As financial professionals, it is easy to become hyper-focused on reaching our goals, but it is our responsibility to always keep what's in the best interest of our clients above our personal ambition. In this episode of Money Script Monday, Kevin goes over 8 tactics financial professionals should avoid when structuring and funding IUL policies in order to best serve their clients.
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Hey there, my name is Kevin Nuber. Thank you so much for watching today's Money Script Monday video called, The 8 IUL Commandments.
I'm extremely passionate about this and you might ask why I have the authority to stand in front of you today to tell you the things that you should never do with IUL.
To that what I want to say is that, as an organization, we have been responsible for selling IUL for two decades.
Over that period of time we have funded over $1 billion into IUL.
That's $1 billion of IUL premium that has gone to these types of insurance products.
It's with that experience that I bring to you these 8 things that you should never do when funding an IUL. See, we face a dilemma. Every single one of us faces a dilemma every day when it comes to IUL.
We're directly compensated from the insurance company in the form of a commission.
Those incentives that we receive are directly tied to many times doing what's in the best interest for us rather than what's in the best interest for the client.
Such as, issuing more than the minimum death benefit or paying more premium than the client actually can afford.
For that reason, we have to fight every day against this temptation to not do what's right for the client.
I believe that each of us individually have a responsibility to ourselves and to our clients to do what's in their best interest despite this incentive to not do that.
In fact, this responsibility extends beyond each and every one of us as individuals, and it extends to our entire community of people that sell IUL.
We have to make sure that everybody is doing the right thing, which is why I'm recording this video and telling you the 8 things that you should never do when it comes to structuring and funding an IUL.
Let's get started.
The first thing you should never do is do not sell a policy to a client unless they have a legitimate need for life insurance.
This is a hard lesson that I learned.
Back when I first started working here, we had a husband and wife and we decided to put an IUL in place for this couple, for the wife who was a nonworking spouse.
She really didn't have a legitimate need for life insurance, but we wrote it on her because the costs were less, the accumulation was better, the income and retirement looked better.
We did not do it on him, and he was the primary breadwinner who made all the income and you know where the story goes.
Unfortunately, he ended up passing away and I am learned an extremely important lesson is that this is first and foremost a life insurance policy.
The death benefit is the most important thing that happens with life insurance and we have a duty to write the policy on the person that has the most legitimate need in a couple.
Not only that, if there is no legitimate need for a person, we cannot make up a convoluted reason why one exists.
If one does not exist, we should move on and find the next client.
Two, never minimum fund an IUL.
There's a minimum amount you can pay on an IUL and there's a maximum amount you can pay on an IUL.
Between those two amounts, there's thousands of different ways that you can fund it.
We believe that there's only one correct way to fund it and that is the absolute maximum. Anything less is not the right way in order to get all the benefits the IUL provide.
Many times, we're tempted to do things like the client says, "Well, I'm going to sell my home in six months. It's just about to close, I'm going to sell it."
"I'm about to put it on the market," or "I'm about to inherit money from my parents in a year."
So, we set up a policy, minimum fund it with this expectation of this money coming in at some point down the road.
Our experience is that, most times, that money does not end up going into the IUL and that money that the client has paid into the IUL at the minimum amount is most times lost.
So do not minimum fund an IUL.
Three, do not illustrate in excess of 7%.
When we show illustrations at 7%, even at 6%, the numbers look fantastic. We don't have to illustrate anything higher than that.
When we illustrate something higher than that, then we show unreasonable projections of the client that very likely will not come true because we're showing too high of a rate.
Insurance companies, unfortunately, are guilty of coming up with all these convoluted indexing strategies or these non-guaranteed bonuses and whiz-bang features in order to justify being able to illustrate in excess of 7% or something higher.
Despite that, we do not ever recommend something higher than 7%.
In fact, I recommend something lower than 7%, but at the risk of offending anyone watching this video, I'm just going to say 7% is a reasonable number in order to illustrate at.
Four is do not use IRA money to fund an IUL pre-59.5, so that's prior to 59.5.
That's because doing so would create a penalty on that IRA distribution, a 10% penalty.
I admit to you that I can show many times that, even with paying the penalty, that it makes mathematical sense for a client to still do it and fund an IUL.
The problem is that, from somebody on the outside, like a compliance department, a regulator, a client who might file a complaint, the client's CPA who inevitably is going to know that they took that IRA distribution, to them, that is never a good recommendation.
That is going to be an uphill battle with the client and because of that, we just don't recommend doing it anymore.
Unless you can avoid that penalty, it might make sense. The only time you should do it when there is no penalty.
If there is one, do not do it.
