On LIFE Pod Ep 91, James and Carlo Viqueira went through an indexed universal life illustration from the first page to the last. An illustration is the printout an agent hands you that projects how a policy might perform over the decades. An IUL, or indexed universal life policy, is permanent life insurance whose growth is tied to a market index, with a floor that keeps a bad index year from crediting you a loss. They worked from one carrier's illustration, so the page names were that carrier's, but most IUL illustrations are laid out close to the same way.
Start with what usually isn't there. Three reports often don't print unless someone asks for them. The policy charges ledger, sometimes called the expense ledger, breaks out every charge the policy takes, year by year. The internal rate of return report shows what your cash value and death benefit actually earn once those charges come out. The input summary lists every choice the agent made in the software: the rate, which riders were turned on or off, and the rest. Without the first two, comparing one illustration against another is much harder. The third matters if you ever get a second opinion, because the next agent can see exactly how the first one built the policy and ask you why.
The first pages are the carrier's best foot forward, run at whatever rate the agent chose. Each carrier sets a maximum rate an agent is allowed to show, and James said that ceiling sits somewhere in the mid-7s right now. He dials it down to 6%. His reasoning is about expectations. If a client is shown 7.5% and gets 6%, they're disappointed. If they're shown 6% and get 6.25 or 6.5%, the policy is right on track. Some illustrations always run at the maximum, and James's view is that a policy carrying high expenses often needs those big numbers to look good at all.
Some carriers also let you illustrate a few years at 0%. A client recently asked James to show two zero years at the very start. That is more conservative than 6% every year, but James pointed out that a zero year early costs far less than a zero year thirty years in, because there's so much less money in the policy early on. Carlo added that an illustrated 6% average already assumes some years land at zero and some go well above it.
Next come the index options, meaning the accounts your money can be credited from. Most IULs have an S&P 500 option with a cap, which means the most you can be credited in a year. Many also offer volatility-controlled or specialty indexes that have only a short real history plus back-testing. James's caution on those: a lot of them were back-tested in the low interest rate years before 2021 and have done poorly since rates climbed in 2022. The carrier can also adjust caps, participation rates, bonuses, and spreads over time, down to guaranteed minimums that are disclosed in the illustration. A participation rate is the share of the index gain you're credited. At 120%, a 10% index year credits you 12%. The guaranteed minimum participation rate on James's own policy is 5%. He said his participation rates have only gone up so far, and he ties that to higher interest rates giving carriers a bigger options budget, which is the money a carrier has each year to buy the options that produce your credit. Rates can move down just as easily when that budget shrinks.
The guaranteed page assumes the index never grows at all, while you keep paying the same premium and taking the same loans shown in the current illustration. James said there's very little to learn from it, with one exception. Look at the late years to see the most the carrier could ever charge for the insurance, and compare that with the cash value. With a proper design and proper funding, that maximum is small next to the cash value. Some carriers also guarantee a lifetime floor of 1 to 3%. That means if you surrender the policy after 20 or 30 years, they guarantee your money averaged at least that rate over the whole period. It does not mean you get that rate every year. James tells clients that if anything like the guaranteed scenario ever started to play out, they'd make changes: move money to the fixed account, reduce the insurance, or get out of the policy.
If the illustration shows loans, check how they're modeled. A participating index loan is one where the borrowed money keeps getting credited by the index while the loan is out. Illustrations assume a spread in your favor, so a 5% loan rate gets illustrated with about a 5.5% credit. That spread is not guaranteed. James has borrowed at 5% and been credited 14% on part of the money, and he's also had a zero year where the full 5% was his cost to borrow. When he illustrates retirement income, he shows indexed loans for the first ten years and then switches to fixed loans. It shows less income than the maximum, and he thinks it's closer to what will really happen.
The policy charges ledger is where the design shows up. The policy fee covers the paperwork each year and should be under $150. The premium load, or premium charge, comes off every premium dollar, and James has seen it run anywhere from 4% to 15%. If you already own a policy and send in extra money, that load is the only charge on the extra dollars. The per unit charge, sometimes called the expense charge, is how the carrier recovers the cost of selling you the policy: commission, underwriting, and medical exams. That column shows the biggest gap between an optimized design and a poorly designed one, and it also drives the surrender charges, which can eat all the cash value in year one on a poor design. James likes to show clients the poorly designed version first so they can see the difference. The cost of insurance column is the insurance itself. On a blended design, where a supplemental term rider carries part of the death benefit, some carriers list that term cost under rider charges instead, so James adds the two columns together to get the real cost of insurance. Some carriers also take an asset charge, a percentage of the cash balance each year. James has seen it range from 0.35% to 1.25%, and in a zero year it turns the credit into a small loss.
The internal rate of return report ties it all together. Illustrating at 6% does not mean the policy earns 6%, because the charges come out first. James uses the report to check for bonuses too. If a 1% bonus is being illustrated on top of 6%, the rate of return should climb above 6% at some point, unless the policy is expensive enough that it never does.
An illustration is a projection, not a promise, and none of the non-guaranteed columns are guaranteed. James is a licensed insurance broker, not a CPA, attorney, or registered advisor. If you have an IUL illustration in hand, ask the agent for the policy charges ledger, the internal rate of return report, and the input summary before you compare it with anything else.