Which Investment Option Should You Use?

The Asset Allocation Decision in Indexed Universal Life Insurance Policies

EBS’ Managing Director, Chris Wyrtzen, recently wrote a white paper that describes a methodology developed by EBS to help with the asset allocation decision faced by owners of indexed universal life (IUL) policies.

These policies offer the ability to allocate policy cash value to an account that receives an interest credit based in part on the performance of the S&P 500 Index, excluding dividends, over a 1-year period.  The minimum crediting rate is typically guaranteed to be either 0% or 1%, in exchange for a cap on the maximum crediting rate.

Use of Index Investing in Split Dollar Arrangements

Index investing is particularly prevalent in Loan Regime Split Dollar arrangements like those used by nonprofit organizations.  The premiums paid by the organization are treated as loans to the executive that are repaid at death.  Having an interest credit that is guaranteed to be 0% or greater but with upside potential based on the S&P 500 can be very attractive.

Most IUL policies offer more than one index account to choose from, however, and therefore present a challenge in deciding which one to use.  A key point to keep in mind is that deciding what index to use does not have to be a long-term decision.  A different index can be used when the current index segment matures and the index credit is received – which is typically at the end of 12 months.  And it’s also possible to use more than one index at a time.

The IUL Asset Allocation Decision Tool

EBS’ methodology involves the creation of a grid.  The rows in the grid represent different rates of return in the S&P 500 index, excluding dividends.  The columns in the grid represent the different index account choices available in a specific IUL policy.

Each of the individual cells in the grid are the calculated interest credit a policy owner would receive given that S&P 500 return (excluding dividends) and the index represented in each column.  Some index options perform better in lower return markets (e.g. a High Floor index) and some index options would perform better in higher return markets (e.g. an Uncapped index).  The grid makes it clear which index would perform best at each S&P 500 rate of return.

EBS’s grid methodology is enhanced with the use of color coding.  The index with the highest crediting rate at a given S&P 500 rate of return is highlighted in green.  The second highest crediting rate is highlighted in yellow.  Color coding makes it easy to see which indexes perform best in low return, average return, and high return markets.

To read EBS’ white paper, you can go to our resource page, or simply click here.