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We have referred recently to the value of participating loans with Indexed Universal Life (“IUL”) and thought you might like to see a mathematical comparison between fixed and participating loans.
To do this, we used the Comparison of Insurance Plans module that is available on the Personal Insurance tab in the InsMark Illustration System.
Case Study
We’ll compare the following two alternatives:
- $500,000 increasing death benefit IUL issued at age 45 (max-funded with 20 annual premiums of $23,717 — just short of a MEC) with level participating policy loans of $91,071 starting at age 65).
- The same as #1 but with level fixed policy loans of $53,194 starting at age 65.
The goal is to have each policy with similar cash values and death benefits at a designated target point in the future — I chose 55 years to age 100 and measured the difference in cumulative loans between age 65 to 100. The difference is dramatic — 171.2% more cumulative cash flow with participating loans. As you can see, the policy values end up close to each other.
This next graphic reflects the trend lines for all 55 years.
Click here to review the full illustration.
Another way to look at it would be to schedule the same level of participating loans as the fixed loans ($53,914). The difference is dramatic — 411% more cash value with participating loans. As you can see, the cash flow ends up exactly the same.
With this strategy, you get the following comparison.
This next graphic reflects the trend lines for all 55 years with cumulative loans the same.
Click here to review the full illustration.
Conclusion
Participating loans are a very significant development in the life insurance industry. Their long-range consequences are difficult to appreciate fully without the mathematical comparisons illustrated in this Blog. Whether you are presenting a large or small amount of insurance, the impact of such loans is considerable.
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