Questions to put to an IUL proposal before you sign

A proposal for an indexed universal life policy is a set of projections, and a projection answers only the questions its author chose to ask. The page you are handed usually shows one premium, one illustrated rate and one smooth line of growing cash value. This checklist is for the meeting where you get to ask the other questions: what is guaranteed, what can change, what it costs, and what the same policy looks like when things go less well than the sales page assumes.

You do not need to be an actuary to use it. Every item below is paired with the reason it matters, so you can tell a satisfying answer from a vague one. Bring a pen and ask for the answers in writing, because a verbal answer in a sales meeting is not part of your contract.

Before the questions: what you are holding

The core document is an policy illustration, sometimes called a ledger. It is a year-by-year table showing premiums, the policy's account value, its surrender value and its death benefit under two sets of assumptions. Usually there is a "guaranteed" column, which assumes the worst the contract allows, and a "non-guaranteed" or "current" column, which assumes the insurer's present numbers hold for decades. The current column is built from non-guaranteed elements, meaning figures the insurer may change. The general method for reading these tables is covered in how to read a life insurance illustration, and the product itself is explained in Indexed universal life (IUL) explained. Here the goal is narrower: a set of questions to ask of this particular proposal.

Mark the proposal up as you go. Write the answer next to each question, and note the page of the illustration or the contract that supports it. If a question is brushed aside ("don't worry about that"), write that down too.

Group 1: the illustrated rate

The illustrated rate is the single assumption that most shapes the projected result, so start here.

1. What rate of index credit does the non-guaranteed column assume each year? Ask for the number, not a description. Reason: a projection is only as realistic as its rate, and you cannot judge it without seeing it.
2. Is that the maximum rate the rules allow, or something lower? The NAIC's Actuarial Guideline 49 limits how high an insurer may illustrate (see IUL illustrations and Actuarial Guideline 49). A rate set at that ceiling is the best case the rules permit, not a typical outcome.
3. Is the rate the same every year? Real index credits arrive unevenly, including zero years. A flat line hides the effect of a poor early decade, when the account is small and charges are large relative to it.
4. What was the actual crediting history of this account, using the cap and participation rate that were in force each year? Be wary of "back-tested" results that apply today's cap to years when the cap was different, or that use an index that did not yet exist.
5. Does the illustration assume a bonus, a multiplier or a volatility-controlled index? Ask what the extra feature costs per year and whether the illustrated rate already nets that cost out.

If the answers to questions 1 and 2 are "the illustrated rate is 6.5%, and that is the highest the guideline allows," that is useful information, not a flaw. It tells you the plan is projected at its ceiling, and it sets up the request in Group 6.

Group 2: caps, participation rates and spreads

The index credit is not the index return. A formula applies a cap, a participation rate, sometimes a spread, and a floor. Say an account has a 9% cap and 100% participation, and the index rises 14% in a year. The credit is 9%. On a $100,000 account balance that is $9,000 before charges, not $14,000. The mechanics are explained in IUL caps, participation rates and floors; these are the questions that go with them.

1. Which index account does the illustration assume, and what are its current cap, participation rate, spread and floor? Write each number down. Reason: two policies with the same index can credit very differently.
2. What are the guaranteed minimum or maximum values for those terms? The contract usually states a worst-case cap or spread. That number is the one your guaranteed column relies on.
3. How often can the insurer change them, and with how much notice? Many contracts allow annual changes on in-force policies. Ask whether you would be told before the change takes effect or after.
4. Are there rules that stop the insurer lowering a cap on existing policies more than on new ones? Some contracts tie declared terms to the insurer's overall experience, and some do not. Ask for the contract language.
5. Does a floor of 0% mean the account cannot fall? No. It means the index credit cannot be negative. The monthly charges still come out, so an account with a 0% credit year shrinks.
6. How is the index change measured? Annual point-to-point, monthly sum, averaging and multi-year methods behave differently in the same market. Ask for the crediting method by name.

A good answer to the third question is specific: "once a year, on the policy anniversary, with a notice at least X days earlier, and the contract's minimum cap is Y." A poor answer is "the insurer has never lowered it," because history is not a contract term.

Group 3: charges and the surrender schedule

Index credits get the attention, but the charges decide whether the policy survives. Fees inside permanent policies are catalogued in fees and charges inside permanent life insurance.

1. What is the monthly cost of insurance in year 1, year 10, year 20 and at age 80, current and guaranteed? The charge rises with age. Ask to see the guaranteed maximum rates, which are printed in the contract.
2. What premium load comes off each payment? A percentage of every premium may be deducted for commissions and taxes before anything reaches the account.
3. What flat monthly administrative fee applies, and for how long? Some fees are heavier in the first years.
4. What riders are on this proposal, and what does each cost per year? A rider you did not ask for deserves an explanation.
5. What is the surrender charge schedule, year by year, and in dollars? The illustration's "surrender value" column shows the account value minus the charge. Compare it with the account value column. The gap is what you would lose by leaving early.
6. Is there any extra charge for the index option, a multiplier or a bonus? If so, where is it deducted?

Here is a way to see the effect of the surrender schedule. Say the illustration shows an account value of $18,000 in year 5 and a surrender value of $11,000. The difference, $7,000, is the surrender charge for leaving then. The same two columns in year 15 might be nearly equal. That tells you the policy is a long commitment, and if there is a real chance you will need to stop paying in the first decade, this is the number to weigh.

Group 4: loans

Loans are the feature behind many retirement-income pitches. The legal and tax side is in life insurance policy loans: how they work and what they risk; the proposal questions are these.