Next, number five is, do not take loans from the policy to pay the taxes on an IRA distribution.
This is a little bit complicated, but the way that it works is that they come up with some creative names for this strategy.
They call it IRA Rescue or pension rescue or 401(k) rescue and these are strategies with pretty names in order to try to put lipstick on something that is not good.
You take an IRA distribution instead of paying taxes on it, you pay the entire amount into the policy and then you take a loan from the policy to pay those taxes.
This might make mathematical sense on an illustration over the long run, but for 95% of the clients that this strategy is shown to, it introduces a substantial amount of risk that is disproportional to the amount of risk that that client is willing to take.
Unfortunately, advisors do not understand exactly the magnitude of the risk that this introduces to a client.
Yes, there are high net worth clients that this might be appropriate for, but for the masses and most people that advisers show this to, it is not a good idea.
For that reason, you should never do this.
Six, do not take loans from a policy to pay the premiums.
This is even more egregious. This is called hyper funding or super funding.
You take a loan from the policy and then pay it right back in to that same policy. You're borrowing money from the insurance company and paying it right back in.
This is absolutely not allowed. You will be terminated from the insurance company. You'll have your license taken away.
This is an absolute do not do this.
Unfortunately, this was common maybe 10 years ago or so and it got shut down.
But, we're seeing more and more people starting to do it again today as if they forgot about the fact that you weren't allowed to do that.
Do not do that.
If an IMO or another agent is telling you that they're doing either of these two things, number five or number six, you should not take advice from them.
You should not trust them, and you should seek advice from another person. That's how egregious it is.
Number seven, this is the most complicated.
Do not decrease the death benefit on a maximum funded policy prior to year 8.
A few qualifications never decrease the death benefit on a maximum funded policy prior to year 8.
There's a rule that's called the 7-pay rule, and with a maximum funded policy, you're funding up to this guideline.
If you reduce the death benefit in year seven or prior, this is called a material change. The IRS code is very clear about this.
A material change requires a recalculation of the 7-pay premium, which would end up turning this policy into a modified endowment contract.
There are 99 insurance companies in this industry that say that you cannot do this. If you do this, it creates a modified endowment contract.
There's one insurance company who says, our interpretation of the rule is that you can do this and so they allow people to do it.
Unfortunately, interpretations change, and they will change.
What that means to you is that if you do this to a client and you reduce the death benefit, then they can end up coming back to you once their interpretation is corrected.
Now, that policy is going to be reclassified as modified endowment contract.
If you show somebody doing that today, it means that in the future they're not going to be able to reduce the death benefit, which means that their policy is not going to perform well.
Unfortunately, the reason why this gets promoted by many IMOs out there is for one reason only and it's because it generates more commission for them as an organization.
Again, it's in direct conflict with what is in the best interest for the client and that is why you should never, never do this.
Lastly is number 8, which is do not use non-registered investment products in order to fund an IUL.
Unfortunately, in this industry we run into organizations that solicit products that they say aren't technically investments therefore, you don't need a securities license.
Inevitably these end up going belly up, getting shut down by regulators or being deemed a Ponzi scheme.
You should never, ever do this in order to fund the premium into the IUL. Not only do they lose the money that they invest in this product, but then they lose their IUL because now they can't fund it.
It is a lose-lose situation for the client and for the agent that's selling it because it'll destroy their career and the client's life.
Do not do this. I cannot be more passionate about that.
In fact, I'm extremely passionate, as you can tell, about all 8 of these things that you should never do.
The reason why I am so passionate about it is because over the last 14 years that I worked here and the billion dollars of premium that we've paid into life insurance, we have learned exactly what works and exactly what doesn't work.
We have decided to actually go and track thousands of different enforce contracts.
We look back to that original point of sale and to where we are today and we say, "Did that original illustration come true or did that illustration not come true?"
Overwhelmingly, those illustrations have can come true, but only if a client and agent do not do these 8 things.
If they do one of these 8 things, it'll create that that policy will not be successful.
We know from personal experience that these are the 8 things that you should never do.
In fact, we've created a website here, lifepro.com/stories. There's going to be a link below in the description.
This is a website that you can go to and you can see examples of actual, real policies that we've sold that go back up to 12 years that show that IUL absolutely does come true.
It can come true just like we tell a client on the day that we sell the policy.
Only, and that is only if you do not do one of these 8 things. If you do one of these 8 things, it is not going to come true.
I ask everybody to go to this website at lifepro.com/stories to show proof, so you can see proof that IUL can come true.
Thank you so much for watching this video and I hope you enjoyed it.
The information presented here is not specific to any individual's personal circumstances. These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable—we cannot assure the accuracy or completeness of these materials.