innovative loan option? Some have argued that such loans are not sustainable. After all, if Moody’s Corporate Bond Yield Average has historically been around 8 percent, and the rate being charged against the policy cash values is only 5 percent, how is the insurance company going to account for the shortfall of 3 percent interest? Some speculate that non-guaranteed insurance charges will have to be increased, or that non-guaranteed caps and participation rates will have to be reduced, in order to compensate for such scenarios.

In the end, the loan provision chosen is up to the agent and the policy holder. Everyone selling cash value life insurance should understand that no one loan provision is better than the other. No loan provision is right for every client either. Agents need to understand the benefits and shortfalls of all life insurance distribution options. In the interim, only time will tell which loan feature ends up being the preferable option for IUL policy holders.

It is undeniable, however, that both variable rate loans and participating fixed rate loans are the more powerful options for indexed life insurance purchasers. With the power of compounding interest and the ability to earn indexed gains on the loaned-against cash values, these two loan options have made “withdrawals to basis, then loans” a thing of the past when it comes to indexed life.

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Business Valuation from Nationwide

No matter what type of business succession plan you’re considering for a client,

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Minimums to keep in mind.

ISN is pleased to offer this service for business clients with at least $2,000,000 in annual sales or $500,000 in book value.

We’re always ready to help you.

1-800-338-1892 x 1



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Premium Finance Made Easier

We keep making it easier for you

New sales partner. New case studies. A big thanks to Lincoln Financial as they continue to strengthen its commitment to the premium finance market. Watch this video to meet your newest dedicated sales partner to help you provide the best strategy and product solution for your high-net-worth clients.

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Under Attack? Fall Back

There is a popular saying “the customer is always right” – in fact some very successful corporations base their whole business model around that concept. But those of us in the financial arena who deal with clients everyday know that the idea that the client is always right  is not necessarily true. In fact, it is often not true. Our clients come to us because they are not sure of what to do in this very complicated financial world that we live in. But, while the client is not always right, he is definitely the judge and the jury. This we must be aware of in all of our dealings. So how do we respond when we are under attack – being questioned about something we absolutely know is wrong?

Another popular saying is that “a good offense is the best defense.” But in the financial arena, again this may not be the best approach. If you take a so-called “good offense” and attempt to justify and explain your position you will likely cause your client to dig in his heels. A “good offense” will only make your client feel “not OK.” Why not try a different approach? When under attack- fall back.

How does that look? What does falling back sound like? Suppose your client challenges your idea that an annuity is a good solution for their concern of “outliving their income in retirement.” Now we know that is not correct but again- to go on the offense might force your client to dig in their heels. But, using questions- we can successfully “fall back” and give our clients the opportunity to change their mind. Here is what that might sound like:

“I imagine you have made up your mind already that a guaranteed lifetime income is not for you and that you do not want to go forward. Would that be a fair statement?

“If you were in my shoes what would you do to make this work for you?”

“Is it me, or is something bothering you about this concept?”

“Falling back” takes the wind out of the customer’s sails and makes it possible for you to have a conversation in which each side is OK. Once the emotional intensity is reduced, and nobody is under attack, you have a better chance of working towards a solution.

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The Fight Against the Best Interest Rule

FACC files Comment Letter opposing Best Interest Rule saying it is too subjective
Provides guidance on building objective process
We oppose applying a security industry “best interest” standard to fixed annuities.   We remain steadfast in our position the fixed annuity marketplace is appropriately and effectively regulated by the existing Suitability Model and the wide range of other laws governing annuity sales, annuity salespeople and insurance companies.  We believe the best interest regulation, as drafted, will cause real damage by inviting second guessing and litigation, chasing away fixed agents, upsetting the independent agent distribution model, and stifling innovation and consumer choice in the marketplace.

[W]e submit that in order for insurance companies and producers to comply with, administer, and supervise a best interest regulation for insurance products, the suitability model must incorporate specific objective criteria. as follows….

Read the Full Comment


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Time is Now to Plan for LTC

LTC may cost more than clients think

Regardless of where you practice, the costs of long-term care are staggering and will likely continue to rise. On average, respondents from a recent survey underestimated the annual cost of a private room in a nursing home by roughly half as much as what they actually are. Plus, the cycle of care is not linear, and it could quickly become overwhelming. Care might just as easily commence with the need for nursing home care as it could with an in-home health aide.

Americans generally look first to their savings to pay for the care they might need. They expect that their savings, in combination with health insurance and government entitlements like Social Security and Medicare, which are not designed to meet most long-term care needs, will cover the potential costs.  Without a common understanding of the real costs and who pays, clients could make false assumptions that can leave them exposed. A common misconception is is that a combination of Medicare and health insurance is a way to meet the expenses of paid long-term care. Until they start using their Medicare coverage, clients don’t realize what’s covered by Medicare and what’s not. Medicare does not cover long-term care or custodial care. It’s limited to special circumstances and situations, such as a portion (up to 100 days) of skilled nursing facility costs, triggered by a minimum three-day hospital stay. And, limited coverage for certain home care.