1. Does the illustration include loans or withdrawals? If so, from which year, in what annual amount, and for how many years?
2. What is the interest rate on the loan, is it fixed or variable, and can it change? A variable rate can rise after you rely on it.
3. What does the loaned part of the account earn? In some policies the loaned amount stops participating in the index and earns a fixed rate instead. In others it keeps participating, which sometimes costs more. The difference between the loan rate and the credited rate is the real cost of borrowing.
4. What happens to the death benefit while a loan is outstanding? An unpaid loan and its accumulated interest are subtracted from the death benefit.
5. What happens if the loan grows larger than the cash value? Ask what the insurer sends you, and when. Also ask whether an overloan protection rider is available and what it costs. An overloan protection rider is meant to keep a heavily borrowed policy from lapsing into a tax bill.

A short example of the loan-rate gap, with invented numbers. Say you borrow $50,000 at a 6% loan rate, and the loaned part of the account credits 5%. Interest charged is $3,000 a year. The loaned portion credits $2,500. The net cost of the loan is $500 a year, or 1% of the borrowed amount, before anything else. If the credited rate on the loan were instead 2% (which would be $1,000), the net cost would be $2,000 a year. Same loan, four times the cost. It is the sort of number a proposal rarely shows unless you ask.

For the tax questions around loans and what happens if a policy with a loan ends, see the guide on how cash value is taxed, and ask a tax professional about your own case.

Group 5: funding and the minimum

A flexible policy has a range of premiums, and the proposal chooses one point in it.

1. Is the illustrated premium the minimum, the target or something higher? The glossary entry on target premium explains the term. Paying only the minimum to keep the policy in force leaves little room for a weak credit year.
2. For how many years does the proposal assume premiums are paid, and what happens if you stop earlier? Ask for the version with premiums stopped at year 10 or at retirement.
3. Is there a premium that is guaranteed to keep the policy in force to a stated age? Some policies carry a secondary guarantee that depends on meeting a premium test. If this one does, ask for its conditions in writing.
4. If you pay more than the target premium, is there a limit? Overfunding can turn a policy into a modified endowment contract, which changes how loans and withdrawals are taxed. The explanation is in modified endowment contracts and the 7-pay test. Ask how the insurer monitors and warns about that line.
5. How much can you pay if a year is tight? Ask what the policy needs at a minimum to stay in force, not just what the plan hopes for.

Group 6: the lower scenario

This group is the most valuable one, and the one least often volunteered.

1. Please run the same policy at an illustrated rate two points lower, and at four points lower. If the maximum is 6.5%, ask for 4.5% and 2.5%. Many insurers can produce this on request.
2. Please run it at 0% credit for the first three years. This tests a poor start, which is hardest on the account.
3. Please run it with the current cost-of-insurance rates replaced by the guaranteed maximums. This shows the worst case on charges.
4. At what age does each scenario show the policy lapsing, or needing more premium? A plan that works at the maximum rate and fails at a rate two points lower is fragile, and you should know that before you sign.

Reading the results takes only a few minutes. Compare three lines: the proposal as sold, the two-points-lower line and the guaranteed line. A policy that stays in force to age 100 in all three is a very different purchase from one that lapses in the 80s in the second line. How to do this stress test in more detail is the subject of Stress-testing an IUL illustration with lower assumed rates.

Group 7: underwriting, paperwork and the seller

1. What health class is this proposal based on, and what happens to the price if the insurer offers a lower class? A proposal built on the best class can change materially after underwriting.
2. Who is the licensed seller, and how are they paid? You may ask whether compensation differs between products. A fair answer is a plain one.
3. What is the free-look period, and when does it start? Typically 10 to 30 days, longer in some states and for replacements.
4. Is this policy replacing an existing one? If so, do not cancel the old coverage until the new one is approved and delivered, and ask about taxes and new waiting periods.
5. What does the insurer's annual statement show, and can you get an in-force illustration each year? Ask how to request one.

What to request in writing

Before you decide, ask for these documents and keep them together:

• The full illustration, with all pages, signed by the producer and applicant where the form requires it.
• The sample contract or specimen policy form, so you can read the guaranteed minimum cap, maximum spread, maximum cost-of-insurance rates and the loan terms.
• The lower-rate and guaranteed-charge illustrations from Group 6.
• A written statement of the surrender charge schedule.
• The index account's declared terms and the last several years of declared caps.
• Any brochure or disclosure statement for the index and its crediting method.

Then read the specimen contract with a highlighter. Where the sales answer and the contract differ, the contract controls.

A simple way to score the answers

Not every question deserves equal weight. A rough ordering helps:

1. Deal-breakers: no willingness to produce a lower-rate illustration; no copy of the contract; unclear loan terms; a plan that depends on loans starting in the first few years.
2. Serious concerns: a plan that only works at the maximum illustrated rate; heavy surrender charges when you may need to stop paying; a funding level at the bare minimum.
3. Trade-offs to weigh: the cap you can accept for a floor, a longer surrender schedule against a lower cost, the mix of premium and death benefit.

If you are still uncertain, a fee-only financial planner who does not earn a commission on the sale is a reasonable second opinion, and your state insurance department can tell you whether the seller is licensed. Four households that weigh this same product with different goals appear in four households weighing indexed universal life for retirement.

Key takeaways

• A proposal shows one set of assumptions; your job is to ask what happens under others, starting with a lower illustrated rate and the guaranteed column.
• Caps, participation rates and spreads can usually change on an in-force policy, so ask for the guaranteed limits and the notice rules in writing.
• The gap between the account value and surrender value columns, and between the loan rate and the credited rate on loans, are two costs the headline numbers hide.
• A policy funded at the bare minimum, or one whose plan depends on early loans, leaves little margin for a weak year.
• Get the specimen contract, not just the sales page, and let the contract settle any disagreement.