Don’t be tricked by 8% eternal Universal Life Insurance Interest Rates!

The math behind Universal Life Insurance Interest Rates is a twisted web and most consumers are deceived. Know how the math works so you can see the potential risks that may exist with your policy.

But before we get into it…

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Blunt, unfiltered truth about Universal Life

Get an in-force illustration when you buy UL

Hidden costs in an insurance illustration – how to crack the code

The math around Universal Life Insurance interest rates is not that straightforward

According to our podcast guest Elan Moas, the investment assumption of the three primary cash value universal life insurance policies (UL, VUL, IUL) displays a hypothetical illustration of what MIGHT occur with the policy. It is based on zero ($0.00) cash value guarantees.

Here’s the danger of relying on illustrations based upon unrealistic Universal Life Insurance interest rate assumptions.

• Universal life (UL=money market investment) policies from the late 1980s to the early 2000s were illustrated using 8%+ CD-like rates of return forever. Money market rates crashed to zero (0%) in 2022 due to Covid-19.
• Variable universal life (VUL=mutual funds) were/are illustrated using an 8%-12% CD-like ROR eternally. That is a mathematical impossibility.
• Indexed universal life (IUL=something like the SP500 index) but WITHOUT dividends and their reinvestment. There is no securities license required to sell it.

The interest rate assumptions for Indexed Universal Life require extra explanation. Actuarial Guideline 49 of 2015, via the National Association of Insurance Commissioners (NAIC) sought to cap, or limit the highly unlikely, aggressive illustrations used in the sales software prior to 2015. This correction was updated in 2020 with AG 49A and again in May 2023 with AG49B. This means the policyholder was likely shown an illustrated rate of return regulators have now deemed to be wrong and/or incorrect.

All three policies likely heavily underperformed the original illustration. Lower future cash value means your internal costs are higher and the policy is more likely to “lapse” or cease to exist while you the policyholder is still alive. This defeats the notion that these are permanent policies.

What to do if you own a policy?

Order yourself an “in force illustration” which is the current policy projection and one that your insurer is not required to send you, unless you request it. Most policyholders have no idea this report exists.

If it still looks ok, congrats, you are one of the lucky ones. But this might be less than 5% of policyholders. Being on the wrong side of compound interest rates in universal life pol