A long-term care event can accelerate the risk of drawing down retirement savings

Advisors see the last 10 years of retirement as being a period of high risk for clients. As individuals grow older, the potential for a long-term care event increases, which can cause clients to spend their assets too quickly. When clients need long-term care and have no insurance in place, advisors estimated the average annual withdrawal rate from savings to more than double, from 5% to 13%. A client who needs extended long-term care, which can be common in later stages of Alzheimer’s, for example, can be at high risk of depleting all their assets when no other sources exist to pay for care. And then there is Medicaid, meant as a safety net for those with limited assets and income. Clients might not know that they can only benefit from Medicaid after they’ve spent down most of their assets, a situation many advisors avoid for their clients.

 America’s attitude toward caregiving is evolving

Out of all the risks associated with long-term care—financial, time spent providing care, physical and emotional burden—families expressed their biggest concern was the emotional risk (72%), and this number was even higher for those who’ve been through a caregiving situation (84%). For a client who has seen or experienced the responsibilities of long-term care up close, an opportunity exists for advisors to begin a broader conversation about long-term care. More than half (52%) of those Americans who have provided care said their experience as a caregiver changed how they are planning for their own future. More than two-thirds of parents (72%) said they don’t want their children to feel the burden of caregiving. And children’s attitudes have evolved as well, with 61% of sons and 51% of women expressing reluctance about providing care to a parent.

Families who haven’t discussed caregiving in the open may be unaware of how their loved ones feel toward providing care. In a survey, respondents recognized their own limitations when it comes to caring for a loved one and they supported having professional care as a viable option. Nine of ten said hiring professional help would be valuable to them if they ended up needing to provide long-term care for either a spouse (92%) and/or a parent (91%).

Start planning sooner rather than later

Most advisors agree that people wait too long before discussing their long-term care preferences and options. Wait too long and people risk having to make decisions quickly and under the duress of an immediate need. The actual age to begin planning for long-term care will vary by client and individual circumstance, but most advisors surveyed believed it to be around age 50. But a good rule of thumb is anytime you’re discussing retirement, it may be a good time to raise the subject with clients. Asking “What if?” questions is a great way to get the conversation started and encourages them to think ahead about what long-term care actually involves. Long-term care planning shares similarities with the many other client needs you address. An early start makes for more viable and better options, leading to more satisfied clients and referrals.


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Marketing on a Budget?

Marketing is expensive. And when you’re a new in the business adding another expense line item can feel like a ton of bricks weighing you down. From digital promotion to advertisements, getting the word out that you are in business takes time, practice and patience…especially when money is low.

Nowadays, many bootstrap minded reps have found ways to navigate tackling their marketing details to bring in sales with little to no money upfront. Here are four tips you can use to do the same.

Ask for referrals from your customers and clients

The best form of publicity and marketing is word of mouth. People love hearing first-hand accounts of other people’s experiences. Consider Google and Yelp reviews. If you leave a review, they’ll email you to tell you how much your review is being seen by others. You want your customers to love being a client of yours so much that they leave honest reviews that help attract you more business.

When you are strapped for cash, the people who do love your services can be your walking billboards. Leverage the people you already have connections with to bring in more potential clients. Offer incentives that entice people to be an advocate for you.

Use your social media platforms to plug your business

For so long, social media platforms were the perfect avenue for marketing small businesses. Due to “friends” and “followers,” many new reps had ready-made pools of potential customers at their fingertips. Now that these social media platforms have found ways to monetize the efforts of businesses who want to advertise, reps have had to start investing to get seen.

There is a workaround, however. It centers around you being intentional about every interaction you have on social media. From status updates to commenting or engaging in groups, use every opportunity you can find to let people know what you have to offer. If you run across someone asking a question that your expertise can offer a solution to, answer it.

Also, connect with others in our industry. Leverage the strength of using other people’s platforms to help build your own. But be tactful. You don’t want to be known as “that” person who is always selling something.

Use your own platform to provide insightful information

In the seize for mass attention, many reps often forsake the power of their own platforms. Your website, social media sites, or business cards can serve as a platform for persuasive conversation.

When potential clients go to your site, they need to see a balanced mixture of visual and written content. The content can be photos of your products, video testimonials, or informational blog posts. If you have a winning personality and are the face of your agenccy, your platform should show you off in a way that creates the know, like and trust factor immediately.

Your social platforms should be on brand and also convey the message you want to spread about your product or service. Your focus should be to teach your audience something new and to ask for the sale. Period.

Don’t forget about the offline world

Although we live in a highly digital society, there is still a whole world of business that occurs offline. As a rep you can’t just wait for business to find you. You have to take the initiative and go find the business you need. And if you open your eyes and your mind, you’ll see your target market all around you.

A great starting point is local networking events. You’ll meet new faces and make connections who may be potential buyers. In addition, attend industry and vendor events, and any event that puts you in a space where you can connect with people and do market research.

When there is a lack of funds, creativity can soar. You have to learn how to take your future in your hands and master being in the trenches of doing business. The more you stay consistent and stick with a strategy, the better your chances will be in generating business for yourself.


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